PROBLEM 1: BOOMERANG INC., is a manufacturer and retailer of household furniture. Your audit of the companys !nancial statements for the year ended "ecem#er $%, &'%&, discloses the follo(in) de#t o#li)ations of the company at the end of its reportin) period. Boomeran)s !nancial !nancial statements are authori*ed for issuance on march +, &'%$. a. A %-',''' short term term o#li)ation o#li)ation due on March March %, &'%&. &'%&. Its maturity maturity could #e e/tended e/tended to March %, &'%-, pro0ided Boomeran) a)rees to pro0ide additional collateral. On 1e#ruary %&, &'%$, an a)reement is reached to e/tend the loans maturity to March %, &'%-. #. A short2term short2term o#li)ation of $,+'',''' in the form of notes notes paya#le due due 1e#ruary 1e#ruary -, &'%$. &'%$. 3he company issued issued 4-,''' ordinary ordinary shares shares for $+ $+ per share share on 5anuary &-, &'%$. 3he proceeds from the issuance, plus 6'',''' cash, (ere used to fully settle the de#t on 1e#ruary -, &'%$. c. A lon) term o#li)ation of &,-'',''' &,-'',''' on "ecem#er %, &'%&. On No0em#er %', %', &'%&, Boomeran) #reaches #reaches a co0enant on its de#t o#li)ation and the loan #ecomes paya#le on demand. An a)reement is reached to pro0ide a (ai0er of the #reach on "ecem#er %%, &'%&. d. A lon) term term o#li)ation of of 7,''','''. 3he 3he loan is maturin) maturin) o0er 7 years years in the amount amount of %,''',''' per year. year. 3he loan is dated 8eptem#er %, &'%&, and the !rst maturity date is 8eptem#er %, &'%&, and the !rst maturity date is 8eptem#er %, &'%$. e. A de#t o#li)ation o#li)ation of %,''',''' maturin) on "ecem#er $%, $%, &'%-. 3he 3he de#t is calla#le on demand #y the lender at any time. %. 9hat amount of current current lia#ilities should #e reported on on the "ecem#er $%, $%, &'%&, statement statement of !nancial position: A. ; ;,&-',''' C. 7,4-',''' B. -,-4',''' ". $,4-',''' &. 9hat amount of noncurrent noncurrent lia#ilities lia#ilities should should #e reported reported on the "ecem#er $%, $%, &'%& statement of !nancial position: A. -,-'',''' C. +,-'',''' B. % %,''',''' ". 4,-'','''
PROBLEM 2: 3he data are are from the records records of MANOR INC. on "ecem#er "ecem#er $%, &'%&< Accounts paya#le Cash #alance, ABC Ban= Cash o0erdraft (ith >Y? Ban= Customers accounts (ith credit #alances "i0idends in arrears on preference shares Employees income ta/ paya#le Estimated (arranty paya#le Estimated premium claims outstandin) Income ta/ paya#le Notes paya#le @issued in &'%& maturin) in &' semi annual installments #e)innin) on April %, &'%$ 8alaries paya#le
+;',''' %,&7',''' ;',''' &-,''' 7'',''' %'',''' -',''' 6',''' 7'',''' 7,''',''' 7'','''
3he amount to #e sho(n as total current current lia#ilities on Manor statement statement of !nancial !nancial position at "ecem#er $%, &'%&, is A. & &,&&-,''' C. &,+&-,''' B. & &,'&-,''' ". &,%7-,'''
PROBLEM 3: 8AI COR. records its purchases at )ross amounts #ut (ishes to chan)e to recordin) purchases net of purchase discounts. "iscounts on purchases recorded from 5anuary %, &'%& to "ecem#er $%, &'%&, totaled ;','''. Of this amount, ;,''' is still a0aila#le in the accounts paya#le #alance. 3he #alance in 8ais accounts as of and for the year ended "ecem#er $%, '%&, #efore con0ersion are< urchases urchase "iscounts Accounts paya#le %. 3he amount amount of purchas purchase e discounts discounts lost lost to #e reco)ni reco)ni*ed *ed is
7,''',''' $&,''' %,&'','''
A. ;,''' C. $&,''' B. ' ". 7',''' &. 3he accounts paya#le #alance should #e reduced #y A. ;,''' C. $&,''' B. ;',''' ". 7',''' $. 3he purchases account should #e reduced #y A. $&,''' C. 7',''' B. ;',''' ". ;,''' 7. 3he entry to record the con0ersion is A. Accounts paya#le ;',''' urchases ;',''' B. urchase discounts lost $&,''' urchases $&,''' C. urchase discounts lost 7',''' urchase discounts $&,''' Accounts paya#le ;,''' urchases ;',''' ". urchase discounts lost $&,''' Account paya#le ;,''' urchases 7','''
PROBLEM 4: ANGIN CORORA3ION must determine the "ecem#er $%, &'%&, year2end accruals for ad0ertisin) and rent e/penses. A -',''' ad0ertisin) #ill (as recei0ed 5anuary %', &'%$, comprisin) costs of $4,-'' for ad0ertisements in "ecem#er &'%& issues, and %&,-'' for ad0ertisements in 5anuary &'%$ issues of the ne(spaper. A short lease, eecti0e "ecem#er %+, &'%%, calls for !/ed rent of %&',''' per month, paya#le one month from the eecti0e date and monthly thereafter. In addition, rent eDual to - of net sales o0er +,''',''' per calendar year is paya#le on 5anuary $% of the follo(in) year. Net sales for &'%& (ere 4,-'','''. 9hat is the total accrued lia#ilities that should #e reported #y An)lin Corporation in its statement of !nancial position as at "ecem#er $%, &'%&: A. %;-,''' C. 64,-'' B. %4&,-'' ". %%','''
PROBLEM 5: Ana Rosa, president of the AOFA COMANY, has a #onus arran)ement (ith the company under (hich she recei0es %' of the net income @after deductin) ta/es and #onuses each year. 1or the current year, the net income #efore deductin) either the pro0ision for income ta/es or the #onus is 7,+-','''. 3he #onus is deducti#le for ta/ purposes, and the ta/ rate is $'. %. "etermine the amount of Ana Rosas #onus. &. Compute the appropriate pro0ision for income ta/ for the year. $. repare the entry to record the #onus @(hich (ill #e paid in the follo(in) year.
PROBLEM 6: OF9ANG COMANY sold 4'',''' #o/es if uto mi/H under a ne( sales promotional pro)ram. Each #o/ contains one coupon, (hich if su#mitted (ith 7', entities the customer to a =itchen =nife. o=(an) pays +' per =nife and - for handlin) and shippin). o=(an) estimates that 4' of the coupons (ill #e redeemed e0en thou)h only &-',''' coupons had #een processed durin) &'%&. o( much should o=(an) report as lia#ility for unredeemed coupons at "ecem#er $%, &'%&: A. +,''',''' C. %-,+'',''' B. 6,+'',''' ". %&,&-','''
PROBLEM 7: In pac=a)es of its products, ACI", INC. includes coupons that may #e presented at retail stores to o#tain discounts on other lacid products. Retailers are reim#ursed for the face amount of coupons redeemed plus %' of that amount for handlin) costs. lacid honors
reDuests for coupon redemption #y retailers up to $ months after the consumer e/piration date. lacid estimates that +' of all coupons issued (ill ultimately #e redeemed. Information relatin) to coupons issued #y lacid durin) &'%& is as follo(s< Consumer e/piration date
"ecem#er $%. &'%& %+-,''' 66,'''
3otal payments to retailers as of "ecem#er $%, &'%& ia#ility for unredeemed coupons as of "ecem#er $%, &'%&
9hat is the total face amount of coupons issued #y lacid, Inc. in &'%&: A. 77',''' C. +'',''' B. 7'',''' ". &+7,'''
PROBLEM 8: OMEGA COMANY sells its products in e/pensi0e, reusa#le containers. 3he customer is char)ed a deposit for each container deli0ered and recei0es a refund for each container returned (ithin t(o years after the year of deli0ery. Ome)a accounts for the containers not returned (ithin the time limit as #ein) sold at the deposit amount. Information for &'%& is as follo(s< Containers held #y customer at "ecem#er $%, &'%%, from deli0eries in< &'%' &'%% Containers deli0ered in &'%& Containers returned in &'%& form deli0ers in<
;-,''' &7','' '
$&-,''' 7$','''
&'%' &'%% &'%&
-4,-'' %7',''' %-4,'''
$-7,-''
%. o( much re0enue from container sales should #e reco)ni*ed for &'%&: A. %&4,-'' C. &4,-'' B. &+4,-'' ". ;-,''' &. 9hat is the total amount of Ome)a Companys lia#ility for returna#le containers at "ecem#er $%, &'%&: A. $4$,''' C. &+4,-'' B. 7'',-'' ". $','''
PROBLEM 9: "escri#ed #elo( are certain transactions of A8EE COMANY< 1e#ruary 3he company purchased )oods from appy Corp. for %-',''' & su#Ject to cash discount terms of &K%', nK$'. 3he company records purchases and accounts paya#le at net amounts after cash discounts. 3he in0oice (as paid on 1e#ruary &-. April %
3he company purchased a truc= for %&',''' from Broom Motors Corp., payin) %&,''' in cash and si)nin) a one2year, %& note for the #alance of the purchase price.
May %
3he company #orro(ed &7',''' from Manila Ban= #y si)nin) a &4+,''' noninterest2#earin) note due one year from May %.
Au)ust %
3he companys #oard of directors declared a 6'',''' cash di0idend that (as paya#le on 8eptem#er %' to shareholders of record on Au)ust $%.
%. repare all the Journal entries necessary to record the transactions descri#ed a#o0e. &. Assume that Ash#y Companys !nancial year ends on "ecem#er $%, and that no adJustin) entries relati0e to the transactions a#o0e ha0e #een recorded. repare any adJustin) Journal entries concernin) interest that are necessary to present fair !nancial statements at "ecem#er $%.
PROBLEM 10: resented #elo( are t(o independent situations. Ans(er the Duestions at the end of each situation.
Situation 1 EG9ENE CO., a machinery dealer, sells a machine for &&,&'' under a %2year (arranty contract that reDuires the company to replace all defecti0e parts and to pro0ide the necessary repair la#or at no cost to the customers. 9ith sales #ein) made e0enly throu)hout the year, E)(ene sells for cash +'' machines in &'%& @half of the (arranty e/pense is incurred in &'%&, half in &'%$. On the #asis of past e/penses, the %2year (arranty costs are estimated to #e -%' parts and ++' la#or. Assume that in &'%&, these (arranty costs are incurred e/actly as estimated. %. 9hat amount of (arranty e/pense (ould #e char)ed a)ainst &'%& re0enue: A. 4'&,''' C. %-$,''' B. $-%,''' ". $6+,''' &. 9hat amount of (arranty lia#ility (ould appear on the "ecem#er $%, &'%& statement of !nancial position: A. ' C. 4'&,''' B. %-$,''' ".$-%,'''
Situation 2 RAN" INC., a dealer of household appliances, sells (ashin) machines at an a0era)e price of ;,%''. 3he company also oers to each customer a separate $2year (arranty contract for ;%' that reDuires the company to pro0ide periodic maintenance ser0ices and to replace defecti0e parts. "urin) &'%&, Rand sold $'' (ashin) machines and &4' (arranty contracts for cash. 3he company estimates that the (arranty costs are %;' for parts and $+' for la#or. Assume sales occurred on "ecem#er $%, &'%&. Rands policy is to reco)ni*e income from the (arranties on a strai)ht2line #asis. In &'%$, Rand incurred actual costs relati0e to &'%& (arranty sales of %;,''' for parts and $+,''' for la#or. %. 9hat lia#ility relati0e to these transactions (ould appear on the "ecem#er $%, &'%&, statement of !nancial position and ho( (ould it #e classi!ed: Current Non2current A. %7-,''' 4&,6'' B. 4&,6'' 4&,6'' C. 4&,6'' %7-,;'' ". ' &%;,4'' &. 9hat amount of (arranty e/pense (ould #e sho(n on the income statement for the year ended "ecem#er $%, &'%$: A. %;,''' C. $+,''' B. ' ". -7,''' $. 9hat lia#ility relati0e to the &'%& (arranties (ould appear on the "ecem#er $%, &'%$, statement of !nancial position and ho( (ould it #e classi!ed: Current Non2 current A. %7-,''' 4&,6'' B. 4&,6'' 4&,6'' C. 4&,6'' %7-,;'' ". %7-,;'' '
PROBLEM 11 O8ON ML8IC EMORILM carries a (ide 0ariety of musical instruments, sound reproduction eDuipments, recorded music, and sheet music. 3o promote the sale of its products, Olson uses t(o promotion techniDues premium and (arranties.
Premiums: 3he premium is oered on the recorded and sheet music. Customers recei0e a coupon for each %' spent on recorded music and sheet music. Customers may e/chan)e &'' coupons and &'' for a C" player. Olson pays $7' for each C" player and estimates that +' of the coupons )i0en to customers (ill #e redeemed. A total of +,-'' C" players used in the
premium (ere purchased durin) the year and there (ere %,&'',''' coupons redeemed in &'%&.
Warranties: Musical instruments and sound reproduction eDuipment are sold (ith a one2year (arranty for replacement of parts and la#or. 3he estimated (arranty cost, #ased on past e/perience, is & of sales. Replacement parts and la#or for (arranty (or= totaled %,+7',''' durin) &'%&. Olson uses accrual method to account for the (arranty and premium costs for !nancial reportin) purposes. Olsons sales for &'%& totaled 4&,''' -7,''',''' from musical instruments and sound reproduction eDuipment and %;,''',''' from recorded music and sheet music. 3he #alances in the accounts related to (arranties and premium on 5anuary %, &'%&, (ere as sho(n #elo(< In0entory of premium C" players Estimated premium claims outstandin) Estimated lia#ility from (arranties
$66,-'' 77;,''' %,$+','''
Based on the precedin) information, determine the amounts that (ill #e sho(n on the &'%& !nancial statements for the follo(in)< %. 9arranty e/pense A. %,+7',''' C. ;'',''' B. %,';',''' ". $+',''' &. Estimated lia#ility from (arranties A. %,6&',''' C. &7',''' B. %,';',''' ". ;'',''' $. remium e/pense A. %,;$+,''' C. 4-+,''' B. ;7',''' ". &,%;6,-'' 7. In0entory of premium C" players A. $66,-'' C. &,&%',''' B. -+6,-'' ". 4$6,-'' -. Estimated premium claims outstandin) A. $+7,''' C. 4-+,''' B. ;7',''' ". +4&,'''
PROBLEM 12: On "ecem#er $%, &'%&, BAFI COMANY acDuired a piece of eDuipment from 8eller Company #y issuin) a %,&'',''' note, paya#le in full on "ecem#er $%, &'%+. Ba=is credit ratin) permits it to #orro( funds from its se0eral lines of credit at %'. 3he eDuipment is e/pected to ha0e a -2 year life and a %-',''', sal0a)e 0alue. 3he present 0alue of % at %' for 7 periods is '.+;$'%. %. 9hat is the eDuipments #oo= 0alue on "ecem#er $%, &'%7: A. --%,4+4 C. 76%,4+4 B. +$',''' ". $7%,4+4 &. 9hat is the carryin) 0alue of the note at "ecem#er $%, &'%7: A. %,'6',6'$ C. %,&'',''' B. 66%,4$' ". ;%6,+%&
PROBLEM 13: ORCI" COMANY purchased machinery on "ecem#er $%, &'%&, payin) ;',''' do(n and a)reein) to pay the #alance in four eDual installments of +',''' paya#le each "ecem#er $%. Implicit in the purchase price is an assumed interest of %&. The following data are abstracted from the present value tables: resent 0alue of % at %& for 7 periods resent 0alue of an annuity of % at %&
'.+$--& $.'$4$-
%. 9hat is the cost of the machine purchased on "ecem#er $%, &'%&: A. &$$,';$ C. &+&,&7% B. $&',''' ". &6',;7& &. o( much interest should #e reported in Orchids income statement for the year ended "ecem#er $%, &'%$: A. $;,%$% C. %4,&6$
B. &%,;+6 ". 7&,4'4 $. 9hat is the carryin) 0alue of the note at "ecem#er $%, &'%7: A. %&',''' C. 66,$%' B. %77,%%' ". %'%,7'$
PROBLEM 14: On Octo#er %, &'%&, A3OR COR. issued a -'',''', %&2month, %& not to ABC Company in payment of account. On the same date, the company #orro(ed %,''',''' form the Asian Ban= #y si)nin) a %&2month, non2interest2#earin), %,%&',''' note. %. repare adJustin) Journal entries at "ecem#er $%, &'%&. &. 9hat is the totalKnet lia#ility to #e reported in the "ecem#er $%, &'%&, statement of !nancial position for< a. 3he interest2#earin) note: #. 3he noninterest2#earin) note:
PROBLEM 15: "escri#ed #elo( are certain transactions of 3LNIC COMANY. On April %, the corporation #ou)ht a truc= for 7'',''' from General Motors Company, payin) 7',''' in cash and si)nin) a one2year, %& note for the #alance of the purchase price. On may %, the corporation #orro(ed ;'',''' from rudent Ban= #y si)nin) a 6&',''' noninterest2#earin) note due one2year from May %. •
•
repare any adJustin) Journal entries to present fair !nancial statements at "ecem#er $%.
PROBLEM 16: In conJunction (ith your !rms e/amination of the !nancial statements of BA3A, INC. as of "ecem#er $%, &'%&, you o#tained the information from the companys 0oucher re)ister so(n in the (or= paper #elo(. Ite m No. %
Entry Date %&.%;.% &
Voucher Referen Description ce %&2&'' 8upplies, shipped 1OB destination, %&K%-K%& recei0ed %&K%4K%&
Amou Account Chare! nt
%&.%;.% & %&.&%.% & %&.&+.% &
%&2&'$
Auto insurance, %&.%-.%& %&K%-K%$
%-,''' &&,'''
%&2&'6
Repairs ser0ices recei0ed %&K&'K%&
%6,'''
Repairs maintenance
%&2&%&
Merchandise, shipped 1OB shippin) point, %&K&'K%& recei0ed %&K&7K%&
%&$,'' '
In0entory
%&.&%.% & %&.&%.% & %&.&;.% & %&.&;.% &
%&2&%' %&2&$7
ayroll, %&K4K%& %&K&%K%& @%& (or=in) days 8u#scription to industry ma)a*ine for &'%$
+6,''' -,'''
%&2&$+
Ltilities for "ecem#er &'%&
&7,'''
8alaries and (a)es "ues su#scriptions e/pense Ltilities e/pense
%&2&7%
Merchandise, shipped 1OB destination, %&,&7,%& recei0ed %K&K%$
%&2&7&
%'
%&.&;.% & %.&.%$
%%
%.&.%$
%2&
%&
%.-.%$
%2$
%$
%.%'.%$
%27
& $ 7
+ 4 ;
6
%2%
Merchandise, shipped 1OB destination %&K&7K%& recei0ed %K&K%$ e)al ser0ices recei0ed %&K&;K%&
Medical ser0ices for employees for "ecem#er &'%& Merchandise, shipped 1OB shippin) point, %&K&6K%& recei0ed %K7K%$ ayroll, %&K&%K%& %K-K%$ @%& (or=in) days in total, 7 (or=in) days in
8upplies on hand repaid insurance
%%%,-' '
In0entory
;7,''' 7+,'''
&-,'''
In0entory e)al and professional fees e/pense Medical e/penses
--,'''
In0entory
%7
%.%'.%$
%2+
%-
%.%&.%$
%2;
%+
%.%$.%$
%26
%4 %;
%.%7.%$ %.%-.%$
%2%' %2%%
%6
%.%-.%$
%2%&
5anuary &'%$ Merchandise, shipped 1OB shippin) point, %K&K%$ recei0ed %K+K%$ Merchandise, shipped 1OB destination, %K$K%$ recei0ed %K%'K%$ Maintenance ser0ices recei0ed %K6K%$
4&,'''
8alaries and (a)es
+7,''' $;,'''
In0entory
Interest on #an= loan, %'K%'K%& %K%'K%$ Manufacturin) eDuipment installed %&K&6K%& "i0idend declared, %&K%-K%$
$',''' &-7,'' ' %+','' '
Accrued lia#ilities as of "ecem#er $%, &'%&, (ere as follo(s< Accrued payroll Accrued interest paya#le "i0idends paya#le
6,'''
In0entory Repairs and maintenance Interest e/pense Machinery eDuipment "i0idends paya#le
7;,''' &+,+++ %+','''
3he accrued payroll and accrued interest paya#le (ere re0ersed eecti0e 5anuary %, &'%$. Required: Re0ie( the data )i0en a#o0e and prepare Journal entries to adJust the accounts on "ecem#er $%, &'%&. Assume that the company follo(s 1OB terms for recordin) in0entory purchases.
PROBLEM 17: You are en)a)ed to audit the "ecem#er $%, &'%&, !nancial statements of I?A COMANY, a manufacturer of household appliances. Your audit disclosed the follo(in) situations. a. In 5une &'%&, the company #e)an producin) and sellin) a ne( line of dish(asher. By the end of the year, it had sold %&',''' to 0arious dealers for %-,''' each. 3he product (as sold under a %2year (arranty, and the company estimates (arranty costs to #e 4-' per dish(asher. i*a had paid out $' million in (arranty e/penses as of "ecem#er $%, &'%&, (hich also the amount sho(n as (arranty e/pense in its income statement for the current year. #. In response to your letter of audit inDuiry, i*as la(yer informed you that the company is in0ol0ed in a la(suit for 0iolation en0ironmental la(s re)ulatin) ha*ardous (aste. Althou)h the liti)ation is pendin), i*as la(yer is certain that i*a (ill most pro#a#ly ha0e to pay cleanup costs and !nes of -,-'','''. i*a neither accrued nor disclosed this loss in the !nancial statements. c. i*a is the defendant in a patent infrin)ement suit #y Mona Ban) o0er i*as use of a hydraulic compressor in se0eral of its manufactured appliances. i*as la(yer informed you that if the suit )oes a)ainst your audit client, the loss may #e as much as %' million. o(e0er, the la(yer #elie0es that the loss of this suit is only possi#le. i*a did not in any (ay disclose this pendin) liti)ation in its !nancial statements. %. 9hat amount of (arranty e/pense should #e sho(n on i*as income statement for the year ended "ecem#er $%, &'%&: A. $',''',''' C. +',''',''' B. ' ". 6',''',''' &. 9hat amount of (arranty lia#ility should #e sho(n on i*as statement of !nancial position as of "ecem#er $%, &'%&: A. +',''',''' C. $',''',''' B. 6',''',''' ". ' $. 9hat amount of la(suit lia#ility should #e reported as a pro0ision on i*as "ecem#er $%, &'%&, statement of !nancial position: A. %',''',''' C. %-,-'',''' B. -,-'',''' ". '
PROBLEM 18: On No0em#er %, &'%&, +6 passen)ers on CANYON AIRINE8 1li)ht No. %7$ (ere inJured upon landin) (hen the plane s=idded o the run(ay. ersonal inJury suits for dama)es totalin) %',''',''' (ere !led on 5anuary %&, &'%$, a)ainst the airline #y &% inJured passen)ers. 3he airline carries no insurance. e)al counsel has studied each suit and ad0ised Canon that it can reasona#ly e/pect to pay 4' of the dama)es claimed. 3he !nancial statements for the year ended "ecem#er $%, &'%&, (ere authori*ed for issue on 1e#ruary %&, &'%$. "urin) the past
decade, the company has e/perienced at least one accident per year and incurred a0era)e dama)es of 7,%'','''. %. repare the Journal entry that should #e made as of "ecem#er $%, &'%&, to reco)ni*ed the loss. &. 9hat lia#ility due to ris= of loss from lac= of insurance co0era)e should Canyon Airlines record or disclose: @I)nore the No0em#er %, &'%&, accident.
PROBLEM 19: BAGFL8 COMANY has the follo(in) three loans paya#le scheduled to #e repaid in 1e#ruary of ne/t year. 3he companys accountin) year ends on "ecem#er $%. a. 3he company intends to repay oan % for %'',''' (hen it comes due in 1e#ruary. In the follo(in) Octo#er, the company intends to )et a ne( loan for ;',''' from the same #an=. #. 3he company intends to re!nance oan & for %-',''' (hen it comes due in 1e#ruary. 3he re!nancin) a)reement, for %;',''', (ill #e si)ned in April, after the !nancial statements for this year ha0e #een authori*ed for issue. c. 3he company intends to re!nance oan $ for &'',''' #efore it comes due in 1e#ruary. 3he actual re!nancin) for %4-,''', too= place in 5anuary, before the !nancial statements for this year ha0e #een authori*ed for issue. %. As of "ecem#er $% of this year, the total current lia#ilities to #e reported in the companys statement of !nancial position should #e A. %'',''' C. 7-',''' B. &-',''' ". %&-,''' &. As of "ecem#er $% of this year, the total noncurrent lia#ilities to #e reported in the companys statement of !nancial position should #e A. &-,''' C. %4-,''' B. ' ". $-','''
PROBLEM 20: 3he follo(in) are #ased on the !nancial statements of CAME COMANY. Current assets 8hort2term loan paya#le 3otal lia#ilities Current ratio "e#t2to2eDuity2ratio
4-',''' +'',''' $,''',''' %.%.-
Camel Company has arran)ed (ith its #an= to re!nance its short2term loan (hen it #ecomes due in $ months. 3he ne( loan (ill ha0e a term of - years. %. Compute the follo(in)< A. 3otal current lia#ilities B. 3otal shareholders eDuity C. 3otal noncurrent lia#ilities &. As the auditor of camel Company, ho( (ould you 0erify the 0alidity of the short2term loan re!nancin):
PROBLEM 21: CAREY CO. o(es %,66;,''' to oan 8har= Corp. the de#t is a %'2year %% note. Because Carey Co. is in !nancial trou#le, oan 8har= Corp. a)rees to accept land and cancel the entire de#t. 3he land has a #oo= 0alue of ;'',''' and aair mar=et 0alue of %,&'','''. 9hat entry should #e made #y Carey Co. for the de#t restructure:
PROBLEM 22: NAFARL CORORA3ION is ha0in) !nancial diculty and therefore has as=ed Naa(a Ban= to restructure its $ million note outstandin). 3he present note has $ years remainin) and pays a current rate of interest of %&. 3he note (as issued as its face 0alue. resented #elo( are t(o independent situations. repare the Journal entry that Na=aru (ould ma=e for each of the follo(in) types of de#t restructurin).
a. Naa(a Ban= a)rees to accept land in e/chan)e for relinDuishin) its claim on this note. 3he land has a #oo= 0alue of &,''',''' and a fair 0alue of &,-'',''' #. Naa(a Ban= a)rees to reduce the principal #alance due to &,''',''' and interest rate to %'. 3he follo(in) present 0alue factors are a#stracted from the present 0alue ta#les. 12" 1#" resent 0alue of % for $ periods '.4%%4; '.4-%$& resent 0alue of an ordinary annuity of % for $ periods &.7'%;$ &.7;+;-
PROBLEM 23: At "ecem#er $%, &'%&, FI88 COMANYs lia#ilities include the follo(in)< %' million of %' notes are due on March $%, &'%4. 3he follo(in) a)reement contains a co0enant that reDuires Fiss to maintain current assets at least eDual to &'' of its current lia#ilities. As of "ecem#er $%, &'%&, Fiss has #reached this loan co0enant. On 1e#ruary %', &'%$, #efore Fisss !nancial statements are authori*ed for issue, Fiss o#tained a period of )race form Mayumi Ban= until 5anuary $%, &'%7, ha0in) con0inced the #an= that the companys normal $ to % ratio of current assets to current lia#ilities (ill #e reesta#lished durin) &'%$. %- million of noncancela#le %& #onds (ere issued at face 0alue on 8eptem#er $', %66%. 3he #onds mature on au)ust $%, &'%$. Fiss e/pects to ha0e sucient cash a0aila#le to redeem the #onds at maturity. &' million of %' #onds (ere issued at face 0alue on 5une $', %66$. 3he #onds mature on 5une $', &'&&, #ut #ondholders ha0e the option to call @demand payment on the #onds on 5une $', &'%$. o(e0er, the call option is not e/pected to #e e/ercised, )i0en pre0ailin) mar=et conditions. •
•
•
9hat potion of Fiss Companys de#t should #e reported as a noncurrent lia#ility: A. %' million C. &' million B. $' million ". '
PROBLEM 24: Your audit client, 8LA COMANY, is in0ol0ed in the situations descri#ed #elo(. 8upas accountin) year ends on "ecem#er $%, &'%&, and its !nancial statements are authori*ed for issue on March &', &'%$. a. 8upa is in0ol0ed in a la(suit resultin) from a dispute (ith a customer. In 5anuary &;, &'%$, Jud)ment (as rendered a)ainst 8upa in the amount of &' million. 8upa plans to appeal the Jud)ment and is una#le to predict its outcome thou)h mana)ement #elie0es that it (ill not ha0e a material ad0erse eect on the company. #. On April &-, &'%$, the Bureau of Internal Re0enue is in the process of e/aminin) 8upas ta/ returns for &'%' and &'%%, #ut has not proposed a de!ciency assessment. Mana)ement feels an assessment is reasona#ly possi#le, and if an assessment is made, an unfa0ora#le settlement of up to - million is reasona#ly possi#le. c. On 5anuary -, &'%$, in0entory purchased 1OB shippin) point from a forei)n country (as detained at that countrys #order #ecause of political unrest. 3he shipment is 0alued at % million. 8upa,s la(yers ha0e stated that it is pro#a#le that 8upa (ill #e a#le to o#tain the shipment. d. On No0em#er %, &'%&, a la(suit (as !led #y a dis)runtled customer (ho disco0ered a safety ha*ard in one of 8upas #est2sellin) products. 8upas la(yers feel it is pro#a#le that the company (ill #e lia#le for -'','''. e. On "ecem#er -, &'%&, 8upa initiated a la(suit see=in) % million in dama)es from a patent infrin)ement. "etermine the appropriate means of reportin) each situation. repare any necessary Journal entries on "ecem#er $%, &'%&<
PROBLEM 25: ARIO COMANY issued %'2year #onds on 5anuary %, &'%&. 3he companys year2end is "ecem#er $%, and !nancial statements are prepared annually. 3he amorti*ation and interest schedule #elo( rePects the #ond issuance and the su#seDuent interest payments and char)es.
A$%R&I'A&I%N SC(ED)*E Interes Interest Amount
Carryin
Date
t pai!
e+pense
'%.'%.% 222 222 & %&.$%.% -+,+%' & --,''' %&.$%.% --,''' -+,;'$ $ %&.$%.% --,''' -4,'%6 7 %&.$%.% --,''' -4,&+% %&.$%.% --,''' -4,-$$ + %&.$%.% --,''' -4,;$4 4 %&.$%.% --,''' -;,%44 ; %&.$%.% --,''' -;,--; 6 %&.$%.& --,''' -;,6;' %&.$%.& --,''' -6,74'Q % Q AdJustment due to roundin)
)namorti, e! &;,&-$
Va-ue 74%,474
&+,+7$
74$,$-4
&7,;7'
74-,%+'
&&,;&%
744,%46
&',-+'
746,77'
%;,'&4
7;%,64$
%-,%6'
7;7,;%'
%&,'%$
7;4,6;4
;,7--
76%,-7-
7,74'
76-,-$'
222
-'','''
%. 3he #onds (ere issued at A. A premium C. 1ace 0alue B. A discount ". ar 0alue &. 9hat amorti*ation method is used in the amorti*ation schedule presented: A. 8trai)ht2line method C. Eecti0e interest method B. Bonds outstandin) method ". "eclinin) #alance method $. 9hat is the nominal @stated interest rate of the #onds issued on 5anuary %, &'%&: A. %% C. %' B. %& ". + 7. 9hat is the eecti0e interest rate of the #onds issued on 5anuary %, &'%&: A. %% C. %' B. %& ". + -. On the #asis of the schedule presented, (hat is the Journal entry to record the issuance of the #onds on 5anuary %, &'%&: A. Cash -'',''' Bonds paya#le -'',''' B. Cash 74%,474 Interest e/pense &;,&-$ Bonds paya#le -'',''' C. Cash -'',''' remium on #onds paya#le &;,&-$ Bonds paya#le 74%,474 ". Cash 74%,474 "iscount on #onds paya#le &;,&-$ Bonds paya#le -'','''
PROBLEM 26: EEANOR COR. has #een producin) Duality disposa#le diapers for more than t(o decades. 3he companys !scal year runs from April % to March $%. 3he follo(in) information relates to the o#li)ations of Eleanor as of March $%, &'%&.
on!s Paya/-e Eleanor issued %',''',''' of %' #onds on 5uly %, &'%'. 3he pre0ailin) mar=et rate of interest for these #onds (as %& on the date of issue. 3he #onds (ill mature on 5uly %, &'&'. Interest is paid semiannually on 5uly % and 5anuary %. Eleanor uses the eecti0e interest rate method to amorti*e #ond premium or discount.
3he follo(in) present 0alue factors are ta=en from the present 0alue ta#les< resent 0alue of % at %& for %' periods '.$&6%4 resent 0alue of % at + for &' periods '.$%%;' resent 0alue of an annuity of % at %& for %' periods -.+-'&& resent 0alue of an ordinary annuity of % at + for &' %%.7+66& periods
Notes Paya/-e Eleanor has si)ned se0eral lon)2term notes (ith !nancial institutions. 3he maturities of these notes are )i0en in the schedule #elo(. 3he total unpaid interest for all these notes amounts to +'',''' on March $%, &'%&. Due Date Aril %, &'%& 5uly %, &'%& Octo#er %, &'%& 5anuary %, &'%$ April %, &'%$ April %, &'%7 April %, &'%- April %, &'%+ April %, &'%4
March March March March March
$%, $%, $%, $%, $%,
&'%7 &'%&'%+ &'%4 &'%;
Amount Due 7'',''' +'',''' $'',''' $'',''' %,&'',''' %,''',''' %,7'',''' ;'',''' %,''',''' P7,000,000
Estimate! Warranties Eleanor has a one2year product (arranty on some selected items in its product line. 3he estimated (arranty lia#ility on sales made durin) the &'%' &'%% !scal year and still outstandin) as of March $%, &'%% amounted to %;','''. 3he (arranty costs on sales made from April %, &'%%, throu)h March $%, &'%&, are estimated at -&','''. 3he actual (arranty costs incurred durin) the current &'%% &'%& !scal year are as follo(s< 9arranty claims honored on &'%' &'%% sales 9arranty claims honored on &'%% &'%& sales 3otal (arranty claims honored
%;',''' %4;,''' P 358,000
%ther Information a. 3RA"E AYABE8 Accounts paya#le for supplies, )oods and ser0ices purchased on open account amount to 47',''' as of March $%, &'%&. #. AYRO REA3E" I3EM8 Accrued salaries and (a)es 9ithholdin) (a/es paya#le Other payroll deductions 3otal
$'',''' 67,''' %',''' P 404,000
c. MI8CEANEOL8 ACCRLA8 Other accruals not separately classi!ed amount to %-',''' as of March $%, &'%&. d. "ISI"EN"8 On March %-, &'%&, Eleanors #oard of directors declared a cash di0idend of '.&' per ordinary share and a %' share di0idend. Both di0idends (ere to #e distri#uted on April %&, &'%&, to the shareholders of record at the close of #usiness on March $%, &'%&. "ata re)ardin) Eleanor ordinary share capital are as follo(s< ar 0alue Num#er of shares issued and outstandin)
Market values of ordinary shares: March %-, &'%& March $%, &'%& April %&, &'%&
-.'' per share +,''',''' shares
&&.'' per share &%.-' per share &&.-' per share
%. o( much (as recei0ed #y Eleanor from the sale of the #onds on 5uly %, &'%': A. ;,;-&,6+' C. %',-'',''' B. %',''',''' ". %',+74,'7' &. 9hat is the current portion of Eleanors notes paya#le at March $%, &'%&: A. &,;'',''' C. %,$'',''' B. %,+'',''' ". $,;'',''' $. 3he #alance of the estimated (arranties paya#le at March $%, &'%&, is A. $7&,''' C. -&',''' B. %;,''' ". %;',''' 7. On March $%, &'%&, Eleanors statement of !nancial position (ould report total current lia#ilities of A. -,&;+,''' C. -,$$+,''' B. 7,$;+,''' ". -,+7&,''' -. On March $%, &'%&, Eleanors statement of !nancial position (ould report total noncurrent lia#ilities of A. %7,$;6,$-' C. %7,$4',4;$ B. %7,$-&,&%4 ". %7,&-&,6+'
PROBLEM 27: 3he follo(in) data (ere o#tained from the initial audit of AN83EEN COMANY<
10" 1#year on!s Paya/-e !ate! 3anuary 1 2#11 "e#it Cash proceeds from issue on 5anuary %, &'%% of %,''', %,''' #onds. 3he mar=et rate of interest on the date of issue (as %&.
on! Interest E+pense Cash paid, %.&.%& Cash paid, 4.%.%& Accrual, %&.$%.%&
%,%4&,' 77
4-,'' ' 4-,''' 4-,'''
Accrue! Interest on on!s Balance, %.%.%& Accrual, %&.$%.%& &reasury on!s Redemption price and interest to date on &'' #onds permanently retired on "ecem#er $%, &'%&
Credit
Balance %,%4&,' 77
4-,''' %-',''' &&-,'''
4-,''' 4-,'''
&+-,' ''
4-,''' %-','''
&+-,'''
Based on the preceding information, determine the following: %. Carryin) 0alue of #onds paya#le at "ecem#er $%, &'%& A. ;$%,%%' C. %,%-%,-;$ B. ;'',''' ". 6%,&++ &. oss on #ond redemption A. 7,+;$ C. %-,''' B. %6,+;$ ". $7,+;$ $. Accrued interest on #onds at "ecem#er $%, &'%& A. 4-,''' C. +',''' B. %$-,''' ". -&,-'' 7. Bond interest e/pense for the year ended "ecem#er $%, &'%& A. %-',''' C. +6,47B. %$6,%47 ". %+',;&+
PROBLEM 28: 3he lon) term de#t section of EMO COMANYs statement of !nancial position as of "ecem#er $%, &'%%, included 6 #onds paya#le of 7'',''', less unamorti*ed discount of $&,'''. 1urther e/amination re0ealed that these #onds (ere issued to yield %'. 3he amorti*ation of the #onds discount (as recorded usin) the eecti0e interest method. Interest (as paid on 5anuary %, and 5uly % of each year. On 5uly %, &'%&, Elmo retired the #onds at %'#efore maturity. 9hat is the amount of loss to #e reco)ni*ed on the retirement of #onds:
A. -&,7'' B. &','''
C. -%,+'' ". '
PROBLEM 29: MAOMBE COR. had outstandin) +,''',''' of %% #onds @interest paya#le 5uly $% and 5anuary $% due in %' years. On 5uly %, it issued 6,''',''' of %', %-2year #onds @interest paya#le 5uly % and 5anuary % at 64. A portion of the proceeds (as used to call the %% #onds at %'$ on Au)ust %. Lnamorti*ed #ond discount and issue cost applica#le to the %% #onds (ere &7',''' and +',''', respecti0ely.
Re4uire!: repare Journal entries to record the follo(in)< a. 8ale of the ne( issue #. Retirement of the old issue
PROBLEM 30: On 5anuary %, &'%&, "IA8 COMANY issued a $2year, 7,''' con0erti#le #onds at face 0alue of %,''' per #ond. Interest is to #e paid annually in arrears at the stated coupon rate of +. Each #ond is con0erti#le, at the holders option, into &'' & par 0alue ordinary shares at any time up to maturity. On the date of issuance, the pre0ailin) mar=et interest rate for similar de#t (ithout the con0ersion pri0ile)e (as 6. On the same date, the mar=et price of one ordinary share (as $. 3he #onds (ere con0erted on "ecem#er $%, &'%$. 3he follo(in) present 0alue factors are o#tained from the present 0alue ta#les< 6 9 resent 0alue of % for $ periods '.;$6+& '.44&%; resent 0alue of an ordinary annuity of % for $ periods &.+4$'% &.-$%$' resent 0alue of an annuity due of % for $ periods &.;$$$6 &.4-6%% %. 3he lia#ility component of the con0erti#le de#t is A. 7,''',''' C. %,+'',''' B. $,+6+,&$& ". $,4$',&7& &. 3he eDuity component of the con0erti#le de#t is A. $'$,4+; C. %,+'',''' B. %,64$,+&% ". &,7'',''' $. 3he interest e/pense to #e reported on "ias Companys income statement for the year ended "ecem#er $%, &'%$, is A. %'%,''' C. &7',''' B. %%',%'4 ". $7%,''' 7. 3he entry to record the #ond con0ersion on "ecem#er $%, &'%$, should include a credit to share premium issuance of A. &,&;6,;6$ C. &,-6$,++% B. &,7'',''' ". '
PROBLEM 31: EYA8I, INC. #e)an operatin) on 5anuary %, &'%&. At the end of the !rst year of operations, Eyasi reported 4,-'',''' income #efore income ta/es on its income statement #ut only 4'',''' ta/a#le income on its ta/ return. Analysis of the +,;'',''' dierence re0ealed that +,&'',''' (as a permanent dierence and +'',''' (as a temporary dierence related to a current asset. At the end of &'%$, the accumulated temporary ta/ lia#ility dierence related to future years is %,%'','''. 3he enacted ta/ rate is $' for &'%& and &'%$. %. 3he Journal entry to adJust the deferred ta/ lia#ility at the end of &'%$ should include a A. "e#it to "eferred ta/ lia#ility of %-',''' B. Credit to "eferred ta/ lia#ility of %-',''' C. "e#it to "eferred ta/ asset of %-',''' ". Credit to "eferred ta/ lia#ility of $$',''' &. Assume that at the end of &'%$, the accumulated temporary ta/ lia#ility dierence related to future years is --','''. 9hat Journal entry should #e made to adJust the deferred ta/ lia#ility at the end of &'%$: A. Income 3a/ e/pense %+-,''' "eferred ta/ lia#ility %+-,''' B. "eferred ta/ asset %-,''' Income ta/ #ene!t %-,''' C. "eferred ta/ lia#ility %-,'''
Income ta/ e/pense ". "eferred ta/ lia#ility "eferred ta/ asset
%-,''' %-,''' %-,'''
PROBLEM 32: At "ecem#er $%, &'%%, GAIEE CORORA3ION had a temporary dierence @related to depreciation and reported a related deferred ta/ lia#ility of +',''' on its statement of !nancial position. At "ecem#er $%, &'%&, Galilee has four temporary dierences. An analysis of these re0eals the follo(in)<
&emporary Di5erence
a. Lse of strai)ht2line depreciation for accountin) purposes and accelerated depreciation for ta/ purposes #. Rent collected in ad0ance reco)ni*ed (hen earned for accountin) purposes and (hen recei0ed for ta/ purposes c. Sarious e/penses accrued (hen incurred for accountin) purposes reco)ni*ed for ta/ purposes (hen paid d. Reco)nition of )ain on installment sales durin) the period of sale of accountin) purposes and durin) the period of collection for ta/ purposes
6uture &a+a/-e 7De!ucti/-e8 Amounts 2#19
2#19
*ater ear
%+','' '
&&','''
@$;','''
22
@6','''
22
22
&4+,' '' !P34,00 0"
&%','''
22
P430,000
P760,000
4+','''
Assume that the company has income ta/es of 7$-,''' due per the ta/ return for &'%&. 3he installment recei0a#le collecti#le in &'%7 is classi!ed as noncurrent. 3he enacted ta/ rate is $' for all periods. %. 9hat amount of deferred ta/ asset should #e sho(n on Galilees statement of !nancial position at "ecem#er $%, &'%&: A. %%7,''' C. %7%,''' B. -%7,;'' ". &4,''' &. 9hat amount of deferred ta/ lia#ility should #e sho(n on Galilees statement of !nancial position at "ecem#er $%, &'%&: A. $7&,''' C. %7%,''' B. 7-+,''' ". 7;4,;'' $. o( much is Galilees preta/ accountin) income for &'%&: A. %,-+$,6'' C. %,7-',''' B. &,7'+,''' ". &,+'+,''' 7. o( much is Galilees net income for &'%&: A. %,64%,''' C. &,7'+,''' B. %,+;7,&'' ". %,7-','''
PROBLEM 33: 3he follo(in) data pertain to the CARRO COMANY. a. At "ecem#er $%, &'%&, the company has a 6'',''' lia#ility reported for estimated liti)ation claims. 3his 6'',''' #alance represents amounts that ha0e #een char)ed to income #ut are not ta/ deducti#le until they are paid. 3he company e/pects to pay the claims and thus ha0e ta/2deducti#le amounts in the future in the follo(in) manner<
ear &'%&'%+
Payments %-',''' +6','''
&'%4
+',''' P900,000
#. 3he company uses dierent depreciation methods for !nancial reportin) and ta/ purposes. ConseDuently, at "ecem#er $%, &&'%&, the company has a cumulati0e temporary dierence due to deprecia#le property of &,7'','''. 3his &,7'',''' cumulati0e temporary dierence is to result in ta/a#le amounts in future years in the follo(in) manner<
ear &'%$ &'%7 &'%&'%+ &'%4
Payments 7;',''' 7;',''' 7;',''' 7;',''' 7;',''' P 2,400,000
c. 3he income ta/ rate is $'. d. 3a/a#le income for &'%& is &,7'','''. 3he company e/pects to report ta/a#le income for the nest !0e years. e. No temporary dierences e/isted at the end of &'%%. %. 3he deferred ta/ lia#ility to #e reported in Carrolls statement of !nancial position at "ecem#er $%, &'%&, is A. 4&',''' C. 7-',''' B. 7;',''' ". &4',''' &. 3he deferred ta/ asset to #e reported in Carrolls statement of !nancial position at "ecem#er $%, &'%&, is A. &4',''' C. 7-',''' B. %-',''' ". 4&',''' $. 3he amount of current income ta/ paya#le to #e reported in Carrolls statement of !nancial position at "ecem#er $%, &'%&, is A. +$',''' C. -7',''' B. -7+,''' ". 4&',''' 7. Carrolls preta/ accountin) income for &'%& is A. $,6'',''' C. &,;47,''' B. 6'',''' ". &,7'',''' -. Carrolls net income for &'%& is A. &,4$',''' C. %,&$',''' B. $,+$',''' ". 7,$-','''
PROBLEM 34: FAME8CA, INC., in its !rst year of operations, has the follo(in) dierences #et(een the carryin) 0alue and ta/ #ase of its assets and lia#ilities at the end of &'%&< Carryin Va-ue &a+ ase EDuipment @net ;'',''' +;','' ' Estimated (arranty lia#ility 7'',''' ' Fampesca estimates that the (arranty lia#ility (ill #e settled in &'%$. 3he dierence in eDuipment @net (ill result in ta/a#le amounts as sho(n #elo(< ear Amount s &'%$ 7',''' &'%7 +',''' &'%&',''' 3he company has ta/a#le income of %,'7',''' for &'%&. e income ta/ rate is $'. %. 9hat amount of deferred ta/ lia#ility should #e reported in Fampescas statement of !nancial position at "ecem#er $%, &'%&: A. $+,''' C. &7,''' B. $',''' ". ;7,'''
&. 9hat amount of deferred ta/ asset should #e reported in Fampescas statement of !nancial position at "ecem#er $%, &'%&: A. %-+,''' C. %&',''' B. ' ". ;7,''' $. 9hat is the amount of income ta/ paya#le @current to #e reported in Fampescas statement of !nancial position at "ecem#er $%, &'%&: A. &&;,''' C. $%&,''' B. $6+,''' ". %-+,''' 7. 9hat is the total income ta/ e/pense for &'%&: A. &&;,''' C. %6&,''' B. $6+,''' ". $7;,'''
PROBLEM 35: On "ecem#er $%, &'%%, EMAN CO. si)ns a %'2year noncancela#le lease a)reement to lease a stora)e #uildin) from 8tora)e Company. 3he follo(in) information pertains to this lease a)reement< a. 3he a)reement reDuires rental payments of 4&',''' #e)innin) on "ecem#er $%, &'%%. #. 3he fair 0alue of the #uildin) on "ecem#er $%, &'%%, is 7,7'',''' c. 3he #uildin) has an estimated economic life of %& years, (ith an un)uaranteed residual 0alue of %'','''. eman depreciates similar #uildin)s on the strai)ht2line method. d. 3he lease is nonrene(a#le. At the termination of the lease, the #uildin) re0erts to the lessor. e. 3he lessors implicit rate, =no(n to eman Co., is %& per year. f. 3he yearly rental payment includes &7,4'- of e/ecutory costs related to ta/es on the property. 3he follo(in) present 0alue factors are for %' periods at %& annual interest rate< resent 0alue of an annuity due of % +.$&;&resent 0alue of an ordinary annuity of -.+-'&& % resent 0alue of % '.$&%64 %. 9hat amount should #e capitali*ed as the cost of the leased stora)e #uildin)s: A. 7,--+,$7' C. 7,7$&,%64 B. 7,7'',''' ". ' &. 9hat amount should #e included in the current lia#ilities section of emans statement position at "ecem#er $%, &'%&: A. 4&',''' C. +6-,&6B. 7%7,744 ". &;',;%; $. 9hat amount should #e included in the noncurrent lia#ilities section of emans statement of !nancial position at "ecem#er $%, &'%&: A. $,7-$,64C. -,-+&,$+' B. $,%4$,%-4 ". ' 7. 9hat is the total lease2related e/penses to #e reported in emans income statement for the year ended "ecem#er $%, &'%&: A. 6'6,&4' C. %,%+',''' B. ;46,%;& ". 7+7,4'-
PROBLEM 36: 5LMBO COMANY enters into a lease a)reement (ith essor Co. on 5uly %, &'%&, to lease a machine to #e used in its manufacturin) operations. The following data pertain to this agreement: a. 3he term of the noncancela#le lease is $ years, (ith no rene(al option and no residual 0alue at the end of the lease term. ayments of &%&,'&7 are due on 5uly % of each year, #e)innin) 5uly %, &'%&. #. 3he fair 0alue of the machine on 5uly %, &'%&, is +&','''. 3he machine has a remainin) economic life of - years, (ith no sal0a)e 0alue. 3he machine re0erts to the lessor upon the termination of the lease. c. 5um#o Company elects to depreciate the machine on the strai)ht2line method. d. 5um#o Companys incremental #orro(in) rate is %' per year, and it has no =no(led)e of the implicit rate computed #y the lessor. e. 3he present 0alue factor of an ordinary annuity of % for $ periods at %' per year is &.7;+;-. the present 0alue factor of an annuity due of % for $ periods at %' is &.4$--7.
o( much lease lia#ility should #e reco)ni*ed #y 5um#o at the #e)innin) of the lease contract: A. ' C. -;',''' B. -&4,&4& ". +$+,'4&
