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Using Financial Accounting Information The Alternative to Debits and Credits 7th Edition Gary A. Porter, Curtis L. Norton - Solutions

How does the effective interest method of amortization result in a constant rate of interest?
What is the meaning of the following sentence: Amortization affects the amount of interest expense. How does amortization of premium affect the amount of interest expense? How does amortization of discount affect the amount of interest expense?
Does amortization of a premium increase or decrease the bond carrying value? Does amortization of a discount increase or decrease the bond carrying value?
Is there always a gain or loss when bonds are redeemed? How is the gain or loss calculated?
What are the reasons that not all leases are accounted for in the same manner? Do you think it would be possible to develop a new accounting rule that would treat all leases in the same manner? Explain.
What is the meaning of the term off-balance-sheet financing? Why do some firms want to engage in off balance-sheet transactions?
What are the effects on the financial statements when a lease is considered an operating lease rather than a capital lease?
Should depreciation be reported on leased assets? If so, over what period of time should depreciation occur?
Why do firms have a Deferred Tax account? Where should that account be shown on the financial statements? (Appendix)
How can you determine whether an item should reflect a permanent or a temporary difference when calculating the deferred tax amount? (Appendix)
Does the amount of income tax expense presented on the income statement represent the amount of tax actually paid? Why or why not? (Appendix)
Do you agree with this statement? All liabilities could be legally enforced in a court of law.
Classification of Long-Term Liabilities Which of the following would normally be included in the Long-Term Liability category of the balance sheet? Accounts Payable Bonds Payable Accrued Expenses Current Maturities of Long-Term Debt Accrued Income Taxes
Define the following terms related to bonds payable.Debenture bonds..... Face value of the bondsSecured bonds...... Face rate of interestConvertible bonds...... Issue priceCallable bonds
Bond Issue Price A bond payable is dated January 1, 2010, and is issued on that date. The face value of the bond is $100,000, and the face rate of interest is 8%. The bond pays interest semiannually. The bond will mature in five years. Required1. What will be the issue price of the bond if the
Effect of Bond Issuance A bond with a face value of $10,000 is issued at a discount of $800 on January 1, 2010. The face rate of interest on the bond is 7%. Required1. Was the market rate at the time of issuance greater than 7% or less than 7%?2. If a balance sheet is presented on January 1,
Amortization of Premium or Discount Bonds payable are dated January 1, 2010, and are issued on that date. The face value of the bonds is $100,000, and the face rate of interest is 8%. The bonds pay interest semiannually. The bonds will mature in five years. The market rate of interest at the time
Gain or Loss on Bonds Refer to Brief Exercise 10-5. Assume that the bonds are redeemed on December 31, 2010, at 102.Required1. Calculate the gain or loss on bond redemption.2. Identify and analyze the effect of the bond redemption.
Lease Classification Dianne Company signed a ten-year lease agreement on January 1, 2010. The lease requires payments of $5,000 per year every December 31. Dianne estimates that the leased property has a life of 12 years. The interest rate that applies to the lease is 8%. Required1. Should Dianne
Debt-to-Equity Ratio Will Able Corporation’s balance sheet showed the following amounts: Current Liabilities, $10,000; Bonds Payable, $3,000; Lease Obligations, $4,000; and Notes Payable, $600. Total stockholders’ equity was $12,000. The debt-to-equity ratio is:a. 0.63.b. 0.83.c. 1.42.d. 1.47.
Long-Term Liabilities and Cash Flow In what category of the statement of cash flows should the following items be shown? Should they appear as a positive or negative amount on the statement of cash flows? Increases in long-term liabilities Decreases in long-term liabilities Interest expense
Deferred T ax (Appendix) On January 1, 2010, Deng Company purchased an asset for $100,000. For financial accounting purposes, the asset will be depreciated on a straight-line basis over five years with no residual value at the end of that time. For tax purposes, the asset will be depreciated as
The following components are computed annually when a bond is issued for other than its face value: • Cash interest payment • Interest expense • Amortization of discount/premium • Carrying value of bond RequiredState whether each component will increase (I), decrease (D), or remain constant
Issue Price Youngblood Inc. plans to issue $500,000 face value bonds with a stated interest rate of 8%. They will mature in ten years. Interest will be paid semiannually. At the date of issuance, assume that the market rate is (a) 8%, (b) 6%, and (c) 10%. RequiredFor each market interest rate,
Issue Price The following terms relate to independent bond issues:a. 500 bonds; $1,000 face value; 8% stated rate; 5 years; annual interest paymentsb. 500 bonds; $1,000 face value; 8% stated rate; 5 years; semiannual interest paymentsc. 800 bonds; $1,000 face value; 8% stated rate; 10 years;
Impact of Two Bond Alternatives Yung Chong Company wants to issue 100 bonds, $1,000 face value, in January. The bonds will have a ten-year life and pay interest annually. The market rate of interest on January 1 will be 9%. Yung Chong is considering two alternative bond issues: (a) Bonds with a
Redemption of Bonds Reynolds Corporation issued $75,000 face value bonds at a discount of $2,500. The bonds contain a call price of 103. Reynolds decides to redeem the bonds early when the unamortized discount is $1,750. Required1. Calculate Reynolds Corporation’s gain or loss on the early
Redemption of a Bond at Maturity On March 31, 2010, Sammonds Inc. issued $250,000 face value bonds at a discount of $7,000. The bonds were retired at their maturity date, March 31, 2020.RequiredAssuming that the last interest payment and the amortization of the discount have already been recorded,
Leased Asset Hopper Corporation signed a ten-year capital lease on January 1, 2010. The lease requires annual payments of $8,000 every December 31. Required1. Assuming an interest rate of 9%, calculate the present value of the minimum lease payments.2. Explain why the value of the leased asset and
Financial Statement Impact of a Lease Benjamin’s Warehouse signed a six-year capital lease on January 1, 2010, with payments due every December 31. Interest is calculated annually at 10%, and the present value of the minimum lease payments is $13,065. Required1. Calculate the amount of the annual
Leased Assets Koffman and Sons signed a four-year lease for a forklift on January 1, 2010. Annual lease payments of $1,510, based on an interest rate of 8%, are to be made every December 31, beginning with December 31, 2010.Required1. Assume that the lease is treated as an operating lease.a. Will
Impact of Transactions Involving Bonds on Statement of Cash Flows In the following list, identify each item as operating (O), investing (I), financing (F), or not separately reported on the statement of cash flows (N). ____________ Proceeds from issuance of bonds payable ____________ Interest
Impact of Transactions Involving Capital Leases on Statement of Cash Flows Assume that Garnett Corporation signs a lease agreement with Duncan Company to lease a piece of equipment and determines that the lease should be treated as a capital lease. Garnett records a leased asset in the amount of
Impact of Transactions Involving T ax Liabilities on Statement of Cash Flows In the following list, identify each item as operating (O), investing (I), financing (F), or not separately reported on the statement of cash flows (N). For items identified as operating, indicate whether the related
Temporary and Permanent Differences (Appendix) Madden Corporation wants to determine the amount of deferred tax that should be reported on its 2010 financial statements. It has compiled a list of differences between the accounting conducted for tax purposes and the accounting used for financial
Deferred Tax (Appendix) On January 1, 2010, Kunkel Corporation purchased an asset for $32,000. Assume that this is the only asset owned by the corporation. Kunkel has decided to use the straight-line method to depreciate it. For tax purposes, it will be depreciated over three years. It will be
Issuance of a Bond at Face Value On January 1, 2010, Whitefeather Industries issued 300, $1,000 face value bonds. The bonds have a five-year life and pay interest at the rate of 10%. Interest is paid semiannually on July 1 and January 1. The market rate of interest on January 1 was 10%.Required1.
Impact of a Discount Berol Corporation sold 20-year bonds on January 1, 2010. The face value of the bonds was $100,000, and they carry a 9% stated rate of interest, which is paid on December 31 of every year. Berol received $91,526 in return for the issuance of the bonds when the market rate was
Assume the same set of facts for Berol Corporation as in Exercise 10-16 except that it received $109,862 in return for the issuance of the bonds when the market rate was 8%.Required1. Identify and analyze the effect of the sale of the bonds on January 1, 2010, and the proper balance sheet
Becca Company is considering the issue of $100,000 face value, ten-year term bonds. The bonds will pay 6% interest each December 31. The current market rate is 6%; therefore, the bonds will be issued at face value. Required1. For each of the following situations, indicate whether you believe the
Amortization of Discount Stacy Company issued five-year, 10% bonds with a face value of $10,000 on January 1, 2010. Interest is paid annually on December 31. The market rate of interest on this date is 12%, and Stacy Company receives proceeds of $9,275 on the bond issuance.Required1. Prepare a
Assume the same set of facts for Stacy Company as in Problem 10-2 except that the market rate of interest of January 1, 2010, is 8% and the proceeds from the bond issuance equal $10,803.Required1. Prepare a five-year table (similar to Exhibit 10-5) to amortize the premium using the effective
Redemption of Bonds McGee Company issued $200,000 face value bonds at a premium of $4,500. The bonds contain a call provision of 101. McGee decides to redeem the bonds due to a significant decline in interest rates. On that date, McGee had amortized only $1,000 of the premium. Required1. Calculate
Financial Statement Impact of a Lease On January 1, 2010, Muske Trucking Company leased a semitractor and trailer for five years. Annual payments of $28,300 are to be made every December 31 beginning December 31, 2010. Interest expense is based on a rate of 8%. The present value of the minimum
Deferred Tax (Appendix) Erinn Corporation has compiled its 2010 financial statements. Included in the Long-Term Liabilities category of the balance sheet are the following amounts:Included in the income statement are the following amounts related to income taxes:In the notes that accompany the
Deferred Tax Calculations (Appendix) Wyhowski Inc. reported income from operations, before taxes, for 2008–2010 as follows: 2008 .....$210,000 2009 .......240,000 2010 .......280,000 When calculating income, Wyhowski deducted depreciation on plant equipment. The equipment was purchased January 1,
Bond Transactions Brand Company issued $1,000,000 face value, eight-year, 12% bonds on April 1, 2010, when the market rate of interest was 12%. Interest payments are due every October 1 and April 1. Brand uses a calendar year-end.Required1. Identify and analyze the effect of the issuance of the
Partial Classified Balance Sheet for Walgreens The following items, listed alphabetically, appear on Walgreens’ consolidated balance sheet at August 31, 2008 (in millions): Accrued expenses and other liabilities $2,272 Deferred income tax (long-term) 150 Long-term debt 1,337 Other noncurrent
Factors that Affect the Bond Issue Price Rivera Inc. is considering the issuance of $500,000 face value, ten-year term bonds. The bonds will pay 5% interest each December 31. The current market rate is 5%; therefore, the bonds will be issued at face value. Required1. For each of the following
Amortization of Discount Ortega Company issued five-year, 5% bonds with a face value of $50,000 on January 1, 2010. Interest is paid annually on December 31. The market rate of interest on this date is 8%, and Ortega Company receives proceeds of $44,011 on the bond issuance. Required1. Prepare a
Amortization of Premium Assume the same set of facts for Ortega Company as in problem 10-2A except that the market rate of interest of January 1, 2010, is 4% and the proceeds from the bond issuance equal $52,230.Required1. Prepare a five-year table (similar to Exhibit 10-5) to amortize the premium
Redemption of Bonds Elliot Company issued $100,000 face value bonds at a premium of $5,500. The bonds contain a call provision of 101. Elliot decides to redeem the bonds due to a significant decline in interest rates. On that date, Elliot had amortized only $2,000 of the premium. Required1.
Financial Statement Impact of a Lease On January 1, 2010, Kiger Manufacturing Company leased a factory machine for six years. Annual payments of $21,980 are to be made every December 31 beginning December 31, 2010. Interest expense is based on a rate of 9%. The present value of the minimum lease
Deferred Tax (Appendix) Thad Corporation has compiled its 2010 financial statements. Included in the Long Term Liabilities category of the balance sheet are the following amounts:Included in the income statement are the following amounts related to income taxes:Required1. Determine the effect on
Deferred T ax Calculations (Appendix) Clemente Inc. has reported income for book purposes as follows for the past three years:Clemente has identified two items that are treated differently in the financial records and in the tax records. The first one is interest income on municipal bonds, which is
Financial Statement Impact of a Bond Worthington Company issued $1,000,000 face value, six- ear, 10% bonds on July 1, 2010, when the market rate of interest was 12%. Interest payments are due every July 1 and January 1. Worthington uses a calendar year-end.Required1. Identify and analyze the effect
Partial Classified Balance Sheet for Boeing The following items appear on the consolidated balance sheet of Boeing Inc. at December 31, 2008 (in millions). The information in parentheses was added to aid in your understanding. Accounts payable and other liabilities ...............$17 ,587 Accrued
Evaluating the Liabilities of General Mills Refer to the General Mills financial statements at the end of the text and answer the following questions: 1. What are the items listed as long-term liabilities by General Mills? How did those liabilities change from 2007 to 2008?2. Calculate the
Comparing Two Companies: General Mills and Kellogg’s Refer to General Mills’s balance sheet and statement of cash flows at May 31, 2009, and Kellogg’s balance sheet and statement of cash flows at December 30, 2008. Answer the following questions: 1. Calculate the debt-to-equity ratio for
Reading PepsiCo’s Statement of Cash Flows A portion of the Financing Activities section of PepsiCo’s statement of cash flows for the year ended December 27, 2008, follows (in millions): Financing Activities: Proceeds from the issuance of long-term debt .......$3,719 Payment of long-term debt
Making a Loan Decision Assume that you are a loan officer in charge of reviewing loan applications from potential new clients at a major bank. You are considering an application from Molitor Corporation, which is a fairly new company with a limited credit history. It has provided a balance sheet
Bond Redemption Decision Armstrong Areo Ace, a flight training school, issued $100,000 of 20-year bonds at face value when the market rate was 10%. The bonds have been outstanding for ten years. The company pays annual interest on January 1. The current rate for similar bonds is 4%. On January 1,
Determination of Asset Life Jen Latke is an accountant for Hale’s Manufacturing Company. Hale’s has entered into an agreement to lease a piece of equipment from EZ Leasing. Jen must decide how to report the lease agreement on Hale’s financial statements. Jen has reviewed the lease contract
What are the two types of events that affect an entity? Describe each.
What is the significance of source documents to the recording process? Give two examples of source documents.
What are four different forms of cash?
How does an account receivable differ from a note receivable?
Explain what is meant by this statement: One company’s account receivable is another company’s account payable.
What do accountants mean when they refer to the double-entry system of accounting? (Appendix)
Stockholders’ equity represents the claim of the owners on the assets of the business. What is the distinction relative to the owners’ claim between the Capital Stock account and the Retained Earnings account?
If an asset account is increased with a debit, what is the logic for increasing a liability account with a credit?
A friend comes to you with the following plight: “I’m confused. An asset is something positive, and it is increased with a debit. However, an expense is something negative, and it is also increased with a debit. I don’t get it.” How can you “straighten out” your friend?
The payment of dividends reduces cash. If the Cash account is reduced with a credit, why is the Dividends account debited when dividends are paid?
If Cash is increased with a debit, why does the bank credit your account when you make a deposit?
Your friend presents the following criticism of the accounting system: “Accounting involves so much duplication of effort. First, entries are recorded in a journal; then the same information is recorded in a ledger. No wonder accountants work such long hours!” Do you agree with this criticism?
How does the T account differ from the running balance form for an account? How are they similar?
What is the benefit of using a cross-referencing system between a ledger and a journal?
How often should a company post entries from the journal to the ledger?
What is the purpose of a trial balance?
External and Internal Events Explain how an external event differs from an internal event.
Source Documents Provide three examples of source documents and the event for which each would provide the evidence to record.
Effects of Transactions on the Accounting Equation List the three elements in the accounting equation. How is the third element expanded to show the linkage between the balance sheet and the income statement?
Types of Accounts For each of the following accounts, indicate whether it is a balance sheet (BS) account or an income statement (IS) account. _________ Prepaid Insurance_________ Sales Revenue_________ Income Taxes Payable_________ Accounts Receivable_________ Utilities Expense_________ Furniture
For each of the following accounts, indicate whether it would be increased with a debit or a credit. _________ Accounts Payable_________ Office Supplies_________ Interest Revenue_________ Income Tax Expense_________ Income Tax Payable_________ Cash_________ Common Stock_________ Land
Prepare in good form the journal entry to record each of the following transactions on the books of ABC.January 10, 2009: ABC is incorporated by issuing $50,000 of common stock to each of the three owners.January 12, 2009: ABC borrows $100,000 at the local bank.January 15, 2009: ABC pays $200,000
For each of the following errors, indicate with a Y for yes or an N for no whether it would be detected by preparation of a trial balance._________ a. Cash is debited instead of Accounts Receivable for a sale on account._________ b. A sale on account for $500 is recorded with a debit to Accounts
For each of the following events, identify whether it is an external event that would be recorded as a transaction (E), an internal event that would be recorded as a transaction (I), or not recorded (NR)._________ 1. A vendor for a company’s supplies is paid an amount owed on account._________ 2.
Following are a list of source documents and a list of transactions. Indicate by letter next to each transaction the source document that would serve as evidence for the recording of the transaction.Source Documentsa. Purchase invoice b. Sales invoice c. Cash register tape d. Time cards e.
The Effect of Transactions on the Accounting Equation For each of the following transactions, indicate whether it increases (I), decreases (D), or has no effect (NE) on the total dollar amount of each of the elements of the accounting equation.
There are three elements to the accounting equation: assets, liabilities, and stockholders€™ equity. Although other possibilities exist, five types of transactions are described here. For each of these five types, write descriptions of two transactions that illustrate the type of
Prepare a table to summarize the following transactions as they affect the accounting equation. Use the format in Exhibit 3-1. 1. Services provided on account of $1,5302. Purchases of supplies on account for $1,3653. Services provided for cash of $7504. Purchase of equipment for cash of $4,2405.
Balance Sheet Accounts and Their Use Choose from the following list of account titles the one that most accurately fits the description of that account or is an example of that account. An account title may be used more than once or not at all. Cash Accounts Receivable Notes ReceivablePrepaid
Each account has a normal balance. For the following list of accounts, indicate whether the normal balance of each is a debit or a credit. Account Normal Balance1. Cash _____________2. Prepaid Insurance _____________3. Retained Earnings _____________4.
Each account has a normal balance. Classify each of the following items found in Carnival Cruise Corporation's 2008 annual report according to (1) whether it is a revenue (R), expense (E), asset (A), liability (L), or stockholders' equity (SE) item and (2) whether it has a normal balance of a debit
The new bookkeeper for Darby Corporation is getting ready to mail the daily cash receipts to the bank for deposit. Because his previous job was at a bank, he is aware that the bank “credits” an account for all deposits and “debits” an account for all checks written. Therefore, he makes the
The following list of accounts was taken from the general ledger of Spencer Corporation on December 31, 2010. The bookkeeper thought it would be helpful if the accounts were arranged in alphabetical order. Each account contains the balance that is normal for that type of account; for example, Cash
Jessie’s Accounting Services was organized on June 1, 2010. The company received a contribution of $1,000 from each of the two principal owners. During the month, Jessie’s Accounting Services provided services for cash of $1,400 and services on account for $450, received $250 from customers in
During the month, services performed for customers on account amounted to $7,500 and collections from customers in payment of their accounts totaled $6,000. At the end of the month, the Accounts Receivable account had a balance of $2,500. What was the Accounts Receivable balance at the beginning
Record each of the following transactions directly in T accounts using the numbers preceding the transactions to identify them in the accounts. Each account needs a separate T account. 1. Received contribution of $6,500 from each of the three principal owners of We-Go Delivery Service in exchange
Refer to the transactions recorded directly in T accounts for We-Go Delivery Service in Exercise 3-13. Assume that all of the transactions took place during December 2010. Prepare a trial balance at December 31, 2010.

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