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Intermediate Accounting 10th Edition Loren A Nikolai, D. Bazley and Jefferson P. Jones - Solutions
Why is the liquidity of liabilities important in the accounting for liabilities?
How does the constraint of materiality affect the accounting for current liabilities?
Define a non-interest-bearing note that is discounted at a bank at a specific rate. How are the proceeds computed for a non-interest-bearing note?
What are compensated absences? How does a company account for them?
FASB Statement No. 49 requires that a company selling inventory and agreeing to repurchase it later neither record the transaction as a sale nor remove the inventory from the balance sheet. If so, does a new current liability arise? How is its amount measured?
Identify how to account for warranty costs under the expense warranty accrual method, sales warranty accrual method, and modified cash basis.
Define contingency. What exactly is the company uncertain about—whether a future event will take place and result in a liability, or whether a future event will take place that will confirm that a liability exists from an event that has already taken place?
How do the matching principle and the conservatism convention enter into the accounting for contingencies?
What two criteria must be met before a loss contingency is reported in a company’s financial statements?
With regard to a loss contingency, by what date must the event that results in a probable loss have occurred before accrual is required? By what date must information be available for a company to assess the probability that a loss has been incurred?
What conditions would have to be met for a company to accrue the loss from an unfiled lawsuit?
Define gain contingency. Describe the accounting requirements for a gain contingency.
What two criteria must be met before a company can classify short-term debt that is expected to be refinanced as a noncurrent liability?
How does a company demonstrate the ability to refinance currently maturing short-term debt?
FASB Statement No. 78 requires that a company report certain obligations due on demand within one year (or operating cycle, if longer) as current liabilities. Do you agree with this statement? Explain.
(Multiple Choice)1. Which of the following is classified as an accrued payroll liability?Federal Income Employee€™s ShareTax Withheld of F.I.C.A. Taxesa. No ............Yesb. No ............ Noc. Yes ........... Nod. Yes ........... Yes2. During 2007 Lawton
Accounts Payable and Cash Discounts On January 4, 2007 Dunbar Company purchased, on credit, 2,000 television sets at $500 each. Terms of the purchase were 2/10, n/30. Dunbar paid for one-fifth of these sets within 10 days and the remaining four-fifths by January 31.RequiredPrepare the journal
Notes Payable On December 1, 2007 Insto Photo Company purchased merchandise, invoice price $25,000, and issued a 12%, 120-day note to Ringo Chemicals Company. Insto uses the calendar year as its fiscal year and uses the perpetual inventory system.RequiredPrepare journal entries on Insto Photo’s
Non-interest-bearing Notes Payable On November 16, 2007 the Clear Glass Company borrowed $20,000 from First American Bank by issuing a 90-day, non-interest-bearing note. The bank discounted this note at 12% and remitted to Clear Glass Company the difference.Required1. Prepare the journal entries of
Discounting of Notes Payable On October 30, 2007 the Sanchez Company acquired a piece of machinery and signed a 12-month note for $24,000. The face value of the note includes the price of the machinery and interest. The note is to be paid in four $6,000 quarterly installments. The value of the
Compensated Absences The Bettinghaus Corporation began business on January 2, 2007 with five employees. It created a sick leave and vacation policy stated as follows: Each employee is allowed eight days of paid sick leave each year and one day of paid vacation leave for each month worked. The
Sales Taxes During August the Hill Sales Company had these summary transactions:1. Cash sales of $210,000, subject to sales taxes of 6%2. Sales on account of $260,000, subject to sales taxes of 6%3. Paid the sales taxes to the stateRequiredPrepare journal entries to record the preceding
Payroll and Payroll Taxes The payroll of the Rand Company on December 31 of the current year is as follows:1. Total payroll, $500,0002. Payroll in excess of $90,000 to each employee, $350,0003. Payroll in excess of $7,000 to each employee, $400,0004. Income taxes withheld, $85,0005. Union dues
Bonus Obligation Raymond Moss, vice president of Moss Auto Parts, gets an annual bonus of 15% of net income after bonus and income taxes. Income before bonus and income taxes is $250,000. The effective income tax rate is 30%. Required1. Compute the amount of Raymond Moss’s bonus.2. Compute the
Property Taxes Family Practice Associates has an estimated property tax liability of $7,200 assessed as of January 1, 2007 for the year May 1, 2007 to April 30, 2008. The property tax is paid on September 1, 2007. The property tax becomes a lien against the property on May 1.RequiredPrepare the
Property Taxes The Ames Company is located in a city and county that issue property tax statements in May of each year. The fiscal year for the two local governmental units is May 1 to April 30. Property taxes of $48,000 are assessed against the Ames Company property held on January 1, 2007. The
Expense Warranty Accrual Method On September 1, 2007 Carolina Electronics Company has ready for sale 1,000 CD players. On October 1, 2007, 900 are sold at $50 each with a one-year warranty. Carolina estimates that the warranty cost on each CD player sold will probably average $2 per unit. During
Sales Warranty Accrual Method On August 1, 2007 Pereira Corporation has ready for sale 2,000 Wiglow instruments. During the next 5 months, 1,600 Wiglows are sold at $460 each with a one-year warranty. Pereira estimates that the warranty cost on each Wiglow will probably average $10 per unit. In
Premium Obligation The Sweet Dates Company offers to its customers a premium—a glass bowl (cost to Sweet Dates, $0.90) upon return of 40 coupons. Two coupons are placed in each box of dates sold. The company estimates, on the basis of past experience, that only 70% of the coupons will ever be
Premium Obligation On the back of its cereal boxes, the Tiger Cereal Company offers a premium to its customers. The premium, a toy truck, may be claimed by sending in $1 plus 10 coupons; one coupon is included in each box of cereal sold. The company estimates, based on past experience, that 60% of
Gift Certificates On December 5, 2007 Super Circuit Store sold gift certificates totaling $4,000. By December 31, 2007 all but $750 worth of these certificates had been redeemed for merchandise. Outstanding certificates were then redeemed by January 15, 2008.Required1. Prepare journal entries on
Loss Contingency On December 4, 2007 Dan Johnson, delivery truck driver for Farmers Products, Inc., ran a stop sign and collided with another vehicle. On January 8, 2008 the driver of the other vehicle filed suit against Farmers Products for damages to the vehicle. Estimated damages to this vehicle
Gain Contingency On December 31, 2007 Braino Tech., Inc. learned that its competitor had introduced a product making use of an accessory over which Braino Tech. has exclusive patent rights. Braino Tech. planned to file suit and in all likelihood, its attorneys felt, Braino should recover at least
Disclosure of Serial Bonds Payable On May 1, 2007 the Ramden Company issues 13% serial bonds with a face value of $2 million. The bond contract calls for retirement of the bonds in periodic installments of $200,000, starting on May 1, 2008 and continuing on each May 1 thereafter until all bonds
Short-Term Debt Expected to Be Refinanced On December 31, 2007 Excello Electric Company had $1 million of short-term notes payable due February 7, 2008. Excello expected to refinance these notes on a long-term basis. On January 15, 2008 the company issued bonds with a face value of $900,000 at 98;
Short-Term Debt Expected to Be Refinanced On December 31, 2007 Carrboro Textile Company had short-term debt in the form of notes payable totaling $600,000. These notes were due on June 1, 2008. Carrboro expected to refinance these notes on a long-term basis. On February 1, 2008 Carrboro entered
The Byrd Company had the following transactions during 2007 and 2008:1. On December 24, 2007 a computer was purchased on account from Computers International for $60,000. Terms of the sale were 2/10, n/30.2. Byrd calculated that to forgo the discount for the computer would be the equivalent of
On November 1, 2007 Edwin, Inc., borrowed cash and signed a $60,000, one year note payable.Required1. Compute the following items assuming (i) An interest-bearing note at 12%, (ii) A non-interest-bearing note discounted at 12%:a. Cash receivedb. Effective interest ratec. Interest expense for 20072.
The Adjusto Corporation (which is on a December 31 fiscal year-end) engaged in the following transactions during 2007 and 2008:2007Nov. 1 Issued a 120-day, 12% note, face value of $15,000, to Johnson Company to settle an open account of that amountDec. 1 Issued a 90-day, 12% note, face value of
The Rexallo Company begins business on January 2, 2007 with 15 employees. Its company policy is to permit each employee to take six days of paid sick leave each year and one and one half days of paid vacation leave for each month worked. The accrued vacation leave cannot be taken until the employee
The Mauldin Company makes sales on which a 5% sales tax is assessed. The following summary transactions were made during 2007:1. Sales for cash of $1,665,400, excluding sales taxes2. Sales on credit of $2,820,500, excluding sales taxes3. Sales taxes of $168,220 were paid to the state government
Bailey Dry Cleaners has six employees who were paid the following wages during 2007:Frank Johnson ........ $ 27,000Bill Long .......... 18,000Duff Morse ......... 95,000Laura Stewart ........ 28,000Cindy Sharpe ......... 26,000Melissa Ledbetter ...... 20,000Total ........... $214,000The state
James Kimberley, president of National Motors, receives a bonus of 10% of National’s profits after his bonus and the corporation’s income taxes are deducted. National’s effective income tax rate is 30%. Profits before income taxes and his bonus are $5,000,000 for 2007.Required1. Compute the
The Rosen Corporation was formed on December 12, 2006. It plans to close its books annually each December 31. The corporation is located in Lanmark City and Apple County. The fiscal period of these two governmental units runs from July 1 to June 30. The property tax that they assess on property
Clean-All, Inc., sells washing machines with a three-year warranty. In the past Clean-All has found that in the year after sale, warranty costs have been 3% of sales; in the second year after sale, 5% of sales; and in the third year after sale, 7% of sales. The following data are also
Wright Machinery Corporation manufactures automobile engines for major automobile producers. These engines have a warranty against any defects for a period of five years. Even though Wright Machinery does not have a separate warranty contract, it assumes that the $993 selling price of each engine
Yummy Cereal Company is offering one toy shovel set for 15 box tops of its cereal. Year-to-date sales have been off, and it is hoped that this offer will stimulate demand. Each shovel set costs the company $3. The following data are available for the last three months of 2007:It is estimated that
Fallon Company, a toy manufacturer that also operates several retail outlets, is preparing its December 31, 2007 financial statements. It has identified the following legal situations that may qualify as contingencies:1. A customer is suing the company for $800,000 in damages because her child was
Greenlaw, Inc., a publishing company, is preparing its December 31, 2007 financial statements and must determine the proper accounting treatment for each of the following situations:1. Greenlaw sells subscriptions to several magazines for a one-year, two-year, or three-year period. Cash receipts
Several times during 2007, Palmer Company issued short-term commercial paper totaling $7 million. On December 31, 2007, the company’s year-end, Palmer intends to refinance the commercial paper by issuing long-term debt. However, because of the temporary existence of excess cash, $3 million of the
On December 31, 2007 Atwood Table Company has $8 million of short-term notes payable owed to City National Bank. On February 1, 2008 Atwood negotiates a revolving credit agreement providing for unrestricted borrowings up to $6 million. Borrowings will bear interest at 1% over the prevailing prime
On January 1, 2007 Northern Manufacturing Company bought a piece of equipment by signing a non-interest-bearing $80,000, one-year note. The face value of the note includes the price of the equipment and the interest. The effective interest rate is an annual rate of 16%, and the note is to be paid
Selected transactions of the Lizard Lick Corporation during 2007 are as follows:Jan. 5 Purchased merchandise from Boston Company for $30,000; terms, 2/10, n/30. Purchases and accounts payable are recorded by Lizard Lick using the net price method.Jan. 26 Paid the January 5 invoice.Mar. 31
Selected transactions of the Shadrach Computer Corporation during November and December of 2007 are as follows:Nov. 1 Borrowed money from the bank by issuing a non-interest-bearing, $40,000, 90-day note. The note is discounted on a 12% basis.9 Sold 100 computers with a one-year warranty for $5,000
The following is the current liability section of Hollo Hardware Company on December 31, 2007:Accounts payable, trade .......... $ 50,000Notes payable, 12%, due February 19, 2008 .. 70,000Unearned interest and revenue ....... 12,000Total current liabilities ......... $132,000On January 15, 2008
While auditing the 2007 financial statements of Warder Corporation, you found evidence that the following were not included in its current liabilities on the December 31, 2007 balance sheet:1. Convertible bonds maturing in 60 days that were never converted.2. Note payable due two months after the
Part a. The two basic requirements for the accrual of a loss contingency are supported by several basic concepts of accounting. Three of these concepts are: periodicity (time periods), measurement, and objectivity. RequiredDiscuss how the two basic requirements for the accrual of a loss contingency
Loss contingencies may exist for companies. Write a short memo that answers the following questions.Required1. What conditions should be met for an estimated loss from a loss contingency to be accrued by a charge to income?2. When is disclosure required, and what disclosure should be made for an
Supey Chemical Co. encountered the following two situations in 2007:1. Supey must pay an indeterminate amount for toxic waste cleanup on its land. An adjoining land owner, Gap Toothpaste, sold its property because of possible toxic contamination by Supey of the water supply and resulting potential
Angela Company is a manufacturer of toys. During the year, the following situations arose:1. A safety hazard related to one of its toy products was discovered. It is considered probable that liabilities have been incurred. Based on past experience, a reasonable estimate of the amount of loss can be
On January 15, 2008 a truck driver for Cork Transfer Company negligently rounded a curve that was also a bridge covering several local merchant shops. The truck jumped the guardrail and fell 30 feet onto one of the shops, causing highly flammable chemicals in the truck to explode. Although by
Worldwide Motors has produced “Stallions” for 10 years as of December 31, 2007. In a civil judgment against it on July 20, 2007, it was found that for the period of January 1, 2004 until the present, Worldwide was negligent in the design of the cars because the gasoline tank was positioned in
Skinner Company has the following contingencies:1. Potential costs due to the discovery of a possible defect related to one of its products. These costs are probable and can be reasonably estimated.2. A potential claim for damages to be received from a lawsuit filed this year against another
At December 31, 2007, Niki Company reviewed the following situations to consider their impact on its 2007 financial statements:1. In December 2007, Niki became aware of a safety hazard related to one of its products. Estimates of the probable costs resulting from the hazard include highest, most
Reese Company sells two types of merchandise, Type A and Type B. Each carries a one-year warranty.Type A merchandise: Product warranty costs, based on past experience, will normally be 1% of sales.Type B merchandise: Product warranty costs cannot be reasonably estimated because this is a new
Refer to the financial statements and related notes of the Coca-Cola Company in Appendix A of this book.Required1. What were the total current liabilities at the end of 2004? What was the largest current liability?2. What did accounts payable and accrued expenses consist of at the end of 2004?3.
Hart Corporation is a chemical company that produces cleaning fluids of different types; it is the main employer in a small town. Stan Hart has been the company president for 15 years and is paid a salary plus a 10% bonus based on pretax income; he is also the major stockholder. After treatment to
Situation Bogan Company is in need of cash to finance its operations. The company creates a new company, Hall Company, which is wholly owned by Bogan. On November 1, 2007 Bogan sells inventory on credit to Hall Company for $50,000, which in turn immediately uses the inventory for a $40,000, 12%
Situation Gilmatt Company developed a new product that it planned to sell directly to customers and to promote heavily because of “stiff” competition in the market place. Its marketing department did extensive market surveys and developed a marketing plan for this product. The plan called for a
Why may a company that requires additional funds choose to issue long-term liabilities rather than equity securities?
What is a bond? Define face value, maturity date, contract rate, bond certificate, and bond indenture.
Distinguish between mortgage and debenture bonds.
Distinguish between registered and coupon bonds.
What are callable bonds? Convertible bonds?
Why does the stated (contract) rate and the effective rate (yield) of interest on bonds frequently differ?
Why do bond discounts and bond premiums arise at the time of sale?
Distinguish between bond premiums or discounts and bond issue costs.
Why does the recorded amount of interest expense for the first interest payment differ from the expense recorded for other interest payments when bonds are issued between interest payment dates?
What two methods may a company use to allocate a premium or discount over the life of a bond issue? Briefly describe each method.
How is the amount of interest expense a company records each period affected by the amortization of a bond discount using the straight-line method?
How is the amount of interest expense a company records each period affected by the amortization of a bond premium using the straight-line method?
How is the amount of proceeds from a bond issue determined once the market (yield) rate of interest is specified?
What is a call provision? Why do companies often include call provisions on bond issues?
Distinguish between bond retirements and bond refunding.
What are the three alternatives that could be used to account for gains or losses on bond refunding? What reasons support each of these methods? Which method did the APB finally favor? Why?
Why does a company issue a bond with detachable warrants (rights)? At what value is each of these securities recorded at the time of the bond issuance?
What are convertible bonds? Why would a company issue convertible debt?
What two alternative methods are available to account for the issuance of convertible debt? What method did the APB finally require? Why?
When a company exchanges a long-term non-interest-bearing note for cash and no interest rate is stated, how does it determine the effective interest?
Describe the steps necessary for a company to determine the value at which to record a non-interest-bearing note payable exchanged for property, goods, or services.
What is the incremental interest rate of a borrower? When and for what calculations is this rate used if a company exchanges a note for property, goods, or services?
When does a troubled debt restructuring occur? What are three conditions a troubled debt restructuring may involve?
(Multiple Choice)1. Should the following bond issue costs be expensed as incurred?UnderwritingLegal Fees Costsa. No .......... Nob. No .......... Yesc. Yes .......... Nod. Yes .......... Yes2. On December 31, 2006 Dumont Corporation had outstanding 8%, $2,000,000 face value
The Kurten Corporation is authorized to issue $500,000 of 8% bonds. Interest on the bonds is payable semiannually; the bonds are dated January 1, 2007 and are due December 31, 2012.RequiredPrepare the journal entries to record the following:April 1, 2007 Sold the bonds at par plus accrued
On April 30, 2007 Hackman Corporation issued $1 million face value 12% bonds dated January 1, 2007, for $1,023,000 plus accrued interest. The bonds pay interest semiannually on June 30 and December 31 and are due December 31, 2014. The company uses the straight-line amortization
The Bryan Company issued $500,000 of 10% face value bonds on January 1, 2007 for $486,000. The bonds are due December 31, 2009, and pay interest semiannually on June 30 and December 31. The company uses the straight-line amortization method.RequiredPrepare the journal entries to record the
The Cotton Corporation issued $100,000 of 10% bonds dated January 1, 2007 for $97,158.54 on July 1, 2007. The bonds are due December 31, 2010, were issued to yield 11%, and pay interest semiannually on June 30 and December 31. The company uses the effective interest method of
Addison Incorporated issued $200,000 of 13% bonds on July 1, 2007 for $206,801.60. The bonds were dated January 1, 2007, pay interest on each June 30 and December 31, are due December 31, 2011, and were issued to yield 12%. The company uses the effective interest method of
The Madison Corporation is authorized to issue $800,000 of five-year bonds dated June 30, 2007, with a face rate of interest of 11%. Interest on the bonds is payable semiannually and the bonds are sold on June 30, 2007.RequiredDetermine the proceeds that the company will receive if it sells(1) The
The Taylor Company issued $100,000 of 13% bonds on January 1, 2007. The bonds pay interest semiannually on June 30 and December 31 and are due December 31, 2009.Required1. Assume the company sells the bonds for $102,458.71 to yield 12%. Prepare the journal entries to record:a. The sale of the
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