Practice Exam Chapters 1 - 4 seventh
Intermediate Accounting II – ACCT 2322
Exam 2 Study Guide: Chapters 14 - 16
Exam 2 may be comprised of multiple choice, matching, short answer and problem questions. The study questions and sample problems below should help you prepare for the exam. Please note that the study format may not directly match the exam format.
Solutions to identification questions and problems can be found at the end of this study guide.
1. List and discuss the five criteria used to classify leases.
2. Explain the concept of “Substance over Form” as it relates to accounting for leases.
3. Describe the advantages and disadvantages of bond financing.
4. Explain how the amount reported as bond interest expense is determined.
5. Describe how a sales-type lease with a profit differs from a sales-type lease without a profit.
6. Discuss the difference between how bonds are accounted for by the issuer and investor.
7. Describe early extinguishment of bonds.
8. Explain the circumstances under which a bond would sell
a) at a discount
b) at a premium
9. Define the following terms relating to bonds and notes:
a. Face value
b. Stated (or contract) rate
c. Effective interest rate
d. Carrying value
e. Convertible bond
f. Installment note
g. Lease residual value
Problem 1
On July 1, 2017, Macon Operations sold $20 million of 10% convertible bonds that mature on July 1, 2027. The bonds sold at 102. Interest is payable each year on January 1 and July 1. Each $1,000 bond is convertible into 5 shares of Macon’s no par common stock. On July 2, 2018, ½ of the outstanding bonds were converted to stock when Macon’s common stock had a market price of $10 per share.
Required:
1) Journalize the entry to record the issuance of the bonds
2) Journalize the entry to record the first interest payment on January 1, 2018. The straight-line method of amortization is used.
3) Journalize the entry to record the second interest payment on July 1, 2018. The straight-line method of amortization is used.
4) Journalize the entry to record conversion of ½ of the bonds on July 2, 2018.
Problem 2
Information for Kent Corp for the year 2018:
|Pretax accounting income |$193,000 |
|Permanent differences |(15,000) |
|Temporary difference – depreciation |(25,000) |
|Taxable income |$153,000 |
|Current balance in Deferred Tax Liability |$3,900 |
|Tax Rate |30% |
Required: Prepare the journal entry to record Kent’s income taxes for 2018
Problem 3
On January 1, 2018, Mania Enterprises issued 12% bonds dated January 1, 2018, with a face amount of $20 million. The bonds mature in 2028 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.
Required:
1) Determine the price of the bonds at January 1, 2018.
2) Prepare the journal entry to record the bond issuance by Mania on January 1, 2018.
3) Prepare the journal entry to record interest on June 30, 2018, using the effective interest method.
4) Prepare the journal entry to record interest on December 31, 2018, using the effective interest method.
Problem 4
On January 1, 2018, Gibson Corporation entered into a nine-year operating lease for manufacturing equipment. Annual lease payments of $20,000 were due to Bender Company each January 1 beginning January 2018. The equipment cost Bender $100,000 and is expected to have a useful life of 10 years with a residual value of $10,000. The present value of the future lease payments is $149,264. An interest rate of 5% is appropriate.
Required:
1) Journalize the entries required by Gibson Corporation for 2018.
2) Journalize the entries required by Bender Company for 2018.
Problem 5
A company purchased new office equipment for a total of $250,000 on January 1, 2015. The company paid $40,000 cash and signed a $210,000, 3-year, 8% note for the remaining balance. The note is to be paid in three annual end-of-year payments of $81,487 each, with the first payment on December 31, 2015. Each payment includes interest on the unpaid balance plus principal.
Required: Complete the note amortization table below:
| Payment Date | Cash | Interest | Principal |Ending Principal |
| |Payment |Expense |Reduction |Balance |
|12/31/2015 | | | | |
|12/31/2016 | | | | |
|12/31/2017 | | | | |
Problem 6
Southern Company leased high-tech electronic equipment from Eastley Leasing on January 1, 2018. Eastley purchased the equipment from International Machines at a cost of $111,332. Payments are due on January 1 of 2018-2020. Accounting methods used include the Effective Interest Method and straight-line depreciation. Round your answers to the nearest whole dollar amount.
Other information:
Lease term 3 years
Annual payments $40,000
Life of asset 3 years
Fair value of asset $111,332
Implicit interest rate 8%
There is no expected residual value
Required:
1) Journalize the entries required by Southern for 2018.
2) Journalize the entries required by Eastley for 2018.
It may be helpful to prepare an amortization schedule to allocate interest and lease payments.
Problem 7
Allmond Corporation, organized on January 3, 2013, had pretax accounting income of $14 million and taxable income of $20 million for the year ended December 31, 2013. The 2013 tax rate is 35%. The only difference between accounting income and taxable income is estimated product warranty costs. Expected payments and scheduled tax rates (based on recent tax legislation) are as follows:
|2014 |$2,000,000 |35% |
|2015 |$1,000,000 |30% |
|2016 |$1,000,000 |30% |
|2017 |$2,000,000 |25% |
Required:
1) Determine the amounts necessary to record Allmond's income taxes for 2013 and prepare the appropriate journal entry.
2) Prepare the journal entry for Allmond’s 2013 income tax.
3) What is Allmond's 2013 net income?
Schedule for Requirement 1
|Temporary Difference | |Tax Rate |Totals |
|Warranty costs reversing in: | | | |
| 2014 | | | |
| 2015 | | | |
| 2016 | | | |
| 2014 | | | |
|Deferred tax asset/liability | | | |
| | | | |
|Income taxable in current year | | | |
|Income tax expense | | | |
Problem 8
Fores Construction Company reported a pretax operating loss of $135 million for financial and tax reporting purposes in 2013. The enacted tax rate is 40%. There were no temporary differences at the beginning of the year. Taxable income in Fores's two previous years of operation is shown below. Fores elects the carryback option.
[pic]
Required:
1) Prepare the journal entry to record the income tax benefit from the 2013 operating loss. Complete the schedule below to determine the amounts necessary for the journal entry.
2) Determine the net loss that will be reported on the 2013 income statement including the income tax benefit.
[pic]
Intermediate Accounting I - ACCT 2322
Exam 1 Study Guide: Chapters 14 – 16
Answer Key
Problem 1
Computations
1) Cash 20,400,000 $20,000,000 X 1.02
Premium on Bonds Payable 400,000
Convertible Bonds Payable 20,000,000 Face Value
2) Interest Expense 980,000 To balance
Premium on Bonds Payable 20,000 $400,000/10 years/2
Cash 1,000,000 $20,000,000 X 5%
3) Interest Expense 980,000 To balance
Premium on Bonds Payable 20,000 $400,000/10 years/2
Cash 1,000,000 $20,000,000 X 5%
4) Convertible Bonds Payable 10,000,000 ½ Face Value
Premium on Bonds Payable 180,000 ($400,000-$40,000)/2
Common Stock 10,180,000 To balance
Problem 2
DR CR Computations
Income Tax Expense 49,500 To balance
Deferred Tax Liability 3,600 ($25,000 X 30%) - $3,900
Income Tax Payable 45,900 $153,000 X 30%
Problem 3
[pic]
Problem 4
This is an operating lease.
Gibson (Lessee)
|Date | |DR |CR | |Computations |
|Jan 1 |Right-of-use asset |149,264 | | |PVAD: n=9, i=5% |
| | Lease Payable | |149,264 | |7.46321 x $20,000 |
| | | | | | |
|Jan 1 |Lease Payable |20,000 | | | |
| | Cash | |20,000 | | |
| | | | | | |
|Dec 31 |Interest Expense |6,463 | | |($149,264 - $20,000) x 5% (rounded) |
| |Lease Payable |13,537 | | |Difference [$20,000 - $6,463] |
| | Cash | |20,000 | | |
| | | | | | |
| |Amortization Expense |13,537 | | | |
| | Right-of-use asset | |13,537 | | |
Bender (Lessor)
|Date | |DR |CR | |Computations |
|Jan 1 |Cash |20,000 | | | |
| | Deferred lease revenue | |20,000 | | |
| | | | | | |
|Dec 31 |Deferred lease revenue |20,000 | | | |
| | Lease Revenue | |20,000 | | |
| | | | | | |
|Dec 31 |Cash |20,000 | | | |
| | Deferred lease revenue | |20,000 | | |
| | | | | | |
|Dec 31 |Depreciation Expense |9,000 | | |($100,000 - $10,000)/10 |
| | Accum Depreciation | |9,000 | | |
|Problem 5 | Cash | Interest Expense | Principal Reduction |Ending Principal Balance |
|Payment Date |Payment | | | |
|12/31/2015 |$81,487 |$16,800 |$64,687 |$145,313 |
| | |($210,000 X 8%) |($81,487-$16,800) |($210,000-$64,687) |
|12/31/2016 |$81,487 |$11,625 |$69,862 |$75,451 |
| | |($145,313 X 8%) |($81,487-$11,625) |($145,313-$69,862) |
|12/31/2017 |$81,487 |$6,036 |$75,451 |$0 |
| | |(to balance) |(to eliminate principal) | |
Problem 6
This is a finance lease for the lessee.
Southern (Lessee)
January 1, 2018
Right-of-use asset 111,332
Lease payable 111,331
Lease payable 40,000
Cash (lease payment) 40,000
December 31, 2018
Interest expense (8% x [$111,332 – 40,000]) 5,707
Interest Payable 5,707
Amortization Expense* ($111,332/3) 37,111
Right-of-use asset 37,111
January 1, 2019
Interest Payable 5,707
Lease payable (difference) 34,293
Cash (lease payment) 40,000
December 31, 2019
Interest expense (8% x [$111,332 – 40,000-34,293]) 2,963
Interest payable 1,142
Amortization Expense ($111,332/3) 37,111
Right-of-use asset 37,111
*Since this is a finance lease, all rights and obligations are essentially the responsibility of the lessee and the lessee will amortize the right to use the asset over the lease term.
Problem 6
This is a sales-type lease with no profit for the lessor.
Eastley (Lessor)
January 1, 2018
Lease receivable (fair value) 111,332
Equipment (lessor’s cost) 111,332
Cash (lease payment) 40,000
Lease receivable 40,000
December 31, 2018
Interest Receivable (8% x [$111,332 – 40,000]) 5,707
Interest Revenue 5,707
January 1, 2018
Cash (lease payment) 40,000
Lease receivable (difference) 13,058
Interest receivable (8% x [$111,332 – 40,000]) 5,707
December 31, 2019
Interest Receivable (8% x [$111,332 – 40,000-34,293]) 2,963
Interest revenue 2,963
Since this is a sales-type lease, the lessor does not record any depreciation on the leased asset.
Problem 7
Requirement 1
|Temporary Difference | |Tax Rate |Totals |
|Warranty costs reversing in: | | | |
| 2014 |$2,000,000 |35% |$700,000 |
| 2015 |$1,000,000 | 30% |$300,000 |
| 2016 |$1,000,000 | 30% |$300,000 |
| 2014 |$2,000,000 | 25% |$500,000 |
|Deferred tax asset/liability | | |$1,800,000 |
| | | | |
|Income taxable in current year | $20,000,000 |35% |$7,000,000 |
|Income tax expense | | |$5,200,000 |
Requirement 2
|Account |Debit |Credit |
|Income Tax Expense |5,200,000 | |
|Deferred Tax Asset |1,800,000 | |
| Income Tax Payable | |7,000,000 |
Requirement 3
Net Income:
Income Before Taxes $14,000,000
Income Tax Expense 5,200,000
Net Income $ 8,800,000
Problem 8
Requirement 1
[pic]
|Account |Debit |Credit |
|Income Tax Refund Receivable |42,000,000 | |
|($30,000,000+$12,000,000) | | |
|Deferred Tax Asset |12,000,000 | |
| Income Tax Benefit | |54,000,000 |
Requirement 2
Net Loss:
Operating Loss Before Taxes $135,000,000
Less: Income Tax Benefit 54,000,000
Net Operating Loss $ 81,000,000
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PVA Table: n=10, i=5%
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