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P 12–7 - Amalgamated General Corporation - Securities held-to- maturity, securities available for sale, and trading securities ● LO1 LO2 LO3 (also see included excel file)
Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division. From time to time the company buys and sells securities intending to earn profits on short-term differences in price. The following selected transactions relate to Amalgamated’s investment activities during the last quarter of 2011 and the first month of 2012. The only securities held by Amalgamated at October 1 were $30 million of 10% bonds of Kansas Abstractors, Inc., purchased on May 1 at face value. The company’s fiscal year ends on December 31.
2011
Oct. 18 Purchased 2 million preferred shares of Millwork Ventures Company for $58 million as a speculative investment to be sold under suitable circumstances.
31 Received semiannual interest of $1.5 million from the Kansas Abstractors bonds.
Nov. 1 Purchased 10% bonds of Holistic Entertainment Enterprises at their $18 million face value, to be held until they mature in 2018. Semiannual interest is payable April 30 and October 31.
Sold the Kansas Abstractors bonds for $28 million because rising interest rates are expected to cause their fair value to continue to fall.
Dec. 1 Purchased 12% bonds of Household Plastics Corporation at their $60 million face value, to be held until they mature in 2028. Semiannual interest is payable May 31 and November 30.
20 Purchased U. S. Treasury bonds for $5.6 million as trading securities, hoping to earn profits on short-term differences in prices.
21 Purchased 4 million common shares of NXS Corporation for $44 million as trading securities, hoping to earn profits on short-term differences in prices.
23 Sold the Treasury bonds for $5.7 million.
29 Received cash dividends of $3 million from the Millwork Ventures Company preferred shares.
31 Recorded any necessary adjusting entry(s) and closing entries relating to the investments. The market price of the Millwork Ventures Company preferred stock was $27.50 per share and $11.50 per share for the NXS Corporation common. The fair values of the bond investments were $58.7 million for Household Plastics Corporation and $16.7 million for Holistic Entertainment Enterprises.
2012
Jan. 7 Sold the NXS Corporation common shares for $43 million.
Required:
Prepare the appropriate journal entry for each transaction or event. go to http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-P12-7-Amalgamated-General-Corporation
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P 12–7 - Amalgamated General Corporation - Securities held-to- maturity, securities available for sale, and trading securities ● LO1 LO2 LO3 (also see included excel file)
Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division. From time to time the company buys and sells securities intending to earn profits on short-term differences in price. The following selected transactions relate to Amalgamated’s investment activities during the last quarter of 2011 and the first month of 2012. The only securities held by Amalgamated at October 1 were $30 million of 10% bonds of Kansas Abstractors, Inc., purchased on May 1 at face value. The company’s fiscal year ends on December 31.
2011
Oct. 18 Purchased 2 million preferred shares of Millwork Ventures Company for $58 million as a speculative investment to be sold under suitable circumstances.
31 Received semiannual interest of $1.5 million from the Kansas Abstractors bonds.
Nov. 1 Purchased 10% bonds of Holistic Entertainment Enterprises at their $18 million face value, to be held until they mature in 2018. Semiannual interest is payable April 30 and October 31.
Sold the Kansas Abstractors bonds for $28 million because rising interest rates are expected to cause their fair value to continue to fall.
Dec. 1 Purchased 12% bonds of Household Plastics Corporation at their $60 million face value, to be held until they mature in 2028. Semiannual interest is payable May 31 and November 30.
20 Purchased U. S. Treasury bonds for $5.6 million as trading securities, hoping to earn profits on short-term differences in prices.
21 Purchased 4 million common shares of NXS Corporation for $44 million as trading securities, hoping to earn profits on short-term differences in prices.
23 Sold the Treasury bonds for $5.7 million.
29 Received cash dividends of $3 million from the Millwork Ventures Company preferred shares.
31 Recorded any necessary adjusting entry(s) and closing entries relating to the investments. The market price of the Millwork Ventures Company preferred stock was $27.50 per share and $11.50 per share for the NXS Corporation common. The fair values of the bond investments were $58.7 million for Household Plastics Corporation and $16.7 million for Holistic Entertainment Enterprises.
2012
Jan. 7 Sold the NXS Corporation common shares for $43 million.
Required:
Prepare the appropriate journal entry for each transaction or event. go to http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-P12-7-Amalgamated-General-Corporation
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P12–10 - Runyan Bakery - Fair value option; equity method investments ● LO2 LO4 LO7
On January 4, 2011, Runyan Bakery paid $324 million for 10 million shares of Lavery Labeling Company common stock. The investment represents a 30% interest in the net assets of Lavery and gave Runyan the ability to exercise significant influence over Lavery’s operations. Runyan chose the fair value option to account for this investment. Runyan received dividends of $2.00 per share on December 15, 2011, and Lavery reported net income of $160 million for the year ended December 31, 2011. The market value of Lavery’s common stock at December 31, 2011, was $31 per share. On the purchase date, the book value of Lavery’s net assets was $800 million and:
a. The fair value of Lavery’s depreciable assets, with an average remaining useful life of six years, exceeded their book value by $80 million.
b. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.
Required:
1. Prepare all appropriate journal entries related to the investment during 2011, assuming Runyan accounts for this investment under the fair value option and accounts for the Lavery investment in a manner similar to what they would use for trading securities.
2. Prepare the journal entries required by Runyan, assuming that the 10 million shares represents a 10% interest in the net assets of Lavery rather than a 30% interest. go to: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-P12-10-Runyan-Bakery
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P12–10 - Runyan Bakery - Fair value option; equity method investments ● LO2 LO4 LO7
On January 4, 2011, Runyan Bakery paid $324 million for 10 million shares of Lavery Labeling Company common stock. The investment represents a 30% interest in the net assets of Lavery and gave Runyan the ability to exercise significant influence over Lavery’s operations. Runyan chose the fair value option to account for this investment. Runyan received dividends of $2.00 per share on December 15, 2011, and Lavery reported net income of $160 million for the year ended December 31, 2011. The market value of Lavery’s common stock at December 31, 2011, was $31 per share. On the purchase date, the book value of Lavery’s net assets was $800 million and:
a. The fair value of Lavery’s depreciable assets, with an average remaining useful life of six years, exceeded their book value by $80 million.
b. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.
Required:
1. Prepare all appropriate journal entries related to the investment during 2011, assuming Runyan accounts for this investment under the fair value option and accounts for the Lavery investment in a manner similar to what they would use for trading securities.
2. Prepare the journal entries required by Runyan, assuming that the 10 million shares represents a 10% interest in the net assets of Lavery rather than a 30% interest. go to: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-P12-10-Runyan-Bakery
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P12–14 Classifying investments ● LO1 through LO5
Required:
Indicate (by letter) the way each of the investments listed below most likely should be accounted for based on the information provided.
See next page! go to: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-P12-14-Classifying-investments
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P12–14 Classifying investments ● LO1 through LO5
Required:
Indicate (by letter) the way each of the investments listed below most likely should be accounted for based on the information provided.
See next page! go to: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-P12-14-Classifying-investments
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E13–21 - Disclosures of liabilities ● LO1 through LO6
Required:
Indicate (by letter) the way each of the items listed below should be reported in a
balance sheet at December 31, 2011. go to http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-E13-21-Disclosures-of-liabilities
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E13–21 - Disclosures of liabilities ● LO1 through LO6
Required:
Indicate (by letter) the way each of the items listed below should be reported in a
balance sheet at December 31, 2011. go to http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-E13-21-Disclosures-of-liabilities
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E13–22 - Woodmier Lawn Products - Warranty expense; change in estimate ● LO5 LO6
Woodmier Lawn Products introduced a new line of commercial sprinklers in 2010 that carry a one-year warranty against manufacturer’s defects. Because this was the first product for which the company offered a warranty, trade publications were consulted to determine the experience of others in the industry. Based on that experience, warranty costs were expected to approximate 2% of sales. Sales of the sprinklers in 2010 were $2.5 million. Accordingly, the following entries relating to the contingency for warranty costs were recorded during the first year of selling the product:
Accrued liability and expense
Warranty expense (2% × $2,500,000) ...........................50,000................................. Estimated warranty liability .............................................................50,000........
Actual expenditures (summary entry)
Estimated warranty liability ............................................23,000..........................
Cash, wages payable, parts and supplies, etc. ...................................23,000
In late 2011, the company’s claims experience was evaluated and it was determined that claims were far more than expected—3% of sales rather than 2%.
Required:
1. Assuming sales of the sprinklers in 2011 were $3.6 million and warranty expenditures in 2011 totaled $88,000, prepare any journal entries related to the warranty.
2. Assuming sales of the sprinklers were discontinued after 2010, prepare any journal entry(s) in 2011 related to the warranty. go to: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-E13-22-Woodmier-Lawn-Products
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E13–22 - Woodmier Lawn Products - Warranty expense; change in estimate ● LO5 LO6
Woodmier Lawn Products introduced a new line of commercial sprinklers in 2010 that carry a one-year warranty against manufacturer’s defects. Because this was the first product for which the company offered a warranty, trade publications were consulted to determine the experience of others in the industry. Based on that experience, warranty costs were expected to approximate 2% of sales. Sales of the sprinklers in 2010 were $2.5 million. Accordingly, the following entries relating to the contingency for warranty costs were recorded during the first year of selling the product:
Accrued liability and expense
Warranty expense (2% × $2,500,000) ...........................50,000................................. Estimated warranty liability .............................................................50,000........
Actual expenditures (summary entry)
Estimated warranty liability ............................................23,000..........................
Cash, wages payable, parts and supplies, etc. ...................................23,000
In late 2011, the company’s claims experience was evaluated and it was determined that claims were far more than expected—3% of sales rather than 2%.
Required:
1. Assuming sales of the sprinklers in 2011 were $3.6 million and warranty expenditures in 2011 totaled $88,000, prepare any journal entries related to the warranty.
2. Assuming sales of the sprinklers were discontinued after 2010, prepare any journal entry(s) in 2011 related to the warranty. go to: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-E13-22-Woodmier-Lawn-Products
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P 12–1 - Fuzzy Monkey Technologies, Inc. - Securities held- to-maturity; bond investment; effective interest ● LO1
Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $80 million of 8% bonds, dated January 1, on January 1, 2011. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $66 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2011, was $70 million.
Required:
1.Prepare the journal entry to record Fuzzy Monkey’s investment on January 1, 2011.
2.Prepare the journal entry by Fuzzy Monkey to record interest on June 30, 2011 (at the effective rate).
3.Prepare the journal entries by Fuzzy Monkey to record interest on December 31, 2011 (at the effective rate).
4. At what amount will Fuzzy Monkey report its investment in the December 31, 2011, balance sheet? Why?
5. How would Fuzzy Monkey’s 2011 statement of cash flows be affected by this investment? go to: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-P12-1-Fuzzy-Monkey-Technologies,-Inc
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P 12–1 - Fuzzy Monkey Technologies, Inc. - Securities held- to-maturity; bond investment; effective interest ● LO1
Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $80 million of 8% bonds, dated January 1, on January 1, 2011. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $66 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2011, was $70 million.
Required:
1.Prepare the journal entry to record Fuzzy Monkey’s investment on January 1, 2011.
2.Prepare the journal entry by Fuzzy Monkey to record interest on June 30, 2011 (at the effective rate).
3.Prepare the journal entries by Fuzzy Monkey to record interest on December 31, 2011 (at the effective rate).
4. At what amount will Fuzzy Monkey report its investment in the December 31, 2011, balance sheet? Why?
5. How would Fuzzy Monkey’s 2011 statement of cash flows be affected by this investment? go to: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-P12-1-Fuzzy-Monkey-Technologies,-Inc
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P13–6 - Eastern Manufacturing - Various contingencies ● LO5 LO6
Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern’s fiscal year ends December 31, and the 2011 financial statements are issued on March 15, 2012.
a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2012, judgment was rendered against Eastern in the amount of $107 million plus interest, a total of $122 million. Eastern plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.
b. In November 2010, the State of Nevada filed suit against Eastern, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2012, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $140 million will be required to cover the cost of violations. Eastern believes that the ultimate settlement of this claim will not have a material adverse effect on the company.
c. Eastern is the plaintiff in a $200 million lawsuit filed against United Steel for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Eastern will prevail and be awarded $100 million.
d. At March 15, 2012, the Environmental Protection Agency is in the process of investigating possible soil contamination at various locations of several companies including Eastern. The EPA has not yet proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settlement of up to $33 million is reasonably possible.
Required:
1. Determine the appropriate means of reporting each situation. Explain your reasoning.
2. Prepare any necessary journal entries and disclosure notes. go to: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-P13-6-Eastern-Manufacturing
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P13–6 - Eastern Manufacturing - Various contingencies ● LO5 LO6
Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern’s fiscal year ends December 31, and the 2011 financial statements are issued on March 15, 2012.
a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2012, judgment was rendered against Eastern in the amount of $107 million plus interest, a total of $122 million. Eastern plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.
b. In November 2010, the State of Nevada filed suit against Eastern, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2012, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $140 million will be required to cover the cost of violations. Eastern believes that the ultimate settlement of this claim will not have a material adverse effect on the company.
c. Eastern is the plaintiff in a $200 million lawsuit filed against United Steel for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Eastern will prevail and be awarded $100 million.
d. At March 15, 2012, the Environmental Protection Agency is in the process of investigating possible soil contamination at various locations of several companies including Eastern. The EPA has not yet proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settlement of up to $33 million is reasonably possible.
Required:
1. Determine the appropriate means of reporting each situation. Explain your reasoning.
2. Prepare any necessary journal entries and disclosure notes. go to: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-P13-6-Eastern-Manufacturing
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ACC306 - ACC 306 - Week 1 DQ2 - Judgment Case 13-9 - Intermediate Accounting I - AU
Judgment Case 13–9 - Valleck Corporation - Loss contingency and full disclosure ● LO5 LO6
In the March 2012 meeting of Valleck Corporation’s board of directors, a question arose as to the way a possible obligation should be disclosed in the forthcoming financial statements for the year ended December 31. A veteran board member brought to the meeting a draft of a disclosure note that had been prepared by the controller’s office for inclusion in the annual report. Here is the note:
On May 9, 2011, the United States Environmental Protection Agency (EPA) issued a Notice of Violation (NOV) to Valleck alleging violations of the Clean Air Act. Subsequently, in June 2011, the EPA commenced a civil action with respect to the foregoing violation seeking civil penalties of approximately $853,000. The EPA alleges that Valleck exceeded applicable volatile organic substance emission limits. The Company estimates that the cost to achieve compliance will be $190,000; in addition the Company expects to settle the EPA lawsuit for a civil penalty of $205,000 which will be paid in 2014.
“ Where did we get the $205,000 figure? ” he asked. On being informed that this is the amount negotiated last month by company attorneys with the EPA, the director inquires, “Aren’t we supposed to report a liability for that in addition to the note? ”
Required:
Explain whether Valleck should report a liability in addition to the note. Why or why not? For full disclosure, should anything be added to the disclosure note itself? go to: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-DQ2-Judgment-Case-13-9
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ACC306 - ACC 306 - Week 1 DQ2 - Judgment Case 13-9 - Intermediate Accounting I - AU
Judgment Case 13–9 - Valleck Corporation - Loss contingency and full disclosure ● LO5 LO6
In the March 2012 meeting of Valleck Corporation’s board of directors, a question arose as to the way a possible obligation should be disclosed in the forthcoming financial statements for the year ended December 31. A veteran board member brought to the meeting a draft of a disclosure note that had been prepared by the controller’s office for inclusion in the annual report. Here is the note:
On May 9, 2011, the United States Environmental Protection Agency (EPA) issued a Notice of Violation (NOV) to Valleck alleging violations of the Clean Air Act. Subsequently, in June 2011, the EPA commenced a civil action with respect to the foregoing violation seeking civil penalties of approximately $853,000. The EPA alleges that Valleck exceeded applicable volatile organic substance emission limits. The Company estimates that the cost to achieve compliance will be $190,000; in addition the Company expects to settle the EPA lawsuit for a civil penalty of $205,000 which will be paid in 2014.
“ Where did we get the $205,000 figure? ” he asked. On being informed that this is the amount negotiated last month by company attorneys with the EPA, the director inquires, “Aren’t we supposed to report a liability for that in addition to the note? ”
Required:
Explain whether Valleck should report a liability in addition to the note. Why or why not? For full disclosure, should anything be added to the disclosure note itself? go to: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-1-DQ2-Judgment-Case-13-9
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E 14–18 - American Food Services, Inc. - Installment note; amortization schedule ● LO3
American Food Services, Inc., acquired a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2011. In payment for the $4 million machine, American Food Services issued a four-year installment note to be paid in four equal payments at the end of each year. The payments include interest at the rate of 10%.
Required:
1. Prepare the journal entry for American Food Services’ purchase of the machine on January 1, 2011.
2. Prepare an amortization schedule for the four-year term of the installment note.
3. Prepare the journal entry for the first installment payment on December 31, 2011.
4. Prepare the journal entry for the third installment payment on December 31, 2013. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-2-E-14-18-American-Food-Services,-Inc
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E 14–18 - American Food Services, Inc. - Installment note; amortization schedule ● LO3
American Food Services, Inc., acquired a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2011. In payment for the $4 million machine, American Food Services issued a four-year installment note to be paid in four equal payments at the end of each year. The payments include interest at the rate of 10%.
Required:
1. Prepare the journal entry for American Food Services’ purchase of the machine on January 1, 2011.
2. Prepare an amortization schedule for the four-year term of the installment note.
3. Prepare the journal entry for the first installment payment on December 31, 2011.
4. Prepare the journal entry for the third installment payment on December 31, 2013. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-2-E-14-18-American-Food-Services,-Inc
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E 14–16 - Wilkins Food Products, Inc. - Error in amortization schedule ● LO3
Wilkins Food Products, Inc., acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2009. In payment for the machine Wilkins issued a three- year installment note to be paid in three equal payments at the end of each year. The payments include interest at the rate of 10%.
Lawrence made a conceptual error in preparing the amortization schedule, which Wilkins failed to discover until 2011. The error had caused Wilkins to understate interest expense by $45,000 in 2009 and $40,000 in 2010.
Required:
1. Determine which accounts are incorrect as a result of these errors at January 1, 2011, before any adjustments. Explain your answer. (Ignore income taxes.)
2. Prepare a journal entry to correct the error.
3. What other step(s) would be taken in connection with the error? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-2-E14-16-Wilkins-Food-Products-Inc
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E 14–16 - Wilkins Food Products, Inc. - Error in amortization schedule ● LO3
Wilkins Food Products, Inc., acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2009. In payment for the machine Wilkins issued a three- year installment note to be paid in three equal payments at the end of each year. The payments include interest at the rate of 10%.
Lawrence made a conceptual error in preparing the amortization schedule, which Wilkins failed to discover until 2011. The error had caused Wilkins to understate interest expense by $45,000 in 2009 and $40,000 in 2010.
Required:
1. Determine which accounts are incorrect as a result of these errors at January 1, 2011, before any adjustments. Explain your answer. (Ignore income taxes.)
2. Prepare a journal entry to correct the error.
3. What other step(s) would be taken in connection with the error? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-2-E14-16-Wilkins-Food-Products-Inc
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E 15–25 Concepts; terminology ● LO3 through LO9
Listed below are several terms and phrases associated with leases. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it.
Exercise 15-25 get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-2-E15-25-Concepts-terminology
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E 15–25 Concepts; terminology ● LO3 through LO9
Listed below are several terms and phrases associated with leases. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it.
Exercise 15-25 get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-2-E15-25-Concepts-terminology
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Ethics Case 14–8 - Hunt Manufacturing - Debt for equity swaps; have your cake and eat it too ● LO5
The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assistant to the controller for Hunt Manufacturing, wore one of the gloomy faces that were just emerging from the conference room. “Wow, I knew it was bad, but not that bad,” Claude thought to himself. “I don’t look forward to sharing those numbers with shareholders.”
The numbers he discussed with himself were fourth quarter losses which more than offset the profits of the first three quarters. Everyone had known for some time that poor sales forecasts and production delays had wreaked havoc on the bottom line, but most were caught off guard by the severity of damage.
Later that night he sat alone in his office, scanning and rescanning the preliminary financial statements on his computer monitor. Suddenly his mood brightened. “This may work,” he said aloud, though no one could hear. Fifteen minutes later he congratulated himself, “Yes!”
The next day he eagerly explained his plan to Susan Barr, controller of Hunt for the last six years. The plan involved $300 million in convertible bonds issued three years earlier.
Meyer: By swapping stock for the bonds, we can eliminate a substantial liability from the balance sheet, wipe out most of our interest expense, and reduce our loss. In fact, the book value of the bonds is significantly more than the market value of the stock we’d issue. I think we can produce a profit.
Barr: But Claude, our bondholders are not inclined to convert the bonds
Meyer: Right. But, the bonds are callable. As of this year, we can call the bonds at a call premium of 1%. Given the choice of accepting that redemption price or converting to stock, they’ll all convert. We won’t have to pay a cent. And, since no cash will be paid, we won’t pay taxes either.
Required:
Do you perceive an ethical dilemma? What would be the impact of following up on Claude’s plan? Who would benefit? Who would be injured? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-2-Ethics-Case-14-8-Hunt-Manufacturing
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Ethics Case 14–8 - Hunt Manufacturing - Debt for equity swaps; have your cake and eat it too ● LO5
The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assistant to the controller for Hunt Manufacturing, wore one of the gloomy faces that were just emerging from the conference room. “Wow, I knew it was bad, but not that bad,” Claude thought to himself. “I don’t look forward to sharing those numbers with shareholders.”
The numbers he discussed with himself were fourth quarter losses which more than offset the profits of the first three quarters. Everyone had known for some time that poor sales forecasts and production delays had wreaked havoc on the bottom line, but most were caught off guard by the severity of damage.
Later that night he sat alone in his office, scanning and rescanning the preliminary financial statements on his computer monitor. Suddenly his mood brightened. “This may work,” he said aloud, though no one could hear. Fifteen minutes later he congratulated himself, “Yes!”
The next day he eagerly explained his plan to Susan Barr, controller of Hunt for the last six years. The plan involved $300 million in convertible bonds issued three years earlier.
Meyer: By swapping stock for the bonds, we can eliminate a substantial liability from the balance sheet, wipe out most of our interest expense, and reduce our loss. In fact, the book value of the bonds is significantly more than the market value of the stock we’d issue. I think we can produce a profit.
Barr: But Claude, our bondholders are not inclined to convert the bonds
Meyer: Right. But, the bonds are callable. As of this year, we can call the bonds at a call premium of 1%. Given the choice of accepting that redemption price or converting to stock, they’ll all convert. We won’t have to pay a cent. And, since no cash will be paid, we won’t pay taxes either.
Required:
Do you perceive an ethical dilemma? What would be the impact of following up on Claude’s plan? Who would benefit? Who would be injured? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-2-Ethics-Case-14-8-Hunt-Manufacturing
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Ethics Case 15–4 - American Movieplex - Leasehold improvements ● LO3
American Movieplex, a large movie theater chain, leases most of its theater facilities. In conjunction with recent operating leases, the company spent $28 million for seats and carpeting. The question being discussed over break- fast on Wednesday morning was the length of the depreciation period for these leasehold improvements. The com- pany controller, Sarah Keene, was surprised by the suggestion of Larry Person, her new assistant.
Keene: Why 25 years? We’ve never depreciated leasehold improvements for such a long period.
Person: I noticed that in my review of back records. But during our expansion to the Midwest, we don’t need expenses to be any higher than necessary.
Keene: But isn’t that a pretty rosy estimate of these assets’ actual life? Trade publications show an average depreciation period of 12 years.
Required:
1. How would increasing the depreciation period affect American Movieplex’s income?
2. Does revising the estimate pose an ethical dilemma?
3. Who would be affected if Person’s suggestion is followed? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-2-Ethics-Case-15-4
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Ethics Case 15–4 - American Movieplex - Leasehold improvements ● LO3
American Movieplex, a large movie theater chain, leases most of its theater facilities. In conjunction with recent operating leases, the company spent $28 million for seats and carpeting. The question being discussed over break- fast on Wednesday morning was the length of the depreciation period for these leasehold improvements. The com- pany controller, Sarah Keene, was surprised by the suggestion of Larry Person, her new assistant.
Keene: Why 25 years? We’ve never depreciated leasehold improvements for such a long period.
Person: I noticed that in my review of back records. But during our expansion to the Midwest, we don’t need expenses to be any higher than necessary.
Keene: But isn’t that a pretty rosy estimate of these assets’ actual life? Trade publications show an average depreciation period of 12 years.
Required:
1. How would increasing the depreciation period affect American Movieplex’s income?
2. Does revising the estimate pose an ethical dilemma?
3. Who would be affected if Person’s suggestion is followed? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-2-Ethics-Case-15-4
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P 15–3 – Rand Medical - Direct financing and sales-type lease; lessee and lessor ● LO3 LO5 LO6
Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for $2,000,000 and leased it to Mid-South Urologists Group, Inc., on January 1, 2011.
Collectibility of the lease payments is reasonably assured, and there are no lessor costs yet to be incurred.
Required:
1. How should this lease be classified by Mid-South Urologists Group and by Physicians’ Leasing?
2. Prepare appropriate entries for both Mid-South Urologists Group and Physicians’ Leasing from the inception of the lease through the second rental payment on April 1, 2011. Depreciation is recorded at the end of each fiscal year (December 31).
3. Assume Mid-South Urologists Group leased the lithotripter directly from the manufacturer, Rand Medical, which produced the machine at a cost of $1.7 million. Prepare appropriate entries for Rand Medical from the inception of the lease through the second lease payment on April 1, 2011.
get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-2-P-15-3-Rand-Medical
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P 15–3 – Rand Medical - Direct financing and sales-type lease; lessee and lessor ● LO3 LO5 LO6
Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for $2,000,000 and leased it to Mid-South Urologists Group, Inc., on January 1, 2011.
Collectibility of the lease payments is reasonably assured, and there are no lessor costs yet to be incurred.
Required:
1. How should this lease be classified by Mid-South Urologists Group and by Physicians’ Leasing?
2. Prepare appropriate entries for both Mid-South Urologists Group and Physicians’ Leasing from the inception of the lease through the second rental payment on April 1, 2011. Depreciation is recorded at the end of each fiscal year (December 31).
3. Assume Mid-South Urologists Group leased the lithotripter directly from the manufacturer, Rand Medical, which produced the machine at a cost of $1.7 million. Prepare appropriate entries for Rand Medical from the inception of the lease through the second lease payment on April 1, 2011.
get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-2-P-15-3-Rand-Medical
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P 14–21 - Appling Enterprises - Report bonds at fair value; quarterly reporting ● LO6
Appling Enterprises issued 8% bonds with a face amount of $400,000 on January 1, 2011. The bonds sold for $331,364 and mature in 2030 (20 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually on June 30 and December 31. Appling determines interest expense at the effective rate. Appling elected the option to report these bonds at their fair value. The fair values of the bonds at the end of each quarter during 2011 as determined by their market values in the over-the-counter market were the following:
March 31 $ 350,000
June 30 340,000
September 30 335,000
December 31 342,000
Required:
1. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the March31 quarterly financial statements?
2. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the June 30 quarterly financial statements?
3. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the September 30 quarterly financial statements?
4. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the December 31 annual financial statements? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-2-P14-21-Appling-Enterprises
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P 14–21 - Appling Enterprises - Report bonds at fair value; quarterly reporting ● LO6
Appling Enterprises issued 8% bonds with a face amount of $400,000 on January 1, 2011. The bonds sold for $331,364 and mature in 2030 (20 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually on June 30 and December 31. Appling determines interest expense at the effective rate. Appling elected the option to report these bonds at their fair value. The fair values of the bonds at the end of each quarter during 2011 as determined by their market values in the over-the-counter market were the following:
March 31 $ 350,000
June 30 340,000
September 30 335,000
December 31 342,000
Required:
1. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the March31 quarterly financial statements?
2. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the June 30 quarterly financial statements?
3. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the September 30 quarterly financial statements?
4. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the December 31 annual financial statements? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-2-P14-21-Appling-Enterprises
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Ethics Case 17–6 - VXI International - 401(k) plan contributions ● LO1
You are in your third year as internal auditor with VXI International, manufacturer of parts and supplies for jet air- craft. VXI began a defined contribution pension plan three years ago. The plan is a so-called 401(k) plan (named after the Tax Code section that specifies the conditions for the favorable tax treatment of these plans) that permits voluntary contributions by employees. Employees’ contributions are matched with one dollar of employer contribution for every two dollars of employee contribution. Approximately $500,000 of contributions is deducted from employee paychecks each month for investment in one of three employer-sponsored mutual funds.
While performing some preliminary audit tests, you happen to notice that employee contributions to these plans usually do not show up on mutual fund statements for up to two months following the end of pay periods from which the deductions are drawn. On further investigation, you discover that when the plan was first begun, contributions were invested within one week of receipt of the funds. When you question the firm’s investment manager about the apparent change in the timing of investments, you are told, “Last year Mr. Maxwell (the CFO) directed me to initially deposit the contributions in the corporate investment account. At the close of each quarter, we add the employer matching contribution and deposit the combined amount in specific employee mutual funds.”
Required:
1. What is Mr. Maxwell’s apparent motivation for the change in the way contributions are handled?
2. Do you perceive an ethical dilemma? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Ethics-Case-17-6
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Ethics Case 17–6 - VXI International - 401(k) plan contributions ● LO1
You are in your third year as internal auditor with VXI International, manufacturer of parts and supplies for jet air- craft. VXI began a defined contribution pension plan three years ago. The plan is a so-called 401(k) plan (named after the Tax Code section that specifies the conditions for the favorable tax treatment of these plans) that permits voluntary contributions by employees. Employees’ contributions are matched with one dollar of employer contribution for every two dollars of employee contribution. Approximately $500,000 of contributions is deducted from employee paychecks each month for investment in one of three employer-sponsored mutual funds.
While performing some preliminary audit tests, you happen to notice that employee contributions to these plans usually do not show up on mutual fund statements for up to two months following the end of pay periods from which the deductions are drawn. On further investigation, you discover that when the plan was first begun, contributions were invested within one week of receipt of the funds. When you question the firm’s investment manager about the apparent change in the timing of investments, you are told, “Last year Mr. Maxwell (the CFO) directed me to initially deposit the contributions in the corporate investment account. At the close of each quarter, we add the employer matching contribution and deposit the combined amount in specific employee mutual funds.”
Required:
1. What is Mr. Maxwell’s apparent motivation for the change in the way contributions are handled?
2. Do you perceive an ethical dilemma? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Ethics-Case-17-6
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E 16–24 - DePaul Corporation - Balance sheet classification ● LO4 LO5 LO6 LO8
At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account. The balances were due to the following cumulative temporary differences:
1. Estimated warranty expense, $15 million: expense recorded in the year of the sale; tax-deductible when paid (one-year warranty).
2. Depreciation expense, $120 million: straight-line in the income statement; MACRS on the tax return.
3. Income from installment sales of properties, $50 million: income recorded in the year of the sale; taxable when received equally over the next five years.
4. Bad debt expense, $25 million: allowance method for accounting; direct write-off for tax purposes.
Required:
Show how any deferred tax amounts should be classified and reported in the December 31 balance sheet. The tax rate is 40%. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Exercise-16-24
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E 16–24 - DePaul Corporation - Balance sheet classification ● LO4 LO5 LO6 LO8
At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account. The balances were due to the following cumulative temporary differences:
1. Estimated warranty expense, $15 million: expense recorded in the year of the sale; tax-deductible when paid (one-year warranty).
2. Depreciation expense, $120 million: straight-line in the income statement; MACRS on the tax return.
3. Income from installment sales of properties, $50 million: income recorded in the year of the sale; taxable when received equally over the next five years.
4. Bad debt expense, $25 million: allowance method for accounting; direct write-off for tax purposes.
Required:
Show how any deferred tax amounts should be classified and reported in the December 31 balance sheet. The tax rate is 40%. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Exercise-16-24
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E 16–24 - DePaul Corporation - Balance sheet classification ● LO4 LO5 LO6 LO8
At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account. The balances were due to the following cumulative temporary differences:
1. Estimated warranty expense, $15 million: expense recorded in the year of the sale; tax-deductible when paid (one-year warranty).
2. Depreciation expense, $120 million: straight-line in the income statement; MACRS on the tax return.
3. Income from installment sales of properties, $50 million: income recorded in the year of the sale; taxable when received equally over the next five years.
4. Bad debt expense, $25 million: allowance method for accounting; direct write-off for tax purposes.
Required:
Show how any deferred tax amounts should be classified and reported in the December 31 balance sheet. The tax rate is 40%. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Exercise-16-24
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E 16–24 - DePaul Corporation - Balance sheet classification ● LO4 LO5 LO6 LO8
At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account. The balances were due to the following cumulative temporary differences:
1. Estimated warranty expense, $15 million: expense recorded in the year of the sale; tax-deductible when paid (one-year warranty).
2. Depreciation expense, $120 million: straight-line in the income statement; MACRS on the tax return.
3. Income from installment sales of properties, $50 million: income recorded in the year of the sale; taxable when received equally over the next five years.
4. Bad debt expense, $25 million: allowance method for accounting; direct write-off for tax purposes.
Required:
Show how any deferred tax amounts should be classified and reported in the December 31 balance sheet. The tax rate is 40%. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Exercise-16-24
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E 16–25 - Case Development - Multiple tax rates; balance sheet classification ● LO1 LO4 LO5 LO8
Case Development began operations in December 2011. When property is sold on an installment basis, Case recognizes installment income for financial reporting purposes in the year of the sale. For tax purposes, installment income is reported by the installment method. 2011 installment income was $600,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for
2012–2014 are as follows:
2012 $150,000 30%
2013 250,000 40
2014 200,000 40
Pretax accounting income for 2011 was $810,000, which includes interest revenue of $10,000 from municipal bonds. The enacted tax rate for 2011 is 30%.
Required:
1. Assuming no differences between accounting income and taxable income other than those described above, prepare the appropriate journal entry to record Case’s 2011 income taxes.
2. What is Case’s 2011 net income?
3. How should the deferred tax amount be classified in a classified balance sheet? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Exercise-16-25
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E 16–25 - Case Development - Multiple tax rates; balance sheet classification ● LO1 LO4 LO5 LO8
Case Development began operations in December 2011. When property is sold on an installment basis, Case recognizes installment income for financial reporting purposes in the year of the sale. For tax purposes, installment income is reported by the installment method. 2011 installment income was $600,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for
2012–2014 are as follows:
2012 $150,000 30%
2013 250,000 40
2014 200,000 40
Pretax accounting income for 2011 was $810,000, which includes interest revenue of $10,000 from municipal bonds. The enacted tax rate for 2011 is 30%.
Required:
1. Assuming no differences between accounting income and taxable income other than those described above, prepare the appropriate journal entry to record Case’s 2011 income taxes.
2. What is Case’s 2011 net income?
3. How should the deferred tax amount be classified in a classified balance sheet? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Exercise-16-25
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E 17–10 - Abbott and Abbott - Determine pension expense ● LO6 LO7
Abbott and Abbott has a noncontributory, defined benefit pension plan. At December 31, 2011, Abbott and Abbott received the following information:
The expected long-term rate of return on plan assets was 10%. There was no prior service cost and a negligible net loss–AOCI on January 1, 2011.
Required:
1. Determine Abbott and Abbott’s pension expense for 2011.
2. Prepare the journal entries to record Abbott and Abbott’s pension expense, funding, and payment for 2011. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Exercise-17-10
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E 17–10 - Abbott and Abbott - Determine pension expense ● LO6 LO7
Abbott and Abbott has a noncontributory, defined benefit pension plan. At December 31, 2011, Abbott and Abbott received the following information:
The expected long-term rate of return on plan assets was 10%. There was no prior service cost and a negligible net loss–AOCI on January 1, 2011.
Required:
1. Determine Abbott and Abbott’s pension expense for 2011.
2. Prepare the journal entries to record Abbott and Abbott’s pension expense, funding, and payment for 2011. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Exercise-17-10
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E 17–19 Record pension expense, funding, and gains and losses; determine account balances ● LO6 LO7 LO8
Beale Management has a noncontributory, defined benefit pension plan. On December 31, 2011 (the end of Beale’s fiscal year), the following pension-related data were available:
Required:
1. Prepare the 2011 journal entry to record pension expense.
2. Prepare the journal entry(s) to record any 2011 gains and losses.
3. Prepare the 2011 journal entries to record the contribution to plan assets and benefit payments to retirees.
4. Determine the balances at December 31, 2011, in the PBO, plan assets, the net gain–AOCI, and prior service cost–AOCI and show how the balances changed during 2011. [Hint: You might find T-accounts useful.]
5. What amount will Beale report in its 2011 balance sheet as a net pension asset or net pension liability for the funded status of the plan? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Exercise-17-19
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E 17–19 Record pension expense, funding, and gains and losses; determine account balances ● LO6 LO7 LO8
Beale Management has a noncontributory, defined benefit pension plan. On December 31, 2011 (the end of Beale’s fiscal year), the following pension-related data were available:
Required:
1. Prepare the 2011 journal entry to record pension expense.
2. Prepare the journal entry(s) to record any 2011 gains and losses.
3. Prepare the 2011 journal entries to record the contribution to plan assets and benefit payments to retirees.
4. Determine the balances at December 31, 2011, in the PBO, plan assets, the net gain–AOCI, and prior service cost–AOCI and show how the balances changed during 2011. [Hint: You might find T-accounts useful.]
5. What amount will Beale report in its 2011 balance sheet as a net pension asset or net pension liability for the funded status of the plan? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Exercise-17-19
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Integrating Case 16–5 - Williams-Santana, Inc. - Tax effects of accounting changes and error correction; six situations ● LO1 LO2 LO8
Williams-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training. In 2011, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2011 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.
a. A five-year casualty insurance policy was purchased at the beginning of 2009 for $35,000. The full amount was debited to insurance expense at the time.
b. On December 31, 2010, merchandise inventory was overstated by $25,000 due to a mistake in the physical inventory count using the periodic inventory system.
c. The company changed inventory cost methods to FIFO from LIFO at the end of 2011 for both financial statement and income tax purposes. The change will cause a $960,000 increase in the beginning inventory at January 1, 2010.
d. At the end of 2010, the company failed to accrue $15,500 of sales commissions earned by employees during 2010. The expense was recorded when the commissions were paid in early 2011.
e. At the beginning of 2009, the company purchased a machine at a cost of $720,000. Its useful life was estimated to be 10 years with no salvage value. The machine has been depreciated by the double declining- balance method. Its carrying amount on December 31, 2010, was $460,800. On January 1, 2011, the company changed to the straight-line method. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Integrating-Case-16-5
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Integrating Case 16–5 - Williams-Santana, Inc. - Tax effects of accounting changes and error correction; six situations ● LO1 LO2 LO8
Williams-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training. In 2011, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2011 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.
a. A five-year casualty insurance policy was purchased at the beginning of 2009 for $35,000. The full amount was debited to insurance expense at the time.
b. On December 31, 2010, merchandise inventory was overstated by $25,000 due to a mistake in the physical inventory count using the periodic inventory system.
c. The company changed inventory cost methods to FIFO from LIFO at the end of 2011 for both financial statement and income tax purposes. The change will cause a $960,000 increase in the beginning inventory at January 1, 2010.
d. At the end of 2010, the company failed to accrue $15,500 of sales commissions earned by employees during 2010. The expense was recorded when the commissions were paid in early 2011.
e. At the beginning of 2009, the company purchased a machine at a cost of $720,000. Its useful life was estimated to be 10 years with no salvage value. The machine has been depreciated by the double declining- balance method. Its carrying amount on December 31, 2010, was $460,800. On January 1, 2011, the company changed to the straight-line method. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Integrating-Case-16-5
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P 16–7 - Sherrod, Inc. - Multiple differences; a. calculate taxable income; balance sheet classification ● LO4 LO6 LO8
Sherrod, Inc., reported pretax accounting income of $76 million for 2011. The following information relates to differences between pretax accounting income and taxable income:
a. Income from installment sales of properties included in pretax accounting income in 2011 exceeded that reported for tax purposes by $3 million. The installment receivable account at year-end had a balance of $4 million (representing portions of 2010 and 2011 installment sales), expected to be collected equally in 2012 and 2013.
b. Sherrod was assessed a penalty of $2 million by the Environmental Protection Agency for violation of a federal law in 2011. The fine is to be paid in equal amounts in 2011 and 2012.
c. Sherrod rents its operating facilities but owns one asset acquired in 2010 at a cost of $80 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions):
d. Bad debt expense of $3 million is reported using the allowance method in 2011. For tax purposes, the expense is deducted when accounts prove uncollectible (the direct write-off method): $2 million in 2011. At December 31, 2011, the allowance for uncollectible accounts was $2 million (after adjusting entries). The balance was $1 million at the end of 2010.
e. In 2011, Sherrod accrued an expense and related liability for estimated paid future absences of $7 million relating to the company’s new paid vacation program. Future compensation will be deductible on the tax return when actually paid during the next two years ($4 million in 2012; $3 million in 2013).
f. During 2010, accounting income included an estimated loss of $2 million from having accrued a loss contingency. The loss is paid in 2011 at which time it is tax deductible.
Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2011, were $1.2 million and $2.8 million, respectively. The enacted tax rate is 40% each year.
Required:
1. Determine the amounts necessary to record income taxes for 2011 and prepare the appropriate journal entry.
2. What is the 2011 net income?
3. Show how any deferred tax amounts should be classified and reported in the 2011 balance sheet. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Problem-16-7
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P 16–7 - Sherrod, Inc. - Multiple differences; a. calculate taxable income; balance sheet classification ● LO4 LO6 LO8
Sherrod, Inc., reported pretax accounting income of $76 million for 2011. The following information relates to differences between pretax accounting income and taxable income:
a. Income from installment sales of properties included in pretax accounting income in 2011 exceeded that reported for tax purposes by $3 million. The installment receivable account at year-end had a balance of $4 million (representing portions of 2010 and 2011 installment sales), expected to be collected equally in 2012 and 2013.
b. Sherrod was assessed a penalty of $2 million by the Environmental Protection Agency for violation of a federal law in 2011. The fine is to be paid in equal amounts in 2011 and 2012.
c. Sherrod rents its operating facilities but owns one asset acquired in 2010 at a cost of $80 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions):
d. Bad debt expense of $3 million is reported using the allowance method in 2011. For tax purposes, the expense is deducted when accounts prove uncollectible (the direct write-off method): $2 million in 2011. At December 31, 2011, the allowance for uncollectible accounts was $2 million (after adjusting entries). The balance was $1 million at the end of 2010.
e. In 2011, Sherrod accrued an expense and related liability for estimated paid future absences of $7 million relating to the company’s new paid vacation program. Future compensation will be deductible on the tax return when actually paid during the next two years ($4 million in 2012; $3 million in 2013).
f. During 2010, accounting income included an estimated loss of $2 million from having accrued a loss contingency. The loss is paid in 2011 at which time it is tax deductible.
Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2011, were $1.2 million and $2.8 million, respectively. The enacted tax rate is 40% each year.
Required:
1. Determine the amounts necessary to record income taxes for 2011 and prepare the appropriate journal entry.
2. What is the 2011 net income?
3. Show how any deferred tax amounts should be classified and reported in the 2011 balance sheet. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Problem-16-7
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P 17–16 – Lakeside Cable - Comprehensive— reporting a pension plan; pension spreadsheet; determine changes in balances; two years ● LO3 through LO8
Actuary and trustee reports indicate the following changes in the PBO and plan assets of Lakeside Cable during 2011:
Required:
1. Determine Lakeside’s pension expense for 2011 and prepare the appropriate journal entries to record the expense as well as the cash contribution to plan assets and payment of benefits to retirees.
2. Determine the new gains and/or losses in 2011 and prepare the appropriate journal entry(s) to record them.
3. Prepare a pension spreadsheet to assist you in determining end of 2011 balances in the PBO, plan assets, prior service cost—AOCI, the net loss—AOCI, and the pension liability.
4. Assume the following actuary and trustee reports indicating changes in the PBO and plan assets of Lakeside Cable during 2012: Determine Lakeside’s pension expense for 2012 and prepare the appropriate journal entries to record the expense, the cash funding of plan assets, and payment of benefits to retirees.
5. Determine the new gains and/or losses in 2012 and prepare the appropriate journal entry(s) to record them.
6. Using T-accounts, determine the balances at December 31, 2012, in the net loss–AOCI and prior service cost–AOCI.
7. Confirm the balances determined in Requirement 6 by preparing a pension spreadsheet. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Problem-17-16
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P 17–16 – Lakeside Cable - Comprehensive— reporting a pension plan; pension spreadsheet; determine changes in balances; two years ● LO3 through LO8
Actuary and trustee reports indicate the following changes in the PBO and plan assets of Lakeside Cable during 2011:
Required:
1. Determine Lakeside’s pension expense for 2011 and prepare the appropriate journal entries to record the expense as well as the cash contribution to plan assets and payment of benefits to retirees.
2. Determine the new gains and/or losses in 2011 and prepare the appropriate journal entry(s) to record them.
3. Prepare a pension spreadsheet to assist you in determining end of 2011 balances in the PBO, plan assets, prior service cost—AOCI, the net loss—AOCI, and the pension liability.
4. Assume the following actuary and trustee reports indicating changes in the PBO and plan assets of Lakeside Cable during 2012: Determine Lakeside’s pension expense for 2012 and prepare the appropriate journal entries to record the expense, the cash funding of plan assets, and payment of benefits to retirees.
5. Determine the new gains and/or losses in 2012 and prepare the appropriate journal entry(s) to record them.
6. Using T-accounts, determine the balances at December 31, 2012, in the net loss–AOCI and prior service cost–AOCI.
7. Confirm the balances determined in Requirement 6 by preparing a pension spreadsheet. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-3-Problem-17-16
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Communication Case 18–10 Should the present two-category distinction between liabilities and equity be retained? Group interaction. ● LO1
The current conceptual distinction between liabilities and equity defines liabilities independently of assets and equity, with equity defined as a residual amount. The present proliferation of financial instruments that combine features of both debt and equity and the difficulty of drawing a distinction have led many to conclude that the present two-category distinction between liabilities and equity should be eliminated. Two opposing viewpoints are:
View 1: The distinction should be maintained.
View 2: The distinction should be eliminated and financial instruments should instead be reported in accordance with the priority of their claims to enterprise assets.
One type of security that often is mentioned in the debate is convertible bonds. Although stock in many ways, such a security also obligates the issuer to transfer assets at a specified price and redemption date. Thus it also has features of debt. In considering this question, focus on conceptual issues regarding the practicable and theoretically appropriate treatment, unconstrained by GAAP.
Required:
1. Which view do you favor? Develop a list of arguments in support of your view prior to the class session for which the case is assigned. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Communication-Case-18-10
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Communication Case 18–10 Should the present two-category distinction between liabilities and equity be retained? Group interaction. ● LO1
The current conceptual distinction between liabilities and equity defines liabilities independently of assets and equity, with equity defined as a residual amount. The present proliferation of financial instruments that combine features of both debt and equity and the difficulty of drawing a distinction have led many to conclude that the present two-category distinction between liabilities and equity should be eliminated. Two opposing viewpoints are:
View 1: The distinction should be maintained.
View 2: The distinction should be eliminated and financial instruments should instead be reported in accordance with the priority of their claims to enterprise assets.
One type of security that often is mentioned in the debate is convertible bonds. Although stock in many ways, such a security also obligates the issuer to transfer assets at a specified price and redemption date. Thus it also has features of debt. In considering this question, focus on conceptual issues regarding the practicable and theoretically appropriate treatment, unconstrained by GAAP.
Required:
1. Which view do you favor? Develop a list of arguments in support of your view prior to the class session for which the case is assigned. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Communication-Case-18-10
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Ethics Case 19–7 International Network Solutions ● LO6
International Network Solutions provides products and services related to remote access networking. The company has grown rapidly during its first 10 years of operations. As its segment of the industry has begun to mature, though, the fast growth of previous years has begun to slow. In fact, this year revenues and profits are roughly the same as last year.
One morning, nine weeks before the close of the fiscal year, Rob Mashburn, CFO, and Jessica Lane, controller, were sharing coffee and ideas in Lane’s office.
Lane: About the Board meeting Thursday. You may be right. This may be the time to suggest a share buyback program.
Mashburn: To begin this year, you mean?
Lane: Right! I know Barber will be lobbying to use the funds for our European expansion. She’s probably right about the best use of our funds, but we can always issue more notes next year. Right now, we need a quick fix for our EPS numbers.
Mashburn: Our shareholders are accustomed to increases every year. Required:
1. How will a buyback of shares provide a “quick fix” for EPS?
2. Is the proposal ethical? 3. Who would be affected if the proposal is implemented? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Ethics-Case-19-7
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Ethics Case 19–7 International Network Solutions ● LO6
International Network Solutions provides products and services related to remote access networking. The company has grown rapidly during its first 10 years of operations. As its segment of the industry has begun to mature, though, the fast growth of previous years has begun to slow. In fact, this year revenues and profits are roughly the same as last year.
One morning, nine weeks before the close of the fiscal year, Rob Mashburn, CFO, and Jessica Lane, controller, were sharing coffee and ideas in Lane’s office.
Lane: About the Board meeting Thursday. You may be right. This may be the time to suggest a share buyback program.
Mashburn: To begin this year, you mean?
Lane: Right! I know Barber will be lobbying to use the funds for our European expansion. She’s probably right about the best use of our funds, but we can always issue more notes next year. Right now, we need a quick fix for our EPS numbers.
Mashburn: Our shareholders are accustomed to increases every year. Required:
1. How will a buyback of shares provide a “quick fix” for EPS?
2. Is the proposal ethical? 3. Who would be affected if the proposal is implemented? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Ethics-Case-19-7
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E 18–18 - Brenner-Jude Corporation -Transactions affecting retained earnings ● LO6 LO7
Shown below in T-account format are the changes affecting the retained earnings of Brenner-Jude Corporation during 2011. At January 1, 2011, the corporation had outstanding 105 million common shares, $1 par per share.
Required:
1. From the information provided by the account changes you should be able to recreate the transactions that affected Brenner-Jude’s retained earnings during 2011. Prepare the journal entries that Brenner-Jude must have recorded during the year for these transactions.
2. Prepare a statement of retained earnings for Brenner-Jude for the year ended 2011. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Exercise-18-18
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E 18–18 - Brenner-Jude Corporation -Transactions affecting retained earnings ● LO6 LO7
Shown below in T-account format are the changes affecting the retained earnings of Brenner-Jude Corporation during 2011. At January 1, 2011, the corporation had outstanding 105 million common shares, $1 par per share.
Required:
1. From the information provided by the account changes you should be able to recreate the transactions that affected Brenner-Jude’s retained earnings during 2011. Prepare the journal entries that Brenner-Jude must have recorded during the year for these transactions.
2. Prepare a statement of retained earnings for Brenner-Jude for the year ended 2011. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Exercise-18-18
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E 18–24 - Softech Canvas Goods - Profitability ratio ● LO1
Comparative balance sheets for Softech Canvas Goods for 2011 and 2010 are shown below. Softech pays no dividends, and instead reinvests all earnings for future growth.
Required:
1. Determine the return on shareholders’ equity for 2011.
2. What does the ratio measure? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Exercise-18-24
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E 18–24 - Softech Canvas Goods - Profitability ratio ● LO1
Comparative balance sheets for Softech Canvas Goods for 2011 and 2010 are shown below. Softech pays no dividends, and instead reinvests all earnings for future growth.
Required:
1. Determine the return on shareholders’ equity for 2011.
2. What does the ratio measure? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Exercise-18-24
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E 19–2 - VKI Corporation - Restricted stock award plan ● LO1
On January 1, 2011, VKI Corporation awarded 12 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within three years. On the grant date, the shares have a market price of $2.50 per share.
Required:
1. Determine the total compensation cost pertaining to the restricted shares.
2. Prepare the appropriate journal entry to record the award of restricted shares on January 1, 2011.
3. Prepare the appropriate journal entry to record compensation expense on December 31, 2011.
4. Prepare the appropriate journal entry to record compensation expense on December 31, 2012.
5. Prepare the appropriate journal entry to record compensation expense on December 31, 2013.
6. Prepare the appropriate journal entry to record the lifting of restrictions on the shares at December 31, 2013. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Exercise-19-2
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E 19–2 - VKI Corporation - Restricted stock award plan ● LO1
On January 1, 2011, VKI Corporation awarded 12 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within three years. On the grant date, the shares have a market price of $2.50 per share.
Required:
1. Determine the total compensation cost pertaining to the restricted shares.
2. Prepare the appropriate journal entry to record the award of restricted shares on January 1, 2011.
3. Prepare the appropriate journal entry to record compensation expense on December 31, 2011.
4. Prepare the appropriate journal entry to record compensation expense on December 31, 2012.
5. Prepare the appropriate journal entry to record compensation expense on December 31, 2013.
6. Prepare the appropriate journal entry to record the lifting of restrictions on the shares at December 31, 2013. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Exercise-19-2
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E 19–5 - American Optical Corporation - Stock options ● LO2
American Optical Corporation provides a variety of share-based compensation plans to its employees. Under its executive stock option plan, the company granted options on January 1, 2011, that permit executives to acquire 4 million of the company’s $1 par common shares within the next five years, but not before December 31, 2012 (the vesting date). The exercise price is the market price of the shares on the date of grant, $14 per share. The fair value of the 4 million options, estimated by an appropriate option pricing model, is $3 per option. No forfeitures are anticipated. Ignore taxes.
Required:
1. Determine the total compensation cost pertaining to the options.
2. Prepare the appropriate journal entry to record the award of options on January 1, 2011.
3. Prepare the appropriate journal entry to record compensation expense on December 31, 2011.
4. Prepare the appropriate journal entry to record compensation expense on December 31, 2012. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Exercise-19-5
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E 19–5 - American Optical Corporation - Stock options ● LO2
American Optical Corporation provides a variety of share-based compensation plans to its employees. Under its executive stock option plan, the company granted options on January 1, 2011, that permit executives to acquire 4 million of the company’s $1 par common shares within the next five years, but not before December 31, 2012 (the vesting date). The exercise price is the market price of the shares on the date of grant, $14 per share. The fair value of the 4 million options, estimated by an appropriate option pricing model, is $3 per option. No forfeitures are anticipated. Ignore taxes.
Required:
1. Determine the total compensation cost pertaining to the options.
2. Prepare the appropriate journal entry to record the award of options on January 1, 2011.
3. Prepare the appropriate journal entry to record compensation expense on December 31, 2011.
4. Prepare the appropriate journal entry to record compensation expense on December 31, 2012. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Exercise-19-5
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E 19–9 - Washington Distribution - Employee share purchase plan ● LO3
In order to encourage employee ownership of the company’s $1 par common shares, Washington Distribution permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 15% discount. During March, employees purchased 50,000 shares at a time when the market price of the shares on the New York Stock Exchange was $12 per share.
Required:
Prepare the appropriate journal entry to record the March purchases of shares under the employee share purchase plan get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Exercise-19-9
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E 19–9 - Washington Distribution - Employee share purchase plan ● LO3
In order to encourage employee ownership of the company’s $1 par common shares, Washington Distribution permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 15% discount. During March, employees purchased 50,000 shares at a time when the market price of the shares on the New York Stock Exchange was $12 per share.
Required:
Prepare the appropriate journal entry to record the March purchases of shares under the employee share purchase plan get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Exercise-19-9
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E 19–24 EPS; concepts; terminology ● LO5 through LO13
Listed below are several terms and phrases associated with earnings per share. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Exercise-19-24
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E 19–24 EPS; concepts; terminology ● LO5 through LO13
Listed below are several terms and phrases associated with earnings per share. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Exercise-19-24
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P 18–5 Shareholders’ equity transactions; statement of shareholders’ equity ● LO6 through LO8 (see included excel file)
Listed below are the transactions that affected the shareholders’ equity of Branch-Rickie Corporation during the period 2011–2013. At December 31, 2010, the corporation’s accounts included:
a. November 1, 2011, the board of directors declared a cash dividend of $.80 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.
b. On March 1, 2012, the board of directors declared a property dividend consisting of corporate bonds of Warner Corporation that Branch-Rickie was holding as an investment. The bonds had a fair value of $1.6 million, but were purchased two years previously for $1.3 million. Because they were intended to be held to maturity, the bonds had not been previously written up. The property dividend was payable to shareholders of record March 13, to be distributed April 5.
c. On July 12, 2012, the corporation declared and distributed a 5% common stock dividend (when the market value of the common stock was $21 per share). Cash was paid in lieu of fractional shares representing 250,000 equivalent whole shares.
d. On November 1, 2012, the board of directors declared a cash dividend of $.80 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.
e. On January 15, 2013, the board of directors declared and distributed a 3-for-2 stock split effected in the form of a 50% stock dividend when the market value of the common stock was $22 per share.
f. On November 1, 2013, the board of directors declared a cash dividend of $.65 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.
Required:
1. Prepare the journal entries that Branch-Rickie recorded during the three-year period for these transactions.
2. Prepare comparative statements of shareholders’ equity for Branch-Rickie for the three-year period ($ in 000s). Net income was $330 million, $395 million, and $455 million for 2011, 2012, and 2013, respectively. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Problem-18-5
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P 18–5 Shareholders’ equity transactions; statement of shareholders’ equity ● LO6 through LO8 (see included excel file)
Listed below are the transactions that affected the shareholders’ equity of Branch-Rickie Corporation during the period 2011–2013. At December 31, 2010, the corporation’s accounts included:
a. November 1, 2011, the board of directors declared a cash dividend of $.80 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.
b. On March 1, 2012, the board of directors declared a property dividend consisting of corporate bonds of Warner Corporation that Branch-Rickie was holding as an investment. The bonds had a fair value of $1.6 million, but were purchased two years previously for $1.3 million. Because they were intended to be held to maturity, the bonds had not been previously written up. The property dividend was payable to shareholders of record March 13, to be distributed April 5.
c. On July 12, 2012, the corporation declared and distributed a 5% common stock dividend (when the market value of the common stock was $21 per share). Cash was paid in lieu of fractional shares representing 250,000 equivalent whole shares.
d. On November 1, 2012, the board of directors declared a cash dividend of $.80 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.
e. On January 15, 2013, the board of directors declared and distributed a 3-for-2 stock split effected in the form of a 50% stock dividend when the market value of the common stock was $22 per share.
f. On November 1, 2013, the board of directors declared a cash dividend of $.65 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.
Required:
1. Prepare the journal entries that Branch-Rickie recorded during the three-year period for these transactions.
2. Prepare comparative statements of shareholders’ equity for Branch-Rickie for the three-year period ($ in 000s). Net income was $330 million, $395 million, and $455 million for 2011, 2012, and 2013, respectively. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-4-Problem-18-5
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Analysis Case 20–10 - DRS Corporation - Various changes ● LO1 through LO4
DRS Corporation changed the way it depreciates its computers from the sum-of-the-year’s-digits method to the straight-line method beginning January 1, 2011. DRS also changed its estimated residual value used in computing depreciation for its office building. At the end of 2011, DRS changed the specific subsidiaries constituting the group of companies for which its consolidated financial statements are prepared.
Required:
1. For each accounting change DRS undertook, indicate the type of change and how DRS should report the change. Be specific.
2. Why should companies disclose changes in accounting principles? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-5-Analysis-Case-20-10
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Analysis Case 20–10 - DRS Corporation - Various changes ● LO1 through LO4
DRS Corporation changed the way it depreciates its computers from the sum-of-the-year’s-digits method to the straight-line method beginning January 1, 2011. DRS also changed its estimated residual value used in computing depreciation for its office building. At the end of 2011, DRS changed the specific subsidiaries constituting the group of companies for which its consolidated financial statements are prepared.
Required:
1. For each accounting change DRS undertook, indicate the type of change and how DRS should report the change. Be specific.
2. Why should companies disclose changes in accounting principles? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-5-Analysis-Case-20-10
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Ethics Case 20–5 Softening the blow ● LO1 LO2 LO3
Late one Thursday afternoon, Joy Martin, a veteran audit manager with a regional CPA firm, was reviewing documents for a long-time client of the firm, AMT Transport. The year-end audit was scheduled to begin Monday.
For three months, the economy had been in a down cycle and the transportation industry was particularly hard hit. As a result, Joy expected AMT’s financial results would not be pleasant news to shareholders. However, what Joy saw in the preliminary statements made her sigh aloud. Results were much worse than she feared.
“Larry (the company president) already is in the doghouse with shareholders,” Joy thought to herself. “When they see these numbers, they’ll hang him out to dry.”
“I wonder if he’s considered some strategic accounting changes,” she thought, after reflecting on the situation. “The bad news could be softened quite a bit by changing inventory methods from LIFO to FIFO or reconsidering some of the estimates used in other areas.”
Required:
1. How would the actions contemplated contribute toward “softening” the bad news?
2. Do you perceive an ethical dilemma? What would be the likely impact of following up on Joy’s thoughts? Who would benefit? Who would be injured? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-5-Ethics-Case-20-5
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Ethics Case 20–5 Softening the blow ● LO1 LO2 LO3
Late one Thursday afternoon, Joy Martin, a veteran audit manager with a regional CPA firm, was reviewing documents for a long-time client of the firm, AMT Transport. The year-end audit was scheduled to begin Monday.
For three months, the economy had been in a down cycle and the transportation industry was particularly hard hit. As a result, Joy expected AMT’s financial results would not be pleasant news to shareholders. However, what Joy saw in the preliminary statements made her sigh aloud. Results were much worse than she feared.
“Larry (the company president) already is in the doghouse with shareholders,” Joy thought to herself. “When they see these numbers, they’ll hang him out to dry.”
“I wonder if he’s considered some strategic accounting changes,” she thought, after reflecting on the situation. “The bad news could be softened quite a bit by changing inventory methods from LIFO to FIFO or reconsidering some of the estimates used in other areas.”
Required:
1. How would the actions contemplated contribute toward “softening” the bad news?
2. Do you perceive an ethical dilemma? What would be the likely impact of following up on Joy’s thoughts? Who would benefit? Who would be injured? get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-5-Ethics-Case-20-5
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Ethics Case 21–7 - Ben Naegle - Where’s the cash? ● LO1 LO3
After graduating near the top of his class, Ben Naegle was hired by the local office of a Big 4 CPA firm in his hometown. Two years later, impressed with his technical skills and experience, Park Electronics, a large regional consumer electronics chain, hired Ben as assistant controller. This was last week. Now Ben’s initial excitement has turned to distress.
The cause of Ben’s distress is the set of financial statements he’s stared at for the last four hours. For some time prior to his recruitment, he had been aware of the long trend of moderate profitability of his new employer. The reports on his desk confirm the slight, but steady, improvements in net income in recent years. The trend he was just now becoming aware of, though, was the decline in cash flows from operations.
Ben had sketched out the following comparison ($ in millions):
Profits? Yes. Increasing profits? Yes. The cause of his distress? The ominous trend in cash flow which is con sistently lower than net income.
Upon closer review, Ben noticed three events in the last two years that, unfortunately, seemed related:
a. Park’s credit policy had been loosened; credit terms were relaxed and payment periods were lengthened.
b. Accounts receivable balances had increased dramatically.
c. Several of the company’s compensation arrangements, including that of the controller and the company president, were based on reported net income.
Required:
1. What is so ominous about the combination of events Ben sees?
2. What course of action, if any, should Ben take?
get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-5-Ethics-Case-21-7
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Ethics Case 21–7 - Ben Naegle - Where’s the cash? ● LO1 LO3
After graduating near the top of his class, Ben Naegle was hired by the local office of a Big 4 CPA firm in his hometown. Two years later, impressed with his technical skills and experience, Park Electronics, a large regional consumer electronics chain, hired Ben as assistant controller. This was last week. Now Ben’s initial excitement has turned to distress.
The cause of Ben’s distress is the set of financial statements he’s stared at for the last four hours. For some time prior to his recruitment, he had been aware of the long trend of moderate profitability of his new employer. The reports on his desk confirm the slight, but steady, improvements in net income in recent years. The trend he was just now becoming aware of, though, was the decline in cash flows from operations.
Ben had sketched out the following comparison ($ in millions):
Profits? Yes. Increasing profits? Yes. The cause of his distress? The ominous trend in cash flow which is con sistently lower than net income.
Upon closer review, Ben noticed three events in the last two years that, unfortunately, seemed related:
a. Park’s credit policy had been loosened; credit terms were relaxed and payment periods were lengthened.
b. Accounts receivable balances had increased dramatically.
c. Several of the company’s compensation arrangements, including that of the controller and the company president, were based on reported net income.
Required:
1. What is so ominous about the combination of events Ben sees?
2. What course of action, if any, should Ben take?
get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-5-Ethics-Case-21-7
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E 20–18 Classifying accounting changes ● LO1 through LO5
Indicate with the appropriate letter the nature of each situation described below:
PR Change in principle reported retrospectively
PP Change in principle reported prospectively
E Change in estimate
EP Change in estimate resulting from a change in principle
R Change in reporting entity
N Not an accounting change get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-5-Exercise-20-18
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E 20–18 Classifying accounting changes ● LO1 through LO5
Indicate with the appropriate letter the nature of each situation described below:
PR Change in principle reported retrospectively
PP Change in principle reported prospectively
E Change in estimate
EP Change in estimate resulting from a change in principle
R Change in reporting entity
N Not an accounting change get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-5-Exercise-20-18
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Leases
ACC306 - Intermediate Accounting II
Name
Professor
Date get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-5-Final-Paper
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Leases
ACC306 - Intermediate Accounting II
Name
Professor
Date get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-5-Final-Paper
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P 21–11 - Arduous Company - Prepare a statement of cash flows; direct method ● LO3 LO8
The comparative balance sheets for 2011 and 2010 and the income statement for 2011 are given below for Arduous Company. Additional information from Arduous’s accounting records is provided also.
a. During 2011, $6 million of customer accounts were written off as uncollectible.
b. Investment revenue includes Arduous Company’s $6 million share of the net income of Demur Company, an equity method investee.
c. Treasury bills were sold during 2011 at a gain of $2 million. Arduous Company classifies its investments in Treasury bills as cash equivalents.
d. A machine originally costing $70 million that was one-half depreciated was rendered unusable by a rare flood. Most major components of the machine were unharmed and were sold for $17 million.
e. Temporary differences between pretax accounting income and taxable income caused the deferred income tax liability to increase by $3 million.
f. The preferred stock of Tory Corporation was purchased for $25 million as a long-term investment.
g. Land costing $46 million was acquired by issuing $23 million cash and a 15%, four-year, $23 million note payable to the seller.
h. A building was acquired by a 15-year capital lease; present value of lease payments, $82 million.
i. $60 million of bonds were retired at maturity.
j. In February, Arduous issued a 4% stock dividend (4 million shares). The market price of the $5 par value common stock was $7.50 per share at that time.
k. In April, 1 million shares of common stock were repurchased as treasury stock at a cost of $9 million.
Required:
Prepare the statement of cash flows of Arduous Company for the year ended December 31, 2011. Present cash flows from operating activities by the direct method. (A reconciliation schedule is not required.) get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-5-Problem-21-11
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P 21–11 - Arduous Company - Prepare a statement of cash flows; direct method ● LO3 LO8
The comparative balance sheets for 2011 and 2010 and the income statement for 2011 are given below for Arduous Company. Additional information from Arduous’s accounting records is provided also.
a. During 2011, $6 million of customer accounts were written off as uncollectible.
b. Investment revenue includes Arduous Company’s $6 million share of the net income of Demur Company, an equity method investee.
c. Treasury bills were sold during 2011 at a gain of $2 million. Arduous Company classifies its investments in Treasury bills as cash equivalents.
d. A machine originally costing $70 million that was one-half depreciated was rendered unusable by a rare flood. Most major components of the machine were unharmed and were sold for $17 million.
e. Temporary differences between pretax accounting income and taxable income caused the deferred income tax liability to increase by $3 million.
f. The preferred stock of Tory Corporation was purchased for $25 million as a long-term investment.
g. Land costing $46 million was acquired by issuing $23 million cash and a 15%, four-year, $23 million note payable to the seller.
h. A building was acquired by a 15-year capital lease; present value of lease payments, $82 million.
i. $60 million of bonds were retired at maturity.
j. In February, Arduous issued a 4% stock dividend (4 million shares). The market price of the $5 par value common stock was $7.50 per share at that time.
k. In April, 1 million shares of common stock were repurchased as treasury stock at a cost of $9 million.
Required:
Prepare the statement of cash flows of Arduous Company for the year ended December 31, 2011. Present cash flows from operating activities by the direct method. (A reconciliation schedule is not required.) get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-5-Problem-21-11
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P 21–14 - Surmise Company - Statement of cash flows; indirect method; limited information ● LO4 LO8
The comparative balance sheets for 2011 and 2010 are given below for Surmise Company. Net income for 2011 was $50 million.
Required:
Prepare the statement of cash flows of Surmise Company for the year ended December 31, 2011. Use the indirect method to present cash flows from operating activities because you do not have sufficient information to use the direct method. You will need to make reasonable assumptions concerning the reasons for changes in some account balances. A spreadsheet or T-account analysis will be helpful. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-5-Problem-21-14
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P 21–14 - Surmise Company - Statement of cash flows; indirect method; limited information ● LO4 LO8
The comparative balance sheets for 2011 and 2010 are given below for Surmise Company. Net income for 2011 was $50 million.
Required:
Prepare the statement of cash flows of Surmise Company for the year ended December 31, 2011. Use the indirect method to present cash flows from operating activities because you do not have sufficient information to use the direct method. You will need to make reasonable assumptions concerning the reasons for changes in some account balances. A spreadsheet or T-account analysis will be helpful. get this course: http://entirecourse.com/course/ACC-306-Intermediate-Accounting-II/ACC-306-Wk-5-Problem-21-14
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