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intermediate accounting volume 2
Intermediate Accounting Volume 2 2nd Edition Hanlon, Hodder, Nelson, Roulstone, Dragoo - Solutions
A manufacturer of household appliances has potential losses due to the discovery of a possible defect in one of its products. The occurrence of the loss is reasonably possible, and the costs can be reasonably estimated at \(\$ 50,000\). How should this potential loss be treated for financial
The Occupational Safety and Health Administration (OSHA) is in the process of conducting a workplace inspection at Kenny's Corp. to determine whether the company is in compliance with standards on health and safety in the workplace. While the investigation is currently in process, Kenny's Corp.
During the year, a driver for Commuters Inc. was involved in an accident. Commuters Inc. brought a suit against the negligent party for \(\$ 1\) million. The suit is pending on December 31, 2020. Commuters Inc. believes it is virtually certain that it will receive a settlement of \(\$ 1\) million.
In January 2021, an explosion occurred at Nilo Company's plant, causing damage to area properties. In March 2021, Nilo received notification of lawsuits filed against the company. Nilo's management and legal counsel concluded that it was reasonably possible that Nilo would be held responsible for
Compute the (1) current ratio and the (2) quick ratio for Nike, Inc. using the following excerpt from the balance sheet reported in a recent \(10-\mathrm{K}\) of Nike, Inc. At May 31 (in millions) Current assets 2015 At May 31 (in millions) 2015 Current liabilities Cash and equivalents. $ 3,852
Cash sales for Zeviae Inc. in 2020 were \(\$ 9\) million. The majority of sales were subject to a sales tax rate of \(6 \%\). Zeviae records sales taxes payable at the point of sale.Requireda. Record the sales and sales tax entry for 2020 assuming that \(\$ 180,000\) of sales were not subject to
On September 1, 2020, Global Tech Inc. purchased merchandise for resale for \(\$ 8,000\) on credit terms \(2 / 15, \mathrm{n} / 60\) using the gross method and a perpetual inventory system. Global Tech incurred a shipping charge of \(\$ 300\) on the purchase, which was immediately paid. On
Record the entries for the following transactions for Shoppers Inc. Shoppers uses a perpetual inventory system and records sales taxes payable at the point of sale.a. On January 1, 2020, Shoppers Inc. purchased merchandise for resale for \(\$ 35,000\) on credit terms \(1 / 15, n / 30\). Shoppers
Manchester Co. operates as a manufacturer of industrial equipment. On March 28, 2020, Manchester Co. required an advance payment of \(\$ 100,000\) from a customer on a special order of equipment. On May 1, 2020, Manchester Co. prepared an invoice and delivered the industrial equipment to the
In 2020, Neighbor Co-Op Inc. sells 500 beverages in glass bottles and receives a \(\$ 1.00\) deposit for each returnable bottle sold. As of December 31, 2020, a total of 400 glass bottles were returned, and deposits on 60 bottles were forfeited because it is the company's policy that a deposit must
Assume Ikeo Inc. sold \(\$ 100,000\) of gift cards during the last two weeks of December 2020. No gift cards were redeemed in 2020, while \(\$ 90,000\) of the gift cards were redeemed for store purchases during 2021. On December 31, 2021, Ikeo Inc. calculates the remaining balance of unredeemed
Aloha Company has a personnel policy that allows each employee with at least one year's employment, 20 days vacation time and two holidays with regular pay. Unused days are carried over to the next year. If not taken during the next year, the vacation and holiday times are lost. Aloha's accounting
Utta Inc. allows each employee to earn 15 paid vacation days each year with full pay. Unused vacation time can be carried over to the next year. If not taken during the next year, unused vacation time is lost. By the end of 2020, all but 3 of the \(30 \mathrm{employees} \mathrm{had} \mathrm{taken}
Urban Fit Corporation paid salaries and wages of \(\$ 143,800\) to its employees for the month. Of this amount, \(\$ 3,800\) was paid to employees who had already exceeded wages of \(\$ 128,400\). Also, \(\$ 43,800\) was paid to employees who had already been paid the SUTA maximum. FICA employee
Bloy Company pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in the following biweekly period. Bloy accrues salaries expense only at its December 31 year-end. Data relating to salaries earned in December 2020 are:- Last payroll was paid on December 26, 2020, for the
Anne Taylor Company borrowed cash on August 1, 2020, and signed a \(\$ 33,300\) (face amount), one-year note payable, due on July 31, 2021. The accounting period of Anne Taylor ends December 31. Assume an effective interest rate of \(11 \%\).Requireda. How much cash should Anne Taylor Company
Consider the following three separate scenarios for a one-year, \(\$ 100,000\) note payable issued on September \(1,2020\). Use the straight-line method to amortize any discount on note payable.Required Complete the table above based upon the information provided for the three separate scenarios.
Masy's Department Store supported its operations through short-term note financing in 2020 described as follows:May 10 The Company entered into a new credit agreement with certain financial institutions providing for revolving credit borrowings and letters of credit in an aggregate amount not to
The following table includes five separate short-term note payable scenarios.Required For each separate scenario, complete the last column in the table by calculating interest expense accrued at the relevant fiscal year-end. Stated Note Payable Issuance Date Term Rate Fiscal Year-End Accrued
On December 31, 2020, Millers Grocery Inc. had a 10 -year, \(7 \%\) note payable balance of \(\$ 100,000\). The note payable was originally issued on June 30, 2011. The company will issue its financial statements on March 15, 2021.Required How will the note payable in each of the following
During 2020, Ward Company introduced a new product carrying a two-year warranty against defects, which is included in the selling price of the product. The estimated warranty costs are \(2 \%\) of sales within the first 12 months following the sale and \(4 \%\) in the second 12 months following the
Assume the same information in Exercise 15-61, except that the warranty is for three years and has a separate purchase price. The company collected \(\$ 20,000\), and \(\$ 35,000\) for this extended warranty feature in the years 2020 and 2021, respectively. The company uses straight-line
Macy Furniture sells a line of products that carry a three-year warranty against defects at no extra charge. Based on industry experience, the estimated warranty costs are as follows: first year following the year of sale, \(1 \%\) of sales; second year following the year of sale, \(3 \%\) of
Koll's Company is preparing its annual financial statements at December 31, 2020. During 2020, a customer fell while riding on the escalator and has filed a lawsuit for \(\$ 150,000\) because of a claimed back injury. The lawyer employed by the company has carefully assessed all of the
Stony Electronics, an electronics manufacturer, includes battery packs with its laptop computers that it sells. After a year of sales of the product, management learns that the battery packs have the potential to overheat, which may lead to burns or fire hazards. As a result of this issue,
Atlanta Corp. is preparing its 2020 financial statements (December 31 year-end) and is considering the following events:a. Probable warranty costs on the company's products are estimated to be \(1 \%\) of sales. The warranties are considered assurance-type warranties.b. One of its manufacturing
Boston Scientific Corporation is a worldwide developer, manufacturer and marketer of medical devices that are used in a broad range of interventional medical specialties. In a recent annual report on Form \(10-\mathrm{K}\), the company reported the following regarding its legal expense accrual.Note
On January 17, 2021, an explosion occurred at a Cord Company plant, causing extensive property damage to area buildings. Although no claims had yet been asserted against Cord by March 10, 2021, the company believes it is probable that claims will be asserted. Cord's management and counsel concluded
The following transactions relate to topics in this chapter.a. Purchased inventory on account, terms \(2 / n, n / 30\), accounted for using the perpetual method.b. Collected sales taxes on a customer sale.c. Received a deposit from a customer as a down payment on a large purchase.d. Recorded a sale
The following transactions relate to topics in this chapter.a. Coupons published in a newspaper that may be redeemed for merchandise or service.b. Sales taxes payable.c. Probable requirements to clean up toxic wastes.d. Company contract promises to pay postretirement health benefits.e. Probable
Atlas Inc. issues short-term interest-bearing notes and uses the proceeds to purchase inventory. The company's profits for the year remain unchanged.Required Indicate how the use of the notes would affect the following ratios:a. Current ratiob. Quick ratio
The balance sheets for Red Oak Inc. and Birch Co. reflect the following:Required Calculate the following ratios and comment on the results.a. Current ratiob. Quick ratio Red Oak Birch Current assets Cash Short-term investments. Accounts receivable Inventory. Other.. Noncurrent assets Total assets..
List and briefly explain the primary characteristics of long-term debt securities. What are the primary distinctions between a debt security and an equity security?
Explain the difference between the stated rate and the market rate on a long-term debt security.
How is the issue price of a zero-interest-bearing note payable determined?
Briefly explain the effects on interest recognized when the stated and market rates of interest are different.
What are the primary characteristics of a bond? What distinguishes it from capital stock?
Distinguish between the face value and the issue price of a bond. When are they the same? When are they different? Explain.
Explain the impact on interest of a bond discount and bond premium to (a) the issuer and (b) the investor.
Assume that a \(\$ 1,000,8 \%\) (payable semiannually), 10 -year bond is sold at a market rate of \(6 \%\). Explain how to compute the price of this bond.
Explain why and how bond discount and bond premium affect (a) the balance sheet and (b) the income statement of the investor.
What is the primary conceptual difference between the straight-line and effective interest methods of amortizing bond discount and premium?
Under GAAP, when is it appropriate to use the (a) straight-line interest method and (b) effective interest method of amortization for bond discount or premium?
What are convertible bonds? What are the primary reasons for their use?
Define extinguishment of debt.
When may extinguishment of debt occur? List the various ways in which extinguishment of debt occurs.
Explain how an accounting gain or loss to the debtor may occur when a call privilege is exercised.
When the issuer purchases its own debt securities in the open market to extinguish the debt, two entries must usually be made. Explain.
What is meant by refunding?
Interest rates have increased since a company issued its bonds. Why would the company want to refund the bonds with another issue of bonds paying a higher rate?
A company retired a bond issue early, at a loss. Is the company in an economically worse position after the retirement?
Why is the accounting different for nonconvertible bonds with detachable stock purchase warrants and nonconvertible bonds with nondetachable stock purchase warrants?
Match each security listed below with its usual classification: (1) trading securities, (2) available-for-sale securities, (3) equity method securities, (4) held-to-maturity securities, or (5) equity security measured at FV-NI.a. Abbot common stock, no-par; acquired to use temporarily idle cash
On January 1, 2020, Lazer Inc. purchased for cash, ten \(\$ 1,000,4 \%\) bonds of Star Corp. at par. The bond interest is paid annually on January 1 of each year, and the bond maturity date is January 1, 2030. Lazer has the intent and ability to hold the bonds over the full term. The fair value of
On January 1, 2020, Baker Corp. purchased \(\$ 20,000\) of Chocolate Inc. bonds. These bonds pay 5\% interest annually on December 31 and mature December 31, 2029. The investment is classified as a held-to-maturity investment because Baker has the intent and the ability to hold the bonds for 10
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation to yield \(10 \%\). The bonds pay \(9 \%\) interest, payable on a semiannual basis each July 1 and January 1, and mature on July 1,2023. The bonds are classified as held-to-maturity securities. The
Repeat Exercise 14-43, assuming discounts and premiums are amortized using the straight-line interest method.Exercise 14-43On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation to yield \(10 \%\). The bonds pay \(9 \%\) interest, payable on a semiannual
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation at a market rate of \(6 \%\). The bonds pay \(5 \%\) interest, payable on a semiannual basis each July 1 and January 1, and mature on July 1, 2023. The bonds are classified as trading securities. The
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation at a market rate of \(6 \%\). The bonds pay \(5 \%\) interest, payable on a semiannual basis each July 1 and January 1, and mature on July 1,2023. The bonds are classified as trading securities. The
Repeat Exercise 14 -45 except now assume that the market rate is 4\% on July \(1,2020\).Exercise 14 -45On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation at a market rate of \(6 \%\). The bonds pay \(5 \%\) interest, payable on a semiannual basis each
At December 31, 2020, the investments in the portfolio of the trading securities of Kennedy Company included the following.Requireda. Record the entry for the receipt of quarterly interest from the Atlanta Corp. bonds on December 31, 2020.b. Record the entry for the receipt of semiannual interest
At December 31, 2020, the investments in the portfolio of the trading securities of Kennedy Company included the following.Requireda. Record the entry for the receipt of quarterly interest from the Atlanta Corp. bonds on December 31, 2020.b. Record the entry for the receipt of semiannual interest
On January 1, 2020, Jules Company purchased for cash, \(\$ 50,000\) bonds (ten \(\$ 5,000\) bonds) of Android Corporation at a market rate of \(6 \%\). The bonds pay \(6.5 \%\) interest, payable on a semiannual basis each June 30 and December 31, and mature on December 31, 2024. The bonds are
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation to yield \(10 \%\). The bonds pay \(9 \%\) interest, payable on a semiannual basis each July 1 and January 1 , and mature on July 1,2023 . The bonds are classified as AFS securities. The annual
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation to yield \(10 \%\). The bonds pay \(9 \%\) interest, payable on a semiannual basis each July 1 and January 1 , and mature on July 1, 2023. The bonds are classified as AFS securities. The annual
A portfolio of investments of available-for-sale securities held by Dow Inc. is as follows.The Fair Value Adjustment account had a \(\$ 0\) balance on January 1, 2020. No sales or purchases took place in the available-for-sale investment portfolio in 2021.Requireda. Record the adjusting entry on
On December 31, 2020, Banff Company held an investment in Glacier Inc. bonds with an original cost of \(\$ 23,000\). The investment was classified as an available-for-sale security, had a fair value of \(\$ 21,500\) on December 31, 2020, and was the only investment in the available-for-sale
On November 1, 2020, Drucker Co. acquired the following investments in equity securities measured at FV-NI.Kelly Corporation-500 shares of common stock (no-par) at \(\$ 60\) per share.Keefe Corporation-300 shares preferred stock ( \(\$ 10\) par) at \(\$ 20\) per share.On December 31, 2020, the
On November 1, 2020, Drucker Co. acquired the following investments in equity securities measured at FV-NI.Kelly Corporation- 500 shares of common stock (no-par) at \(\$ 60\) per share.Keefe Corporation-300 shares preferred stock ( \(\$ 10\) par) at \(\$ 20\) per share.On December 31, 2020, the
On September 1, 2020, Tech Company purchased 2,000 shares of common stock of Eagle Inc. for \(\$ 200,000\), while not obtaining significant influence over Eagle Inc. On November 1, 2020, Tech Company sold 1,000 shares of the Eagle Inc. stock for \(\$ 105\) per share and incurred brokerage fees of
At December 31, 2019, the portfolio of investments in equity securities measured at FV-NI held by Athletes Inc. is as follows. Investment Security Badger Common Stock (1,000 shares) Spartan Common Stock (1,600 shares). Wildcat Common Stock (500 shares). Cost $ 40,000 50,000 Fair Value $ 39,500
On June 1, 2020, Athletes Inc. sold 400 shares of Spartan stock for \(\$ 33\) per share and 100 shares of Wildcat stock for \(\$ 55\) per share. Athletes Inc. purchased 400 shares of Gopher common stock for \(\$ 35\) per share on August 1 , 2020. The fair value of the remaining stock held on
At December 31, 2019, the portfolio of investments in equity securities measured at FV-NI held by Athletes Inc. is as follows. Investment Security Badger Common Stock (1,000 shares) Spartan Common Stock (1,600 shares). Wildcat Common Stock (500 shares).. Cost $ 40,000 50,000 25,000 Fair Value $
On June 1, 2020, Athletes Inc. sold 400 shares of Spartan stock for \(\$ 33\) per share and 100 shares of Wildcat stock for \(\$ 55\) per share. Athletes Inc. purchased 400 shares of Gopher common stock for \(\$ 35\) per share on August 1, 2020. The fair value of the remaining stock held on
Five separate scenarios of equity investment holdings, measured at FV-NI are as follows.Required For each of the five separate scenarios, record the adjustment to fair value required on December 31, 2020. Assume that each investment was purchased in 2019 and that there were no purchases or sales
Corporation completed the following transactions, in the order given, relative to the portfolio of stocks held as equity investments measured at FV-NI.Year 2020 1. Purchased 150 shares of Starbux Corporation common stock (par value \(\$ 1\) ) at \(\$ 50\) per share plus a brokeraige commission of
On January 1, 2020, Allen Corporation purchased \(30 \%\) of the 30,000 outstanding common shares of Towne Corporation at \(\$ 17\) per share as a long-term investment. On the date of purchase, the book value and the fair value of the net assets of Towne Corporation were equal. During the year,
Assume that Fleetwood Inc. purchased 40\% of the voting stock of Mac Corporation on January 1, 2020, for \(\$ 100,000\), an amount equal to \(40 \%\) of Mac's book value. Assume that the fair value and book value of all net assets of Mac were the same at that time. During the year, Fleetwood Inc.
On January 1, 2020, Allen Corporation purchased \(30 \%\) of the 30,000 outstanding common shares of Towne Corporation at \(\$ 15\) per share as a long-term investment. On the date of purchase, the book value and the fair value of the net assets of Towne Corporation were equal. During the year,
On January 1, 2020. Case Corporation purchased 3,000 of the 10,000 outstanding shares of common stock of Dow Corporation for \(\$ 28,000\) cash. At that date, Dow's balance sheet reflected the following book values.Dow Corporation reported net income of \(\$ 18,000\) in 2020 and declared and paid a
On July 1, 2020, Allen Corporation purchased \(30 \%\) of the 30,000 outstanding common shares of Towne Corporation at \(\$ 17\) per share as a long-term investment. On the date of purchase, the book value and the fair value of the net assets of Towne Corporation were equal. During the year, Towne
Atlanta Inc. holds an HTM bond investment in Falcons Corporation. The carrying value of the investment is \(\$ 140,500\) on December 31, 2020. Atlanta Inc. determines the present value of the amounts expected to be collected under the debt contract under the CECL model to be \(\$
Eagle Software has an equity investment in Finch Enterprises accounted for under the equity method. The carrying value of the investment was \(\$ 45,000\) on December 31, 2020. At December 31, 2020, the fair value of Eagle's investment in Finch has declined to \(\$ 32,000\). Eagle management
Atlanta Inc. holds an AFS bond investment in Falcons Corporation. The amortized cost of the investment is \(\$ 140,500\) on December 31, 2020. Atlanta Inc. estimates the fair value of the bonds to be \(\$ 130,000\). The unrealized loss of \(\$ 10,500\) is partially due to a credit loss of \(\$
On January 1, 2020, Josie Inc. purchased for cash ten, \(\$ 1,000,4 \%\) bonds of Star Corp. at par. The bond interest is paid annually on January 1 of each year, and the bonds mature on January 1, 2030. Josie has the intent and ability to hold the bonds over the full term and has elected to
On October 31, 2020, West Company purchased \(\$ 10,000\) of East Company bonds. West Company plans to hold the bonds for an indefinite period of time. West Company elects to account for the debt investment using the fair value option.Requireda. If the fair value of the East Company bonds were \(\$
Assume that Fireside Inc. purchased \(30 \%\) of the common stock of Theater Supplies Corporation on January 1, 2020 , for \(\$ 100,000\). Fireside Inc. elected to account for its investment using the fair value option. During the year, Fireside Inc. reported net income of \(\$ 80,000\) and
Provide the definition of a current liability.
Explain how the measurement of a liability is related to its cause.
Why are most current liabilities recognized at maturity value at the beginning of their term?
Compute the present value of a \(\$ 10,000\), one-year note payable that specifies no interest, although \(10 \%\) would be a realistic rate. Is the present value less than, greater than, or equal to the maturity value?
In evaluating a balance sheet, some creditors say the liability section is one of the most important sections. What are some reasons justifying this position?
Some liabilities are reported at their maturity amount. In general, when should liabilities, prior to the maturity date, be reported at less than their maturity amount?
Explain why the amount of cash salaries paid to employees does not equal salaries expense for the employer.
Differentiate between secured and unsecured liabilities. Explain the reporting procedures for each.
What are examples of secured and unsecured liabilities?
Distinguish between the stated rate and the market rate on a debt.
Briefly define the following terms related to a note payable: present value of the note and maturity value of the note.
Distinguish between an interest-bearing note and a noninterest-bearing note.
Assume that \(\$ 4,000\) cash is borrowed on a \(\$ 4,000,10 \%\), one-year note payable that is interest-bearing and that another \(\$ 4,000\) cash is borrowed on a \(\$ 4,400\) one-year note that is noninterest-bearing. For each note, provide the following:a. Present value of the note.b. Maturity
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