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University of Phoenix ACC 422 Comprehensive Questions and Answers. Detailed for Grade A+ Download Now

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Brief Exercise 7-1 Your answer is correct. Cheyenne Enterprises owns the following assets at December 31, 2017. Cash in bank—savings account 71,600 Checking account balance 19,500 Cash on ... hand 8,510 Postdated checks 950 Cash refund due from IRS 40,600 Certificates of deposit (180-day) 90,560 What amount should be reported as cash? Brief Exercise 7-1 Checking account balance 19,500 Cash to be reported $99,610 Brief Exercise 7-7 Your answer is correct. Sage Family Importers sold goods to Tung Decorators for $37,800 on November 1, 2017, accepting Tung’s $37,800, 6-month, 6% note. Prepare Sage’s November 1 entry, December 31 annual adjusting entry, and May 1 entry for the collection of the note and interest. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.) Brief Exercise 7-7 5/1/18 Interest Revenue = ($37,800 × 6% × 4/12) = $756 Exercise 7-4 Your answer is correct. Your accounts receivable clerk, Mitra Adams, to whom you pay a salary of $1,995 per month, has just purchased a new Acura. You decide to test the accuracy of the accounts receivable balance of $109,060 as shown in the ledger. The following information is available for your first year in business. (1) Collections from customers $263,340 (2) Merchandise purchased 425,600 (3) Ending merchandise inventory 119,700 (4) Goods are marked to sell at 40% above cost Compute an estimate of the ending balance of accounts receivable from customers that should appear in the ledger and any apparent shortages. Assume that all sales are made on account. $ The ending balance of accounts receivable from Customers 164920 $ Apparent shortage 55860 Exercise 7-4 Computation of cost of goods sold: Merchandise purchased $425,600 Less: Ending inventory 119,700 Cost of goods sold $305,900 Selling price = 1.40(Cost of goods sold) = 1.40($305,900) = $428,260 Sales on account $428,260 Less: Collections 263,340 Uncollected balance 164,920 Apparent shortage $55,860 Enough for a new car = $55,860 Exercise 7-9 Your answer is correct. The trial balance before adjustment of Pina Inc. shows the following balances. Dr. Cr. Accounts Receivable $95,600 Allowance for Doubtful Accounts 2,010 Sales Revenue (all on credit) $590,400 Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 5% of gross accounts receivable and Allowance for Doubtful Accounts has a $1,743 credit balance. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Exercise 7-9 (a) Allowance for Doubtful Accounts = ($95,600 × 4%) + $2,010 = $5,834 (b) Allowance for Doubtful Accounts = [($95,600 x 5%) – $1,743] = $3,037 Exercise 7-22 Your answer is partially correct. Marigold, Inc. decided to establish a petty cash fund to help ensure internal control over its small cash expenditures. The following information is available for the month of April. 1. On April 1, it established a petty cash fund in the amount of $255. 2. A summary of the petty cash expenditures made by the petty cash custodian as of April 10 is as follows. Delivery charges paid on merchandise purchased $73 Supplies purchased and used 38 Postage expense 46 I.O.U. from employees 30 Miscellaneous expense 49 The petty cash fund was replenished on April 10. The balance in the fund was $7. 3. The petty cash fund balance was increased by $113 to $368 on April 20. Prepare the journal entries to record transactions related to petty cash for the month of April. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Cash 255 April 10 Freight-In 73 Supplies Expense 38 Postage Expense 46 Accounts Receiv 30 Miscellaneous Ex 49 Cash Over and S 12 Cash 248 EAT_144989552 Pet y Cash April 20 113 Cash 113 Exercise 7-22 Cash = ($255 – $7) = $248 Exercise 7-24 (Part Level Submission) Concord Lansbury Company deposits all receipts and makes all payments by check. The following information is available from the cash records. June 30 Bank Reconciliation Balance per bank $25,200 Add: Deposits in transit 5,544 Deduct: Outstanding checks (7,200 ) Balance per books $23,544 r Books Your answer is correct. Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance. $ : : $ $ : Less : $ Bank service charge 54 EAT_136135692 NSF check 1206 1260 $ EAT_136135692 Cor ect cash balance, J uly 31 35640 Don't show me this message again for the assignment Attempts: 3 of 3 used Exercise 7-24 (Part Level Submission) Computation of deposits in transit Deposits per books $20,916 Deposits per bank in July $18,000 Less deposits in transit (June) (5,544) Deposits mailed and received in July (12,456) Deposits in transit, July 31 $8,460 Computation of outstanding checks Checks written per books $11,160 Checks cleared by bank in July $14,400 Less outstanding checks (June)* (7,200) Checks written and cleared in July (7,200) Outstanding checks, July 31 $3,960 *Assumed to clear bank in July (b) Your answer is correct. Prepare the general journal entry to correct the Cash account. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Notes Receivable 3600 Don't show me this message again for the assignment Problem 7-4 (Part Level Submission) From inception of operations to December 31, 2017, Windsor Corporation provided for uncollectible accounts receivable under the allowance method. The provisions are recorded, based on analyses of customers with different risk characteristics. Bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account, and no year-end adjustments to the allowance account were made. Windsor’s usual credit terms are net 30 days. The balance in Allowance for Doubtful Accounts was $131,300 at January 1, 2017. During 2017, credit sales totaled $9,101,900, the provision for doubtful accounts was determined to be $182,038, $91,019 of bad debts were written off, and recoveries of accounts previously written off amounted to $19,950. Windsor installed a computer system in November 2017, and an aging of accounts receivable was prepared for the first time as of December 31, 2017. A summary of the aging is as follows. Classification by Month of Sale Balance in Each Category Estimated % Uncollectible November–December 2017 $1,275,500 2% July–October 655,900 10% January–June 449,700 27% Prior to 1/1/17 158,000 74% $2,539,100 Based on the review of collectability of the account balances in the “prior to 1/1/17” aging category, additional receivables totaling $59,000 were written off as of December 31, 2017. The 74% uncollectible estimate applies to the remaining $99,000 in the category. Effective with the year ended December 31, 2017, Windsor adopted a different method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable. Don't show me this message again for the assignment (a) Your answer is correct. Prepare a schedule analyzing the changes in Allowance for Doubtful Accounts for the year ended December 31, 2017. Show supporting computations in good form. (Hint: In computing the 12/31/17 allowance, subtract the $59,000 write-off.) WINDSOR CORPORATION Analysis of Changes in the Allowance for Doubtful Accounts For the Year Ended December 31, 2017 $ EAT_144991438 Balance at J anuary 1, 2017 131300 EAT_144991438 Provision for doubtful accounts 182038 EAT_144991438 Recovery in 2017 of bad debts written offpreviously 19950 333288 EAT_144991442 Less 150019 EAT_144991438 Write-offs for 2017 EAT_144991438 Balance at December 31, 2017 before change in accounting estimate 183269 EAT_144991438 Increase due to change in accounting estimate during 2017 102510 Problem 7-4 (Part Level Submission) Provision for doubtful accounts = ($9,101,900 × 2%) = $182,038 Deduct write-offs for 2017 = ($91,019 + $59,000) = $150,019 Increase due to change in accounting estimate during 2017 = ($285,779 – $183,269) = $102,510 Exercise 8-2 Your answer is correct. In your audit of Steve Company, you find that a physical inventory on December 31, 2017, showed merchandise with a cost of $455,940 was on hand at that date. You also discover the following items were all excluded from the $455,940. 1 . Merchandise of $65,070 which is held by Steve on consignment. The consignor is the Max Suzuki Company. 2 . Merchandise costing $34,770 which was shipped by Steve f.o.b. destination to a customer on December 31, 2017. The customer was expected to receive the merchandise on January 6, 2018. 3 . Merchandise costing $47,070 which was shipped by Steve f.o.b. shipping point to a customer on December 29, 2017. The customer was scheduled to receive the merchandise on January 2, 2018. 4 . Merchandise costing $91,200 shipped by a vendor f.o.b. destination on December 30, 2017, and received by Steve on January 4, 2018. 5 . Merchandise costing $51,970 shipped by a vendor f.o.b. shipping point on December 31, 2017, and received by Steve on January 5, 2018. Based on the above information, calculate the amount that should appear on Steve’s balance sheet at December 31, 2017, for inventory. 542680 Exercise 8-2 Inventory per physical count $455,940 Goods in transit to customer, f.o.b. destination 34,770 Goods in transit from vendor, f.o.b. seller 51,970 Inventory to be reported on balance sheet $542,680 The consigned goods of $65,070 are not owned by Steve and were properly excluded. The goods in transit to a customer of $47,070, shipped f.o.b. shipping point, are properly excluded from the inventory because the title to the goods passed when they left the seller (Steve) and therefore a sale and related cost of goods sold should be recorded in 2017. The goods in transit from a vendor of $91,200, shipped f.o.b. destination, are properly excluded from the inventory because the title to the goods does not pass to Steve until the buyer (Steve) receives them. 4 Sale 93 units at $8 each 11 Purchase 165 units at $6 each 13 Sale 136 units at $9 each 20 Purchase 163 units at $7 each 27 Sale 104 units at $11 each Buffalo uses the FIFO cost flow assumption. All purchases and sales are on account. (a) Your answer is correct. Assume Buffalo uses a periodic system. Prepare all necessary journal entries, including the end-of-month closing entry to record cost of goods sold. A physical count indicates that the ending inventory for January is 113 units. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Solution Exercise 8-9 (Part Level Submission) Jan. 4 Sales Revenue = 93 x $8 = $744 Jan. 11 Purchases = 165 x $6 = $990 Jan. 13 Sales Revenue = 136 x $9 = $1,224 Jan. 20 Purchases = 163 x $7 = $1,141 Jan. 27 Sales Revenue = 104 x $11 = $1,144 Jan. 31 Inventory = $7 x 113 = $791 Cost of Goods Sold = $590 + $2,131 – $791 = $1,930 Purchases = $990 + $1,141 = $2,131 Inventory = 118 x $5 = $590 Assume Buffalo uses a perpetual system. Prepare all necessary journal entries. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) J an. 13 Accounts Receiv 1224 Sales Revenue 1224 (To record the sale) Cost of Goods So 791 Inventory 791 (To record the cost of inventory) J an. 20 Inventory 1141 Accounts Payable 1141 J an. 27 Accounts Receiv 1144 Sales Revenue 1144 (To record the sale) Cost of Goods So 674 Inventory 674 (To record the cost of inventory) Solution Exercise 8-9 (Part Level Submission) Jan. 4 Sales Revenue = 93 x $8 = $744 Jan. 4 Inventory = 93 x $5 = $465 Jan. 11 Accounts Payable = 165 x $6 = $990 Jan. 13 Sales Revenue = 136 x $9 = $1,224 Jan. 13 Inventory = ([(25 x $5) + (111 x $6)] = $791 Jan. 20 Accounts Payable = 163 x $7 = $1,141 Jan. 27 Sales Revenue = 104 x $11 = $1,144 Inventory = [(54 x $6) + (50 x $7)] = $674 Your answer is correct. Compute gross profit using the perpetual system. Solution Exercise 8-9 (Part Level Submission) Sales revenue $3,112 Cost of goods sold ($465 + $791 +$674) 1,930 Gross profit $ 1,182 Exercise 8-12 (Part Level Submission) Vaughn Company was formed on December 1, 2016. The following information is available from Vaughn’s inventory records for Product BAP. A physical inventory on March 31, 2017, shows 1,872 units on hand. Prepare schedule to compute the ending inventory at March 31, 2017, under FIFO inventory method. VAUGHN COMPANY COMPUTATION OF INVENTORY FOR PRODUCT BAP UNDER FIFO INVENTORY METHOD March 31, 2017 Units Unit Cost Total Cost Prepare schedule to compute the ending inventory at March 31, 2017, under LIFO inventory method. 702 8.00 5616 Purchases January 5, 2017 1170 9.00 10530 Calculate average-cost per unit. (Round answer to 2 decimal places, e.g. 2.76.) Exercise 8-12 (Part Level Submission) VAUGHN COMPANY COMPUTATION OF INVENTORY FOR PRODUCT BAP UNDER WEIGHTED-AVERAGE INVENTORY METHOD March 31, 2017 Units Unit Cost Total Cost Beginning inventory 702 $8.00 $ 5,616 January 5, 2017 1,404 9.00 12,636 January 25, 2017 1,521 10.00 15,210 February 16, 2017 936 11.00 10,296 March 26, 2017 702 12.00 8,424 5,265 $52,182 Weighted average-cost ( $52,182 ÷ 5,265) $9.91 Compute the ending inventory at March 31, 2017, under Weighted-average inventory method. (Round answer to 0 decimal places, e.g. 2,760.) Weighted-Average $ Ending Inventory at March 31, 2017 18552 March 31, 2017, inventory 1,872 x $9.91 = $18,552 Exercise 9-2 Your answer is correct. Buffalo Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2017, consists of products D, E, F, G, H, and I. Relevant per unit data for these products appear below. Item D Item E Item F Item G Item H Item I Estimated selling price $140 $129 $111 $105 $129 $105 Cost 88 94 94 94 59 42 Cost to complete 35 35 29 41 35 35 Selling costs 12 21 12 23 12 23 Using the LCNRV rule, determine the proper unit value for balance sheet reporting purposes at December 31, 2017, for each of the inventory items above. $ Item D 88 $ Item E 73 $ Item F 70 $ Item G 41 $ Item H 59 $ Item I 42 Exercise 9-2 Item Net Realizable Value Cos t LCNRV D $93* $88 $88 E 73 94 73 F 70 94 70 G 41 94 41 H 82 59 59 I 47 42 42 *Estimated selling price – Estimated selling expense = $140 – $35 – $12 = $93. Martinez Company follows the practice of pricing its inventory at the lower-of-cost-or-market, on an individual-item basis. Item No. Quantit y Cost per Unit Cost to Replace Estimated Selling Price Cost of Completion and Disposal Normal Profit 1320 1,500 $3.36 $3.15 $4.73 $0.37 $1.31 1333 1,200 2.84 2.42 3.68 0.53 0.53 1426 1,100 4.73 3.89 5.25 0.42 1.05 1437 1,300 3.78 3.26 3.36 0.26 0.95 1510 1,000 2.36 2.10 3.41 0.84 0.63 1522 800 3.15 2.84 3.99 0.42 0.53 1573 3,300 1.89 1.68 2.63 0.79 0.53 1626 1,300 4.94 5.46 6.30 0.53 1.05 From the information above, determine the amount of Martinez Company inventory. $ The amount of Martinez Company’s inventory 32676 Exercise 9-7 Item No. Cost per Unit Replacemen t Cost Net Realizable Value Net Real. Value Less Normal Profit Designated Market Value Quantit y Final Inventory Value 1320 $3.36 $3.15 $4.36* $3.05** $3.15 1,500 $ 4,725 1333 2.84 2.42 3.15 2.62 2.62 1,200 3,144 1426 4.73 3.89 4.83 3.78 3.89 1,100 4,279 1437 3.78 3.26 3.10 2.15 3.10 1,300 4,030 1510 2.36 2.10 2.57 1.94 2.10 1,000 2,100 1522 3.15 2.84 3.57 3.04 3.04 800 2,432 1573 1.89 1.68 1.84 1.31 1.68 3,300 5,544 1626 4.94 5.46 5.77 4.72 5.46 1,300 6,422*** $32,676 *$4.73 – $0.37 = $4.36. **$4.36 – $1.31 = $3.05. ***Cost is used because it is lower than designated market value. Exercise 9-17 Your answer is correct. You are called by Tim Duncan of Bonita Co. on July 16 and asked to prepare a claim for insurance as a result of a theft that took place the night before. You suggest that an inventory be taken immediately. The following data are available. Sales revenue—goods delivered to customers (gross) 121,700 Your client reports that the goods on hand on July 16 cost $30,100, but you determine that this figure includes goods of $6,400 received on a consignment basis. Your past records show that sales are made at approximately 40% over cost. Duncan’s insurance covers only goods owned. Compute the claim against the insurance company. (Round ratios for computational purposes to 2 decimal places, e.g. 78.73% and final answer to 0 decimal places, e.g. 28,987.) $ Claim against the insurance company 5057 Exercise 9-17 Beginning inventory (at cost) $ 35,600 Purchases (at cost) 77,300 Goods available (at cost) 112,900 Sales (at selling price) $121,700 Less sales returns 3,900 Net sales 117,800 Less: Gross profit* (28.57% of $117,800) 33,655 Net sales (at cost) 84,145 Estimated inventory (at cost) 28,755 Less: Goods on hand ($30,100 – $6,400) 23,700 Claim against insurance company $5,055 Note: Depending on details of the consignment agreement and Duncan’s insurance policy, the consigned goods might be considered owned for insurance purposes. Exercise 9-18 Your answer is correct. Carla Lumber Company handles three principal lines of merchandise with these varying rates of gross profit on cost. Lumber 25% Millwork 30% Hardware and fittings 40% On August 18, a fire destroyed the office, lumber shed, and a considerable portion of the lumber stacked in the yard. To file a report of loss for insurance purposes, the company must know what the inventories were immediately preceding the fire. No detail or perpetual inventory records of any kind were maintained. The only pertinent information you are able to obtain are the following facts from the general ledger, which was kept in a fireproof vault and thus escaped destruction. Lumber Millwork Hardware Inventory, Jan. 1, 2017 $247,800 $90,800 $45,600 Purchases to Aug. 18, 2017 1,510,800 380,100 160,000 Sales to Aug. 18, 2017 2,046,800 508,300 200,200 Submit your estimate of the inventory amounts immediately preceding the fire. (Round ratios for computational purposes to 5 decimal places, e.g. 78.74265% and final answers to 0 decimal places, e.g. 28,987.) Lumber Millwork Hardware Inventory $ $ $ 121160 79900 62600 Exercise 9-18 Lumber Millwork Hardware Inventory 1/1/17 (cost) $247,800 $90,800 $45,600 Purchases to 8/18/17 (cost) 1,510,800 380,100 160,000 Cost of goods available 1,758,600 470,900 205,600 Deduct cost of goods sold* 1,637,440 391,000 143,000 Inventory 8/18/17 $121,160 $79,900 $62,600 *Computation for cost of goods sold: Lumber: = $2,046,800 = $1,637,440 1.25 Millwork: = $508,300 = $391,000 *Alternative computation for cost of goods sold: Markup o n selling price: Cost of goods sold: Lumber: 25% 100% + 25% = 20% or 1/5 $2,046,800 x 80% = $1,637,440 Millwork: 30% 100% + 30% = 3/13 $508,300 x 10/13 = $391,000 Hardware: 40% 100% + 40% = 2/7 $200,200 x 5/7 = $143,000 Exercise 9-22 Your answer is correct. The records of Kingbird’s Boutique report the following data for the month of April. Sales revenue $107,900 Purchases (at cost) $51,900 Sales returns 2,000 Purchases (at sales price) 82,700 Markups 10,900 Purchase returns (at cost) 2,000 Markup cancellations 1,700 Purchase returns (at sales price) 3,100 Markdowns 8,600 Beginning inventory (at cost) 28,117 Markdown cancellations 2,800 Beginning inventory (at sales price) 47,500 Freight on purchases 2,400 Compute the ending inventory by the conventional retail inventory method. (Round ratios for computational purposes to 0 decimal places, e.g. 78% and final answer to 0 decimal places, e.g. 28,987.) $ Ending inventory using conventional retail inventory method 14514 Exercise 9-22 Cost Retail Beginning inventory $28,117 $47,500 Purchases 51,900 82,700 Purchase returns (2,000) (3,100) Freight on purchases 2,400 Totals 80,417 127,100 Add: Net markups Markups $10,900 Markup cancellations (1,700) Net markups 9,200 Totals $80,417 136,300 Deduct: Net markdowns Markdowns 8,600 Markdown cancellations (2,800) Net markdowns 5,800 Sales price of goods available 130,500 Deduct: Net sales ($107,900 – $2,000) 105,900 Ending inventory, at retail $24,600 Ending inventory at cost = 59% x $24,600 = $14,514 Cost Retail Beginning inventory $ 56,190 $97,100 Purchases (net) 133,480 198,500 Net markups 10,589 Net markdowns 24,302 Sales revenue 195,610 Don't show me this message again for the assignment Your answer is correct. Compute the ending inventory at retail. $ Ending inventory 86277 Exercise 9-20 Beginning inventory $ 56,190 $97,100 Purchases 133,480 198,500 Net markups 10,589 Totals $189,670 306,189 Net markdowns (24,302) Sales price of goods available 281,887 Deduct: Sales revenue 195,610 Ending inventory at retail $86,277 Compute a cost-to-retail percentage under the following conditions. (Round ratios to 2 decimal places, e.g. 78.74%) Cost-to-retail percentage (1) Excluding both markups and markdowns. 64.16 % (2) Excluding markups but including markdowns. 69.91 % (3) Excluding markdowns but including markups. 61.95 % (4) Including both markdowns and markups. 67.29 % Exercise 9-20 (1) $189,670 ÷ $295,600 = 64.16 % (2) $189,670 ÷ $271,298 = 69.91 % (3) $189,670 ÷ $306,189 = 61.95 % (4) $189,670 ÷ $281,887 = 67.29 % Which of the methods in (b) above does the following? Compute ending inventory at lower-of-cost-or-market. (Round ratio to 2 decimal places, e.g. 78.74% and final answer to 0 decimal places, e.g. 6,225.) Exercise 9-20 61.95% x $86,277 = $53,449 Compute cost of goods sold based on (d). (Round answer to 0 decimal places, e.g. 6,225.) Exercise 9-20 $189,670 – $53,449 = $136,221 Compute gross margin based on (d). (Round answer to 0 decimal places, e.g. 6,225.) Exercise 9-20 $195,610 – $136,221 = $59,389 Brief Exercise 10-10 Your answer is correct. Sheridan Company traded a used welding machine (cost $9,900, accumulated depreciation $3,300) for office equipment with an estimated fair value of $5,500. Sheridan also paid $3,300 cash in the transaction. Prepare the journal entry to record the exchange. (The exchange has commercial substance.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Exercise 10-3 Your answer is correct. Teal Corporation operates a retail computer store. To improve delivery services to customers, the company purchases four new trucks on April 1, 2017. The terms of acquisition for each truck are described below. 1 . Truck #1 has a list price of $47,550 and is acquired for a cash payment of $44,063. 2 . Truck #2 has a list price of $50,720 and is acquired for a down payment of $6,340 cash and a zero-interest-bearing note with a face amount of $44,380. The note is due April 1, 2018. Teal would normally have to pay interest at a rate of 9% for such a borrowing, and the dealership has an incremental borrowing rate of 8%. 3 . Truck #3 has a list price of $50,720. It is acquired in exchange for a computer system that Teal carries in inventory. The computer system cost $38,040 and is normally sold by Teal for $48,184. Teal uses a perpetual inventory system. 4 . Truck #4 has a list price of $44,380. It is acquired in exchange for 1,080 shares of common stock in Teal Corporation. The stock has a par value per share of $10 and a market price of $13 per share. Prepare the appropriate journal entries for the above transactions for Teal Corporation. (Round present value factors to 5 decimal places, e.g. 0.52587 and final answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Exercise 10-3 2 . Trucks = PV of $44,380 @ 9% for 1 year = $44,380 × 0.91743 = $40,716 $40,716 + $6,340 = $47,056 Note: The selling (retail) price of the computer system appears to be a better gauge of the fair value of the consideration given than is the list price of the truck as a gauge of the fair value of the consideration received (truck). Vehicles are very often sold at a price below the list price. Exercise 10-13 Your answer is correct. Presented below is information related to Wildhorse Company. 1. On July 6, Wildhorse Company acquired the plant assets of Doonesbury Company, which had discontinued operations. The appraised value of the property is: Land $406,000 Buildings 1,218,000 Equipmen t 812,000 Total $2,436,000 Wildhorse Company gave 12,500 shares of its $100 par value common stock in exchange. The stock had a market price of $212 per share on the date of the purchase of the property. 2. Wildhorse Company expended the following amounts in cash between July 6 and December 15, the date when it first occupied the building. (Prepare consolidated entry for all transactions below.) Repairs to building $101,830 Construction of bases for equipment to be installed later 128,250 Driveways and parking lots 125,120 Remodeling of office space in building, including new partitions and walls 152,260 Special assessment by city on land 17,730 Exercise 10-13 1 Com . Buildings mon Stock 2 = $1,250,000 Paid-in Capital in Excess of Par-Common Stock = ($2,650,000 – $1,250,000) = $1,400,000 Equipment The cost of the property, plant and equipm88e3n3t3i3s $2,650,000 (12,500 × $212). This cost is allocated based on appraised values as follows: Your answer is partially correct. Pearl Company purchased equipment for $244,530 on October 1, 2017. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $13,680. Estimated production is 40,500 units and estimated working hours are 20,000. During 2017, Pearl uses the equipment for 520 hours and the equipment produces 1,100 units. Compute depreciation expense under each of the following methods. Pearl is on a calendar-year basis ending December 31. (Round rate per hour and rate per unit to 2 decimal places, e.g. 5.35 and final answers to 0 decimal places, e.g. 45,892.) (a) Straight-line method for 2017 $ 7214 (b) Activity method (units of output) for 2017 $ 6270 (c) Activity method (working hours) for 2017 $ 6001 (d) Sum-of-the-years'-digits method for 2019 $ 43,285 (e) Double-declining-balance method for 2018 $ 57312 Exercise 11-6 Allocated to Sum-of-the-years'-digits Total 2017 2018 2019 Year 1 8/36 x $230,850 = $51,300 $12,825 $38,475 2 7/36 x $230,850 = $44,888 11,222 $33,666 3 6/36 x $230,850 = $38,475 9,619 $12,825 $49,697 $43,285 2019: $43,285 = (9/12 of 2nd year of machine’s life plus 3/12 of 3rd year of machine’s life) (e) Double-declining-balance 2018: 1/8 x 2 = 25%. 2017: 25% x $244,530 x 3/12 = $15,283 2018: 25% x ($244,530 – $15,283) = $57,312 OR 1st full year (25% x $244,530) = $61,133 2nd full year [25% x ($244,530 – $61,133)] = $45,849 2017 Depreciation 3/12 x $61,133 = $15,283 2018 Depreciation 9/12 x $61,133 = $45,850 3/12 x $45,849 = 11,462 $57,312 Exercise 11-15 Your answer is correct. On March 10, 2019, Shamrock Company sells equipment that it purchased for $213,120 on August 20, 2012. It was originally estimated that the equipment would have a life of 12 years and a salvage value of $18,648 at the end of that time, and depreciation has been computed on that basis. The company uses the straight-line method of depreciation. Compute the depreciation charge on this equipment for 2012, for 2019, and the total charge for the period from 2013 to 2018, inclusive, under each of the six following assumptions with respect to partial periods. (Round depreciation per day to 2 decimal places, e.g. 15.64 and final answers to 0 decimal places, e.g. 45,892.) Exercise 11-15 2013–2018 2012 Incl. 2019 Total (1) $213,120 – $18,648 = $194,472 $194,472 ÷ 12 = $16,206 per yr. ($44.40 per day) 133*/365 of $16,206 = $5,905 2013–2018 Include. (6 x $16,206) $97,236 68/365 of $16,206 = $3,019 $106,160 (2) 0 $97,236 $16,206 113,442 (3) $16,206 $97,236 0 113,442 (4) $8,103 $97,236 $8,103 113,442 (5) 4/12 of $16,206 $5,402 2013–2018 Inc. $97,236 3/12 of $16,206 $4,052 106,690 (6) 0 $97,236 0 97,236 *(11 + 30 + 31 + 30 + 31) = 133 The 2014 Annual Report of Tootsie Roll Industries contains the following information. (in millions) December 31, 2014 December 31, 2013 Total assets $910.4 $888.4 Total liabilities 219.3 208.1 Net sales 539.9 539.6 Net income 63.2 60.8 Compute the following ratios for Tootsie Roll for 2014. time 0.6003 s (b) Return on assets (Round answer to 2 decimal places, e.g. 4.87%.) 7.03 % (c) Profit margin on sales (Round answer to 3 decimal places, e.g. 4.872%.) 11.706 % Exercise 11-24 Exercise 12-1 Your answer is correct. Presented below is a list of items that could be included in the intangible assets section of the balance sheet. (a) Indicate which items on the list below would generally be reported as intangible assets in the balance sheet. Not an Intangible Asset 4. Lease prepayment (6 months’ rent paid in advance). 5. Cost of equipment obtained. 6. Cost of searching for applications of new research findings. 7. Costs incurred in the formation of a corporation. 8. Operating losses incurred in the start-up of a business. 9. Training costs incurred in start-up of new operation. Not an Intangible Asset Not an Intangible Asset Not an Intangible Asset Not an Intangible Asset Not an Intangible Asset Not an Intangible Asset 10. Purchase cost of a franchise. Intangible Asset 11. Goodwill generated internally. Not an Intangible Asset 12. Cost of testing in search for product alternatives. Not an Intangible Asset 13. Goodwill acquired in the purchase of a business. Intangible Asset 14. Cost of developing a patent. Not an Intangible Asset 15. Cost of purchasing a patent from an inventor. Intangible Asset 16. Legal costs incurred in securing a patent. Intangible Asset Intangible Asset 17. Unrecovered costs of a successful legal suit to protect the patent. 18. Cost of conceptual formulation of possible product alternatives. 19. Cost of purchasing a copyright. 20. Research and development costs. 21. Long-term receivables. 22. Cost of developing a trademark. Intangible Asset Not an Intangible Asset Intangible Asset Not an Intangible Asset Not an Intangible Asset Not an Intangible Asset Exercise 12-4 Presented below is selected information for Sandhill Company. Answer the questions asked about each of the factual situations. 1. Sandhill purchased a patent from Vania Co. for $1,190,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Sandhill determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2017? $ The amount to be reported 714000 2. Sandhill bought a franchise from Alexander Co. on January 1, 2016, for $345,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was $495,000. The franchise agreement had an estimated useful life of 30 years. Because Sandhill must enter a competitive bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount should be amortized for the year ended December 31, 2017? $ The amount to be amortized 34500 3. On January 1, 2017, Sandhill incurred organization costs of $272,500. What amount of organization expense should be reported in 2017? $ The amount to be reported 272500 4. Sandhill purchased the license for distribution of a popular consumer product on January 1, 2017, for $149,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Sandhill can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017? $ The amount to be amortized 0 Exercise 12-4 1. Sandhill should report the patent at $714,000 (net of $476,000 accumulated amortization) on the balance sheet. The computation of accumulated amortization is as follows. Amortization for 2015 and 2016 = ($1,190,000/10) × 2 = $238,000 2017 amortization: = ($1,190,000 – $238,000) ÷ (6 – 2) = 238,000 Accumulated amortization, 12/31/17 $476,000 2. Sandhill should amortize the franchise over its estimated useful life. Because it is uncertain that Sandhill will be able to retain the franchise at the end of 2025, it should be amortized over 10 years. The amount of amortization on the franchise for the year ended December 31, 2017, is $34,500: ($345,000/10). 3. These costs should be expensed as incurred. Therefore $272,500 of organization expense is reported in income for 2017. 4. Because the license can be easily renewed (at nominal cost), it has an indefinite life. Thus, no amortization will be recorded. The license will be tested for impairment in future periods. Exercise 12-14 (Part Level Submission) Presented below is net asset information related to the Windsor Division of Santana, Inc. WINDSOR DIVISION NET ASSETS AS OF DECEMBER 31, 2017 (IN MILLIONS) Cash $72 Accounts receivable 205 Property, plant, and equipment (net) 2,616 Goodwill 201 Less: Notes payable (2,611) Net assets $483 The purpose of the Windsor Division is to develop a nuclear-powered aircraft. If successful, traveling delays associated with refueling could be substantially reduced. Many other benefits would also occur. To date, management has not had much success and is deciding whether a write-down at this time is appropriate. Management estimated its future net cash flows from the project to be $440 million. Management has also received an offer to purchase the division for $330 million. All identifiable assets’ and liabilities’ book and fair value amounts are the same. (a) Your answer is correct. Prepare the journal entry to record the impairment at December 31, 2017. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Exercise 12-14 (Part Level Submission) The fair value of the reporting unit ($330 million) is below its carrying value ($483 million). Therefore, an impairment has occurred. To determine the impairment amount, we first find the implied goodwill. We then compare this implied fair value to the carrying value of the goodwill to determine the amount of the impairment to record. Fair value of division $330,000,000 Carrying amount of division, net of goodwill 282,000,000 Implied value of goodwill 48,000,000 Carrying value of goodwill (201,000,000) Loss on impairment $153,000,000 *($483,000,000 – $201,000,000) Exercise 13-2 (Part Level Submission) The following are selected 2017 transactions of Flint Corporation. Don't show me this message again for the assignment (a) Your answer is correct. Prepare journal entries for the selected transactions above. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Record entries in the order displayed in the problem statement.) Prepare adjusting entries at December 31. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,125.) Exercise 13-2 (Part Level Submission) Compute the total net liability to be reported on the December 31 balance sheet for: (1) The interest-bearing note $ 60,792 $ (2) The zero-interest-bearing note 60,430 Exercise 13-2 (Part Level Submission) (1) Notes payable $59,600 Interest payable 1,192 $60,792 (2) Notes payable $62,920 Less discount ($3,320 – $830) 2,490 $60,430 Payroll Wages Due FICA Federal State Factory $127,400 $127,400 $42,700 $42,700 Sales 28,900 28,900 4,000 4,000 Administrativ e 35,200 35,200 Total $191,500 $191,500 $46,700 $46,700 At this point in the year, some employees have already received wages in excess of those to which payroll taxes apply. Assume that the state unemployment tax is 2.5%. The FICA rate is 7.65% on an employee’s wages to $118,500 and 1.45% in excess of $118,500. Of the $191,500 wages subject to FICA tax, $21,000 of the sales wages is in excess of $118,500. Federal unemployment tax rate is 0.8% after credits. Income tax withheld amounts to $15,400 for factory, $7,700 for sales, and $6,800 for administrative. Don't show me this message again for the assignment (a) Your answer is correct. Prepare a schedule showing the employer’s total cost of wages for November by function. (Round answers to 0 decimal places, e.g. 5,275.) Exercise 13-7 (Part Level Submission) Salaries and wages $127,400 Social security taxes (FICA) 9,746 (7.65% × $127,400) Federal unemployment taxes (FUTA) 342 (0.8% × $42,700) State unemployment taxes (SUTA) 1,068 (2.5% × $42,700) Total Cost $138,556 Sales Salaries and wages $28,900 Social security taxes (FICA) 909* Federal unemployment taxes (FUTA) 32 (0.8% × $4,000) State unemployment taxes (SUTA) 100 (2.5% × $4,000) Total Cost $29,941 *$7,900 × 7.65% = $604; $21,000 × 1.45% = $305; $604 + $305 = $909 Administrative Salaries and wages $35,200 Social security taxes (FICA) 2,693 (7.65% × $35,200) Federal unemployment taxes (FUTA) 0 State unemployment taxes (SUTA) 0 Total Cost $37,893 Prepare the journal entries to record the factory, sales, and administrative payrolls including the employer’s payroll taxes. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,125.) Presented below is a list of possible transactions. Analyze the effect of the 18 transactions on the financial statement categories indicated. 2. Issued an $80,000 note payable in payment on account (see item 1 above). EAT_1362732209 EAT_1362732209 EAT_1362732209 EAT_1362732209 No net effect No net effect No net effect No net effect 3. Recorded accrued interest on the note from item 2 above. EAT_1362732209 EAT_1362732209 EAT_1362732209 EAT_1362732209 No net effect Increase Decrease Decrease 4. Borrowed $100,000 from the bank by signing a 6-month, $112,000, zero-interest-bearing note. EAT_1362732209 EAT_1362732209 EAT_1362732209 EAT_1362732209 Increase Increase No net effect No net effect 5. Recognized 4 months’ interest expense on the note from item 4 above. EAT_1362732209 EAT_1362732209 EAT_1362732209 EAT_1362732209 No net effect Increase Decrease Decrease 6. Recorded cash sales of $75,260, which includes 6% sales tax. EAT_1362732209 EAT_1362732209 EAT_1362732209 EAT_1362732209 Increase Increase Increase Increase 7. Recorded wage expense of $35,000. The cash paid was $25,000; the difference was due to various amounts withheld. 8. Recorded employer’s payroll taxes. EAT_1362732209 Decrease EAT_1362732209 EAT_1362732209 Increase EAT_1362732209 EAT_1362732209 Decrease EAT_1362732209 EAT_1362732209 Decrease EAT_1362732209 No net effect Increase Decrease Decrease 9. Accrued accumulated vacation pay. EAT_1362732209 EAT_1362732209 EAT_1362732209 EAT_1362732209 No net effect Increase Decrease Decrease 10. Recorded an asset retirement obligation. EAT_1362732209 EAT_1362732209 EAT_1362732209 EAT_1362732209 Increase Increase No net effect No net effect 11. Recorded bonuses due to employees. EAT_1362732209 EAT_1362732209 EAT_1362732209 EAT_1362732209 No net effect Increase Decrease Decrease 12. Recorded a contingent loss on a lawsuit that the company will probably lose. EAT_1362732209 EAT_1362732209 EAT_1362732209 EAT_1362732209 No net effect Increase Decrease Decrease 13. Accrued warranty expense (assume expense warranty approach). EAT_1362732209 EAT_1362732209 EAT_1362732209 EAT_1362732209 No net effect Increase Decrease Decrease 14. Paid warranty costs that were accrued in item 13 above. EAT_1362732209 EAT_1362732209 EAT_1362732209 EAT_1362732209 Decrease Decrease No net effect No net effect 15. Recorded sales of product and related service- type warranties. EAT_1362732209 EAT_1362732209 EAT_1362732209 EAT_1362732209 Increase Increase Increase Increase 16. Paid warranty costs under contracts from item 15 above. EAT_1362732209 EAT_1362732209 EAT_1362732209 EAT_1362732209 Decrease No net effect Decrease Decrease 17. Recognized warranty revenue (see item 15 above). EAT_1362732209 EAT_1362732209 EAT_1362732209 EAT_1362732209 No net effect Decrease Increase Increase Don't show me this message again for the assignment Crane Company issued $420,000 of 10%, 20-year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Crane Company uses the straight-line method of amortization for bond premium or discount. Prepare the journal entries to record the following. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) (c) The accrual of interest and the related amortization on December 31, 2017. Exercise 14-4 1/1/17 Cash = ($420,000 x 102%) = $428,400 7/1/17 Premium on Bonds Payable = ($8,400 ÷ 40) = $210 Cash = ($420,000 x 10% x 6/12) = $21,000 Sandhill Company sells 9% bonds having a maturity value of $2,500,000 for $2,229,651. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1. Set up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to 0 decimal places, e.g. 38,548.) Schedule of Discount Amortization Straight-Line Method Year Cash Paid Interest Expense Discount Carrying Amortized Amount of Bonds Jan. 1, 2017 $ $ $ $ Jan. 1, 2018 225000 279070 54070 2283721 Jan. 1, 2019 225000 279070 54070 2337791 Jan. 1, 2020 225000 279070 54070 2391861 Jan. 1, 2021 225000 279070 54070 2445931 Jan. 1, 2022 225000 279070 54070 2500001 Exercise 14-6 Schedule of Discount Amortization Straight-Line Method Year Cash Paid Interest Expense Discount Amortize d Carrying Amount of Bonds Jan. 1, 2017 $2,229,651 Jan. 1, 2018 $225,000* $279,070 $54,070** 2,283,721 Jan. 1, 2019 225,000 279,070 54,070 2,337,791 Jan. 1, 2020 225,000 279,070 54,070 2,391,861 Jan. 1, 2021 225,000 279,070 54,070 2,445,931 Jan. 1, 2022 225,000 279,070 54,070 2,500,001 *$225,000 = $2,500,000 × 9% **$54,070 = ($2,500,000 – $2,229,651) ÷ 5 (a) Your answer is correct. Prepare the journal entries to record the following transactions. (Round answer to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) (1) The issuance of the bonds on June 30, 2017. (2) The payment of interest and the amortization of the premium on December 31, 2017. (3) The payment of interest and the amortization of the premium on June 30, 2018. (4) The payment of interest and the amortization of the premium on December 31, 2018. (4) December 31, 2018 Interest Expen o Exercise 14-9 (Part Level Submission) (2) Interest Expense = ($3,440,734 x 12% x 6/12) = $206,444 Cash = ($3,200,000 x 13% x 6/12) = $208,000 (3) Interest Expense = [($3,440,734 – $1,556) x 12% x 6/12] = $206,351 (4) Interest Expense = [($3,440,734 – $1,556 – $1,649) x 12% x 6/12] = $206,252 (b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2018, balance sheet. (Round answers to 0 decimal places, e.g. 38,548.) December 31, 2018 3435781 Exercise 14-9 (Part Level Submission) (c) Provide the answers to the following questions. (1) What amount of interest expense is reported for 2018? (Round answer to 0 decimal places, e.g. 38,548.) $ Interest expense reported for 2018 412603 (2) Will the bond interest expense reported in 2018 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used? (3) Determine the total cost of borrowing over the life of the bond. (Round answer to 0 decimal places, e.g. 38,548.) $ Total cost of borrowing over the life of the bond 8079266 (4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used? Exercise 14-9 (Part Level Submission) (1) Interest expense for the period from January 1 to June 30, 2018 from (a) 3 $206,351 Interest expense for the period from July 1 to December 31, 2018 from (a) 4 206,252 Amount of bond interest expense reported for 2018 $412,603 (2) The amount of bond interest expense reported in 2018 will be greater than the amount that would be reported if the straight-line method of amortization were used. Under the straight-line method, the amortization of bond premium is $12,037 ($240,734/20). Bond interest expense for 2018 is the difference between the amortized premium, $12,037, and the actual interest paid, $416,000 ($3,200,000 x 13%). Thus, the amount of bond interest expense is $403,963 ($416,000 – $12,037), which is smaller than the bond interest expense under the effective-interest method. (3) Total interest to be paid for the bond ($3,200,000 x 13% x 20) $8,320,000 Principal due in 2034 3,200,000 Total cash outlays for the bond 11,520,000 Cash received at issuance of the bond 3,440,734 Total cost of borrowing over the life of the bond $8,079,266 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Problem 14-2 (Part Level Submission) Present value of the principal $2,140,000 x 0.35218 (PV10, 11%) $ 753,665 Present value of the interest payments $256,800* x 5.88923 (PVOA10, 11%) 1,512,354 Present value (selling price of the bonds) $2,266,019 *$2,140,000 x 12% = $256,800 Prepare a bond amortization schedule up to and including January 1, 2020, using the effective interest method. (Round answers to 0 decimal places, e.g. 38,548.) Assume that on July 1, 2019, Riverbed Co. redeems half of the bonds at a cost of $1,143,800 plus accrued interest. Prepare the journal entry to record this redemption. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Problem 14-2 (Part Level Submission) Carrying amount as of 1/1/19 $2,240,827 Less: Amortization of bond premium (10,309 ÷ 2) 5,155 Carrying amount as of 7/1/19 $2,235,672 Reacquisition price $1,143,800 Carrying amount as of 7/1/19 ($2,235,672 ÷ 2) (1,117,836) Loss on redemption of bonds $25,964 1. Premium on Bonds Payable = ($10,309 x 1/2 x 1/2) = $2,577 Cash = ($256,800 x 1/2 x 1/2) = $64,200 The loss is reported as an ordinary loss. Assume that IBM leased equipment that was carried at a cost of $92,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2017, with equal rental payments of $18,427 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is $92,000. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM. Prepare IBM’s January 1, 2017, journal entries at the inception of the lease. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.) Click here to view factor tables Brief Exercise 21-6 Lease Receivable = (4.99271 x $18,427) = $92,000 1. Noncancelable term of 50 months. 2. Rental of $250 per month (at end of each month). (The present value at 1% per month is $9,800.) 3. Estimated residual value after 50 months is $1,040. (The present value at 1% per month is $632.) Sweet Company guarantees the residual value of $1,040. 4. Estimated economic life of the automobile is 60 months. 5. Sweet Company’s incremental borrowing rate is 12% a year (1% a month). Simon’s implicit rate is unknown. $ The present value of the minimum lease payments 10432 Exercise 21-2 The minimum lease payments in the case of a guaranteed residual value by the lessee include the guaranteed residual value. The present value therefore is: Monthly payment of $250 for 50 months $9,800 Residual value of $1,040 632 Present value of minimum lease payments $10,432 (c) Record the lease on Sweet Company’s books at the date of inception. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) (d) Record the first month’s depreciation on Sweet Company’s books (assume straight-line). (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 15.) (e) Record the first month’s lease payment. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 15.) Exercise 21-2 (d) Accumulated Depreciation—Capital Leases = [($10,432 – $1,040) ÷ 50 months] = $188 (e) Interest Expense = (0.01 x $10,432) = $104 Exercise 21-8 (Part Level Submission) The following facts pertain to a noncancelable lease agreement between Flint Leasing Company and Buffalo Company, a lessee. Inception date: May 1, 2017 Annual lease payment due at the beginning of each year, beginning with May 1, 2017 $20,253.44 Bargain-purchase option price at end of lease term $4,100 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $66,000 Fair value of asset at May 1, 2017 $87,000 Lessor’s implicit rate 10 % Lessee’s incremental borrowing rate 10 % The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs. Click here to view factor tables (c) Your answer is correct. Prepare a lease amortization schedule for Buffalo Company for the 5-year lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25125 and Round answers to 2 decimal places, e.g. 15.25.) Date Annual Lease Payment Plus BPO Interest on Liability Reduction of Lease Liability Lease Liability 5/1/17 $ $ $ $ 5/1/17 5/1/18 Exercise 21-8 (Part Level Submission) Computation of lease liability: $20,253.44 Annual rental payment x 4.16987 PV of annuity due of 1 for n = 5, i = 10% $84,454.23 PV of periodic rental payments $4,100 Bargain-purchase option x 0.62092 PV of 1 for n = 5, i = 0.10% $2,545.77 PV of bargain-purchase option $84,454.23 PV of periodic rental payments + 2,545.77 PV of bargain-purchase option $87,000 Lease liability Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Buffalo’s annual accounting period ends on December 31. Reversing entries are used by Buffalo. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and Round answers to 2 decimal places, e.g. 15.25.) 8700 (To record depreciation.) Exercise 21-8 (Part Level Submission) 12/31/17 Interest Payable = ($6,674.66 x 8/12) = $4,449.77 Accumulated Depreciation—Capital Leases = ($87,000 ÷ 10 = $8,700.00; $8,700.00 x 8/12) = $5,800.00 12/31/18 Interest Payable = ($5,316.78 x 8/12) = $3,544.52 Accumulated Depreciation—Capital Leases = ($87,000 ÷ 10 years) = $8,700.00 Note: Because a bargain-purchase option was involved, the leased asset is depreciated over its economic life rather than over the lease term. On January 1, 2017, Coronado Co. leased a building to Whispering Inc. The relevant information related to the lease is as follows. 1. The lease arrangement is for 10 years. 2. The leased building cost $4,495,000 and was purchased for cash on January 1, 2017. 3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value. 4. Lease payments are $269,000 per year and are made at the end of the year. 5. Property tax expense of $90,200 and insurance expense of $10,800 on the building were incurred by Coronado in the first year. Payment on these two items was made at the end of the year. 6. Both the lessor and the lessee are on a calendar-year basis. (a) Prepare the journal entries that Coronado Co. should make in 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) (b) Prepare the journal entries that Whispering Inc. should make in 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Debit Credit Explanation 12/31/17 Rent Expense 269000 (c) If Coronado paid $29,200 to a real estate broker on January 1, 2017, as a fee for finding the lessee, how much should Coronado Co. report as an expense for this item in 2017? $ Expense should be reported 2920 Exercise 21-12 (a) Accumulated Depreciation-Buildings = ($4,495,000 ÷ 50) = $89,900 (c) The real estate broker’s fee should be capitalized and amortized equally over the 10-year period. As a result, real estate fee expense of $2,920 ($29,200 ÷ 10) should be reported in each period. On February 20, 2017, Sheffield Inc. purchased a machine for $1,602,000 for the purpose of leasing it. The machine is expected to have a 10- year life, no residual value, and will be depreciated on the straight-line basis. The machine was leased to Tamarisk Company on March 1, 2017, for a 4-year period at a monthly rental of $17,700. There is no provision for the renewal of the lease or purchase of the machine by the lessee at the expiration of the lease term. Sheffield paid $32,640 of commissions associated with negotiating the lease in February 2017. (a) What expense should Tamarisk Company record as a result of the facts above for the year ended December 31, 2017? (b) What income or loss before income taxes should Sheffield record as a result of the facts above for the year ended December 31, 2017? (Hint: Amortize commissions over the life of the lease.) Exercise 21-14 (a) TAMARISK COMPANY Rent Expense For the Year Ended December 31, 2017 Monthly rental $17,700 Lease period in 2017 (March–December) x 10 months $177,000 (b) SHEFFIELD INC. Income or Loss from Lease before Taxes For the Year Ended December 31, 2017 Rental revenue ($17,700 x 10 months) $177,000 Less expense Depreciation $133,500* Commission 6,800** 140,300 Income from lease before taxes $36,700 * $1,602,000 cost ÷ 10 years = $160,200/year $160,200 x 10/12 = $133,500 **Under principles of accrual accounting, the commission should be amortized over the life of the lease: $32,640 ÷ 4 years = $8,160 x 10/12 = $6,800. Presented below are four independent situations. (Round answers to 0 decimal places, e.g. 125. If answer is 0, please enter 0. Do not leave any fields blank.) (a) On December 31, 2017, Oriole Inc. sold computer equipment to Daniell Co. and immediately leased it back for 10 years. The sales price of the equipment was $517,600, its carrying amount is $400,000, and its estimated remaining economic life is 12 years. Determine the amount of deferred revenue to be reported from the sale of the computer equipment on December 31, 2017. $ The amount of deferred revenue to be reported 117600 (b) On December 31, 2017, Waterway Co. sold a machine to Cross Co. and simultaneously leased it back for one year. The sales price of the machine was $484,700, the carrying amount is $417,700, and it had an estimated remaining useful life of 14 years. The present value of the rental payments for the one year is $34,700. At December 31, 2017, how much should Waterway report as deferred revenue from the sale of the machine? $ The amount of deferred revenue to be reported 0 (c) On January 1, 2017, Wildhorse Corp. sold an airplane with an estimated useful life of 10 years. At the same time, Wildhorse leased back the plane for 10 years. The sales price of the airplane was $500,500, the carrying amount $378,400, and the annual rental $74,204. Wildhorse Corp. intends to depreciate the leased asset using the sum-of-the-years’-digits depreciation method. How much gain on the sale should be reported at the end of 2017 in the financial statements? $ The gain on the sale should be reported 22200 (d) On January 1, 2017, Sheffield Co. sold equipment with an estimated useful life of 5 years. At the same time, Sheffield leased back the equipment for 2 years under a lease classified as an operating lease. The sales price (fair value) of the equipment was $213,300, the carrying amount is $302,700, the monthly rental under the lease is $6,000, and the present value of the rental payments is $115,995. For the year ended December 31, 2017, determine which items would be reported on its income statement for the sale-leaseback transaction. Exercise 21-16 (a) Sale-leaseback arrangements are treated as though two transactions were a single financing transaction if the lease qualifies as a capital lease. Any gain on the sale is deferred and amortized over the lease term (if possession reverts to the lessor) or the economic life (if ownership transfers to the lessee). In this case, the lease qualifies as a capital lease because the lease term (10 years) is 83% of the remaining economic life of the leased property (12 years). Therefore, at 12/31/17, all of the gain of $117,600 ($517,600 – $400,000) would be deferred and amortized over 10 years. Since the sale took place on 12/31/17, there is no amortization for 2017. (b) A sale-leaseback is usually treated as a single financing transaction in which any profit on the sale is deferred and amortized by the seller. However, FASB amends this general rule when either only a minor part of the remaining use of the property is retained, or more than a minor part but less than substantially all of the remaining use of property is retained. The first situation occurs when the present value of the lease payments is 10% or less of the fair value of the sale-leaseback property. The second situation occurs when the lease-back is more than minor but does not meet the criteria of a capital lease for all the property sold. (The second situation was not discussed in the text.) This problem is an example of the first situation because the present value of the lease payments ($34,700) is less than 10% of the fair value of the asset ($484,700). Under these circumstances the sale and the leaseback are accounted for as separate transactions. Therefore, the full gain ($484,700 – $417,700, or $67,000) is recognized and $0 is deferred. (c) The profit on the sale of $122,100 should be deferred and amortized over the lease term. Since the leased asset is being depreciated using the sum-of-the-years’ depreciation method, the deferred gain should also be reported in the same manner. Therefore, in the first year, $22,200 (10/55 x $122,100) of the gain would be recognized. (d) In this case, Sheffield would report a loss of $89,400 ($302,700 – $213,300) for the difference between the book value and lower fair value. The profession requires that when the fair value of the asset is less than the book value (carrying amount), a loss must be recognized immediately. In addition, rent expense of $72,000 (12 x $6,000) should be reported. [Show More]

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