Accounting for non current liability
Question: 1. Following terms are related to independent bond issues:
a. 500 bonds; Rs. 1,000 face value; 8% stated rate; annual interest payment
b. 500 bonds; Rs. 1,000 face value; 8% stated rate; 5years; semiannual interest payments
c. 800 bonds; Rs. 1,000 face value 8% stated rate; 10 years; semiannual interest payments
d. 2,00 bonds; Rs. 500 face value 12% stated rate; 15 years; semiannual interest payments
Required: Assuming the market rate of interest is 10%, calculate the selling for each bond issue.
Question:2.
Tamrakar & Sons signed a four-year lease for machinery on January 1, 2003 . Annual lease payments of Rs. 60,040, based on an interest rate of 8%, are to be made every December 31, beginning with December 31, 2003.
Required:
1. Assume the lease is treated as an operating lease.
a. Will the value of the machinery appear on Tamrakar & Son’s balance sheet?
b. What account will indicate lease payments have been made?
2. Assume the lease is treated as a capital lease.
a. Prepare any journal entries needed when the lease is signed. Explain why the value of the leased asset is not recorded at Rs. 240,160 (Rs. 60,040×4)
b. Prepare the journal entries to record the first lease payment on December 31, 2003
c. Prepare the adjusting entry to record the depreciation expenses on December 31, 2003
d. What amount would the lease obligation be presented on the balance sheet as of December 31, 2003
Accounting for current assets:
Question:3.
Following data have been extracted from the accounting records in the books of Ever Green Company and its bank City bank of Pokhara.
1. Balance as per bank statement, dated March 31st 2004, is Rs. 4,450
2. Balance of the cash account on the company’s books as of March 31st 2004, is Rs. 4,459
3. The Rs. 1,300 deposit of March 31st was not shown n the bank statement.
4. Of the checks recorded as cash disbursements in March, some checks, totaling Rs. 1,050, have not yet cleared the bank.
5. Service and collection charges for the month were Rs. 10
6. The bank erroneously charged the Ever Green Company account for the Rs. 200 check of another company. The check was included with the canceled checks returned with the bank statement.
7. The bank credited the Company’s account with the Rs. 1,000 proceeds of a noninterest-bearing note that it collected for the company.
8. A customer’s Rs. 75 check marked NSF was returned with the bank statement.
9. As directed, the bank paid and charged to the company’s account a Rs. 507.5 noninterest note of Ever Green Company. This payment has not been recorded by the company.
10. An examination of the cash receipts and the deposit tickets revealed that the bookkeeper erroneously recorded a customer’s check of Rs. 148.5 as Rs. 135.
11. The bank credited the company for Rs. 20 of interest earned on the company’s checking account.
Required: a. Prepare a bank reconciliation statement as of March 31, 2004
b. Prepare the necessary journal entry or entries to adjust the cash account.
Solution:
a. EVER GREEN COMPANY
Bank Reconciliation
Balance as per bank statement, March 31, 2004 Rs.4, 450.00
Add: Deposit in transit Rs.1, 300
Check charged in error 200 1,500.00
Rs.5, 950.00 Less: Outstanding checks……………………. 1,050.00
Adjusted balance, 
Balance as per ledger, March 31, 2004 Rs.4, 459.00
Add: Note collected……………………………… Rs.1, 000.00
Interest earned on checking account………. 20.00
Error in recording customer’s check……….. 13.5.00 1,033.50 Rs.5, 492.50 Less: Service and collection charge………… Rs.10.00
NSF check………………………… 75.00
Ever Green Company note charged against account.. 507.50 592.50
Adjusted balance, 
b. 
2004 Mar. 31Cash…………………………………………….. 1,033.50
Notes Receivable………………………... 1,000.00
Interest Receivable……………………… 20.00
Accounts Receivable……………………. 13.50
To record additions to Cash Account
Bank Service Charge Expense………………….. 10.00
Accounts Receivable……………………………. 75.00
Notes Payable…………………………………… 507.50
Cash……………………………………… 592.50
To record deductions from Cash Account
Question: 4.
Following information has been extracted from the Pass Book and Cash Book of Roselle Company for the month of December 31, 2003 . You are required to prepare the Bank reconciliation Statement stating clearly the reasons for disagreement between these two accounts:
Current Account of Roselle Company
Pass Book
Date | Particulars | Debit | Credit | Dr/Cr | Balance |
2003 Dec. 01 | Opening balance | Cr. | 8,500 | ||
2003 Dec. 12 | Salaries (Check No. 003) | 7,000 | Cr. | 1,500 | |
2003 Dec. 18 | Bills receivable collected | 4,000 | Cr. | 5,500 | |
2003 Dec. 20 | Hari (check No. 004) | 1,500 | Cr. | 4,000 | |
2003 Dec. 22 | Service charges | 100 | Cr. | 3,900 | |
2003 Dec. 25 | Customer’s check | 2,000 | Cr. | 5,900 | |
2003 Dec. 28 | Interest earned | 500 | Cr. | 6,400 |
Cash Book
(Bank Column only)
Dr. Cr.
Date | Particulars | Amount | Date | Particulars | Amount |
2003 Dec. 01 | To balance b/c | 8,500 | By salaries | 7,000 | |
2003 Dec. 25 | To Cash | 2,000 | 2003 Dec. 12 | By Hari | 1,500 |
2003 Dec. 18 | To Natraj & Sons | 3,250 | By Rajesh & Co. | 2,600 | |
By balance c/d | 2,650 | ||||
13,750 | 13,750 |
Solution:
1. Reasons for the disagreement between the balances shown by pass book and cash book
a. Bills receivable of Rs.4,000 collected by bank but not recorded in cash book
b. Bank service charges debited in pass book but not credited in cash book amounted to Rs.100
c. Customer’s check of Rs.2,000 credited in pass book but not debited in cash book
d. Interest earned but not debited in cash book amounting to Rs.500
e. Check issued to Rajesh & Co. but not cashed.
f. Cash deposited in to bank but not credited in pass book
g. Amount deposited by Natraj & Son but not recorded in pass book.
2.
ROSELLE COMPANY
Bank Reconciliation
Balance as per bank statement, December 31, 2003 Rs.6, 400.00
Add: Deposit in transit Rs5,250.00
11,650.00 Less: Outstanding checks……………………. 2,600.00
Adjusted balance, Balance as per cash book December 31, 2004 Rs.2,650.00
Add: Bills receivable collected……………………… Rs.4, 000.00
Interest earned on checking account………. 500.00
Customer’s check directly collected by bank….. 2,000 6,500 Rs.9,150 Less: Service charge………… Rs.100.00
Adjusted balance |
Question:5.
The bank statement of Akriti Trading Company showed a balance of Rs. 17,552.85 on July 31, 2003 . On the same date, the company’s Cash Account balance was Rs. 12,388.95. Returned with the bank statement was a credit memo for Rs. 3,.75 for proceeds of a note that was collected by the bank for the company. Of that amount, Rs. 75 was interest. There were two debit memos – one for service charges of Rs. 28.50 and one for an NSF check of Green Company for Rs. 105. By comparing the canceled checks with the check register, it ws found that Rs. 7,292.40 of checks were outstanding. The deposit made after banking hours on July 31, of Rs. 5,070 was not listed on the bank statement.
Required:
a. Prepare a bank reconciliation for July 31, 2003
b. Prepare any necessary journal entries to correct the account
Question: 6.
Response the following transactions related to Bluebird Company that closes its accounts on December 31 every year.
a. Issued a Rs. 10,000, 90 day, 9% note on December 1, 2003 .
b. Issued a Rs. 10,000, 90 day note payable and received cash of Rs. 9,775 from city bank Lalitpur on December 31, 2003
Required: Prepare necessary entries in the books of Bluebird Company in parallel from for comparison purpose on December 1, 2003 , December 31, 2003 and March 1, 2004
Question:7.
Jaya Trading Company estimates its uncollectible accounts expenses to be 1% of sales, Sales during 2003 were Rs.
125,000.
Required: Prepare journal entries for the following transactions:
1. The Company prepared the adjusting entry for uncollectible accounts for 2003
2. On January 15, 2004 , the company decided that the account for Bimal Pandey in the amount of Rs. 750 was uncollectible.
3. On February 12, 2004 , Bimal’s check for Rs. 750 arrived.
Question:8.
A Rs. 45,000, 90 day, 12% note dated June 15, 2004 , was received by Jaya Trading Company from Bijaya Trading Company in payment of its account.
Required: Prepare the journal entries in the record of Jaya Trading Company for each of the following:
1. Jaya Trading Company received the note on June 15, 2004 .
2. Jaya Trading Company discounted the bill on July 15, 2004 , at 10% at Citizen Investment Bank Ltd.
3. Bijaya Company paid the note at maturity to Citizen Investment Bank Ltd.
4. Assume that Bijaya Trading Company did not pay the note at maturity; Citizen Investment Bank Ltd. charged the note to Jaya Trading Company and charged a protest fee of Rs. 30. Jaya Company decided that the note was uncollectible.
Question:9.
To add to his growing chain of grocery stores, on January, 1, 1998 , Danny Marks bought a grocery store of a small competitor for $520,000. An appraiser was hired to asses the value of the assets acquired and determined that the land had a market value of $200,000. the building a market value of $150,000, and the equipment a market value of $250,000.
Required
1. What is the acquisition cost of each asset? Prepare a journal entry to record the acquisition.
2. Any plans to depreciate the operating assets on a straight-line basis for 20 years. Determine the amount of depreciation expense for 1998 on these newly acquired assets.
3. How would the assets appear on the balance sheet as of December 31, 1998 ?
Question:10.
Assume that Sample Company purchased factory equipment on January 1, 1998 , for $50,000. The equipment has an estimated life of five years and an estimated residual value of $5,000. Sample's accountant is considering whether to use the straight-line or the units-of-production method to depreciate the asset. Because he company is beginning a new production process, the equipment will be used to produce 10,000 units in 1998, but production subsequent to 1998 will increase by 10,000 units each year.
Required
Calculate the depreciation expense, the accumulated depreciation, and the book value of the equipment under both methods for each of the five years of the asset's life. Do you think that the units-of-production method yields reasonable results in this situation?
Question:11.
Koffman's Warehouse purchased a forklift on January 1, 1998 , for $5,000. It is expected to last for five years and have a residual value of $500. Koffman's uses the double declining-balance method for depreciation.
Required
1. Calculate the depreciation expense, the accumulated depreciation, and the book value for each year of the forklift's life.
2. Prepare the journal entry to record depreciation expense for 1999.
3. What factors may have influenced Koffman to use the double declining-balance method?
Question:12.
Assume that Gonzalez Company purchased an asset on January 1, 1996 , for $60,000. The asset had an estimated life of six years and an estimated residual value of $6,000. The company used the straight-line method to depreciate the asset. On July 1, 1998 , the asset was sold for $40,000 cash.
Required
1. Make the journal entry to record depreciation for 1998. Also record all transactions necessary for the sale of the asset.
2. How should the gain or loss on the sale of the asset be presented on the income statement ?
Question:13.
Refer to Prob. 12. Assume that Gonzalez Company sold the asset on July 1, 1998, and received $15,000 cash and a note for an additional $15,000.
Required
1. Make the journal entry to record depreciation for 1998. Also record all transactions necessary for the sale of the asset.
2. How should the gain or loss on the sale of the asset be presented on the income statement?
Question:14.
For each of the following intangible assets, indicate the amount of amortization expense that should be recorded for the year 1998 and the amount of accumulated amortization on the balance sheet as of December 31,1998 .
ORGANIZATION
GOODWILL PATENT COSTS TRADEMARK
Cost $40,000 $50,000 $60,000 $80,000
Date of purchase 1/1/91 1/1/93 1/1/95 1/1/96
Useful life 50yrs. 10yrs. 10yrs. 20yrs.
Legal life undefined 17yrs. Undefined 20yrs.
Method SL SL SL SL
Question:15.
On January 1,1996 , Jose Company purchased a building for $100,000 and a delivery truck for $20,000. The following expenditures have been incurred during 1998 related to the building and the truck:
*The building was painted at a cost of $5,000.
* To prevent leaking, new windows were installed in the building at a cost of $10,000.
* To allow an improved flow of production, a new conveyor system was installed at a cost of $40,000.
* The delivery truck was repainted with a new company logo at a cost of $1,000.
* To allow better handling of large loads, a hydraulic lift system was installed on the truck at a coswt of $5,000.
* The truck's engine was overhauled at a cost of $4,000.
Required
1. Determine which of these4 costs should be capitalized. Also record the journal entry for the capitalized costs. Assume that all costs were incurred on January 1,1998 .
2. Determine the amount of depreciation for the year 1998. The company uses the straight-line method and depreciates the building over 25 years and the truck over 6 years. Assume zero residual value for all assets.
3. How would the assets appear on the balance sheet of December 31, 1998 ?
Question:16.
During 1998, Mahima Company borrowed $80,000 from a local bank and, in addition, used $120,000 of cash to construct a new corporate office building. Based on averag3e accumulated expenditures, the amount of interest capitalized during 1`998 was $8,000. Construction was completed and the building was occupied on January 1, 1999 .
Required
1. Determine the acquisition cost of the new building.
2. The building has an estimated useful life of 20 years and a $5,000 salvage value. Assuming that Mahima uses the straight-line basis to depreciate its operating assets, determine the amount of depreciation expense for 1998 and 1999.
Question:17.
The June 30, 1995 , balance sheet of Delta Air Lines Inc. revealed the following informtion in the property and equipment category (in millions):
1995 1994
Flight equipment $9,288 $9,063
Less: Accumulated depreciation 4,209 3,880
$5,079 $5,183
Ground property and equipment $2,442 $2,398
Less: Accumulated depreciation 1,354 1,250
$1,088 $1,148
The footnotes that accompany the financial statements revealed the following:
Depreciation and Amortization - Prior to April 1, 1993 , substantially all of the Company's flight equipment was being depreciated on a straight-line basis to residual values (10% of cost) over a 15-year period from the dates placed in service. As result of a review of its fleet plan, effective April 1, 1993 , the Company increased the estimated useful lives of substantially all of its flight equipment. Flight equipment that was not already fully depreciated is being depreciated on a straight-line basis to residual values (5% of cost) over a 20-year period from the dates placed in service. The effect of this change was a $34 million decrease in depreciation expense and a $22 million ($0.44 per common share) decrease in n et loss for fiscal 1993. Ground property and equipment are depreciated on a straight-line basis over their estimated service lives, which range from three years to thirty years.
Required
1. Assume that Delta Air Lines did not dispose of any ground property and equipment during the fiscal year 1995. Calculate the amount of depreciation expense for the year.
2. What was the average life of the ground property and equipment as of 1995?
3. What was the average age of the ground property and equipment as of 1995?
4. What was the effect of Delta Air Lines' decision to change the depreciable lives and residual values of its flight equipment? On what line of the 1993 income statement would you find the impact disclosed?
Question:18.
Carter Development Company purchased, for cash, a large tract of land that was immediately platted and deeded into smaller sections:
Section 1: Retail development with highway frontage.
Section 2: Multifamily apartment development.
Section 3: Single-family homes in the largest section.
Based on recent sales of similar property, the fair market value of the three sections are as follows:
Section 1: $630,000.
Section 2: $378,000.
Section 3: $252,000.
Required
1. What value is assigned to each section of land if the tract was purchased for (a) $1,260,000. (b) $1,560,000. or (c) $1,000,000?
2. How does the purchase of the tract affect the balance sheet?
3. Why would Carter ge concerned with the value assigned to each individual section? Would Carter e more concerned with the value assigned if instead of purchasing three sections of land. it purchased land with buildings? Why or Why not?
Question:19.
The term tax shield refers to amount of income tax saved by deducting depreciation for income tax purposes. Assume that Supreme Company is considering the purchase of an asset as of January 2, 1998 . The cost of an asset with a five-year life and zero residual value is $100,000. The company will use straight-line method of depreciation.
Supreme's income for tax purposes before recording depreciation on the asset will be $50,000 per the next five years. The corporation is currently in the 35% tax bracket.
Required
Calculate the amount of income tax that Supreme must pay each year if the asset is not purchased. Calculate the amount of income tax that Supreme must pay each year if the asset is purchased. What is the amount of the depreciation tax shield?
Question:20.
Centralia Stores Inc. had property, plant, and equipment, net of accumulated depreciation of $4,459,000; and intangible assets, net of accumulated amortization of $673,000 at December 31, 1998 . The company's 1998 statement of cash flows, prepared using the indirect method, included the following items.
The cash flows from operating activities section included three additions to net income: (1) depreciation expense in the amount of $672,000, (2) amortization expense in the amount of $33,000, and (3) the loss on the sale of equipment in the amount of $35,000. The cash flows from operating activities section also included a subtraction from net income for the gain on the sale of a copyright of $55,000. The cash flows from investing activities section included outflows for the purchase of a building in the amount of $292,000 and $15,000 for the payment of legal fees to protect a patent from infringement. The flows from investing activities section also included inflows from the sle of equipment in the amount of $315,000 and the sale of a copyright in the amount of $75,000.
Required:
1. Determine the book values of assets that were sold during 1998.
2. Reconstruct the amount of property, plant, and equipment, net of accumulated depreciation, that was reported on the company's balance sheet at December 31.1997.
3. Reconstruct the amount of intangibles, net of accumulated amortization, that was reported on the company's balance sheet at December 31,1997 .
Question:21.
The following events took place at Pate's Painting Company during 1998:
a. On January 1,Pate bought a used truck for $14,000. He added a tool chest and side racks for ladders for $4,800. The truck is expected to last four years and then be sold for $80. Pete uses straight-line depreciation.
b. On January 1, he purchased several items at an auction for $2,400. These items had fair market values as follows:
10 cases of paint trays and roller covers $ 200
Storage cabinets 600
Ladders & scaffolding 2,400
pate will use all the paint trays and roller covers this year. The storage cabinets are expected to last 9 years, and the ladders and scaffolding for four years.
c. On February 1, Pete paid the city $1,500 for a three-year license to operate the business.
d. On September 1, Pete sold an old truck for $4,800. The truck had cost $12,000 when it was purchased on September 1,1993 . It had been expected to last eight years and have a salvage value of $800.
Required
1. For each situation, explain the value assigned to the asset when it is purchased (or for part d, the book value when sold).
2. Determine the amount of depreciation or other expense to be recorded for each asset for 1998.
3. How would these assets appear on the balance sheet as of December 31, 1998 ?
Question:22.
Metron Company purchased an office building at a cost of $364,000 on January 1, 1997 . Metron estimated that the building's life would be 25 years and the residual value at the end of 25 years would be $14,000.
On January 1, 1998 , the company made several expenditures related to the building. The entire building was painted and floors were refinished at a cost of $21,000. A federal agency required Merton to install additional pollution-control devices in the building at a cost of $42,000. With the new devices, Merton believed it was possible to extend the life of the building by an additional six years.
In 1999, Merton altered its corporate strategy dramatically; The Company sold the factory building on April 1, 1999 , for $392,000 in cash and relocated all operation in another state.
Required:
1. How should Reynosa
2. How much amortization expenses should Reynosa September 30, 1998 ?
3. How much amortization expense should Reynosa September 30, 1999
Question:23.
Tableleaf Inc. purchased a patent a number of years ago. The patent is being amortized on a straight-line basis over its estimated useful life. The company's comparative balance sheets as of December 31, 1998 and 1997, included the following line item:
12/31/98 12/31/97
______________________________________________________________
patent, less accumulated amortization
of $119,000(1998) and $102,000 (1997) $170,000 187,000
______________________________________________________________
Required:
1. How much amortization expense was recorded during 1998?
2. What was the patent's acquisition cost? When was it acquired? What is its estimated useful life? How was the acquisition of the patent reported on that year's statement of cash flows?
3. Assume that Tableleaf uses the indirect method to prepare its statement of cash flows. How in the amortization of the patent reported annually on the statement of cash flows?
4. How would the sale of the patent on January 1, 1999 , for $200,000 be reported on the 1999 statement of cash flows?
Question:24.
The footnotes to the June30, 1994, financial statements of Quaker Oata Company included the following disclosures:
PROPERY , PLANT AND EQUIPMENT (IN MILLIONS)1994
BALANCE AT BEGINNING OF YEAR RETIREMENT OTHER CHANGES BALANCE ADDITIONS AND SALES AT END OF YEAR
__________________________________________________________________________________________
Land $ 28.7 $ 0.5 $ (1.0) $ 2.4 $ 30.6
Building and
Improvements 441.5 23.9 (10.2) (0.2) 455.0
Machinery and
equipment 1,589.0 161.0 (103.7) (6.0) 1,640.3
Total $2,059.2 $ 185.4 $ (114.9) $ (3.8) 2,125.9
Accumulated depreciation:
Building and improvements$ 120.3 $ 13.3 $ (1.3) $ (0.8) $131.5
Machinery and equipment 710.7 124.0 ( 50.7 (3.8) 780.2
Total $ 831.0 137.3 $ (52.0) $ (4.6) $ 911.7
____________________________________________________________________________________
Software Costs- The Company defers significant software development project costs. Software cost of $ 5.3 million, $ 5.0 million and $ 13.2 million were deferred during fiscal 1994, 1993, respectively, pending the projects' completion. Amounts deferred are amortized over a three-year period beginning with a project's completion
Required:
1. Based on the footnote disclosures, what was the amount of depreciation expense for fiscal year 1994 for buildings and improvements and for machinery and equipments and Machinery and Equipment?
(You may ignore the other changes column when answering this question.)
2. What was the average life of the assets in the building and improvements and machinery and equipments categories?
3. What was the average age of the assets in the building and improvements and machinery and equipment categories?
4. Explain the meaning of the footnote that indicates Quaker Oats defers and amortizes significant software costs.
Question:25.
Dixon Manufacturing purchased, for cash, three large pieces of equipment. Based on recent sales of similar equipment, the fair market values are as follows:
Piece 1 $ 200,000
Piece 2 $ 200,000
Piece 3 $ 440,000
Required:
1. What value is assigned to each of equipment if the equipment was purchased for (a) $960,000, (b) 680,000 or (c) $800,000?
2. How does the purchase of the equipment affect total assets?
Question:26.
The term tax shield refers to the amount of income tax saved by deducting depreciation for income tax purposes. Assume that Rummy Company is considering the purchase of an asset as of January 1, 1998 . The cost of the asset with a five-year life and zero residual value is $60,000. The company will use the double declining balance method of depreciation.
Rummy's income for tax purposes before recording depreciation on the asset will be $62,000 per year for the next five years. The corporation is currently in the 28% tax bracket.
Required:
Calculate the amount of income tax that Rummy must pay each year if the asset is not purchased and then the amount of income tax shield over the life of the asset? What is the amount of tax shield for Rummy if it uses the straight-line method over the life of the asset? Why would Rummy choose to use the accelerated method?
Question:27.
Book Company's only asset as of January 1, 1998 , was a copyright. During 1998, only three transactions occured:
Royalties earned from copyright use, $500,000 in cash.
Cash paid for advertising and clerical services, $2,500
Amortization of copyright, $50,000
Required:
1. What amount of income will Book report in 1998?
2. What is the amount of cash on hand at December 31, 1998 ?
3. Explain how the cash balance increased from zero at the beginning of the year to its end of year balance. Why does the increase in cash not equal the income?
Question:28.
E-Gen Enterprises Inc. had property, plant, and equipment, net of accumulated depreciation of $1,555,000; and intangible assets, net of accumulated amortization, of $340,000 at December 31, 1998 . The company's 1998 statement of ash flows, prepared using the indirect method, include the following items.
The cash flows from operating activities section included three additions to net income :(1) depreciation expense in the amount of $205,000(2) amortization expense in the amount of $3000, and (3) the loss on the sale of land in the amount of $17,000. The cash flows from operating activities section also included a subtraction from net income tor the gain on the sale of a trademark of $7000. The cash flows from investing activities section include outflows for the purchase of equipment in the amount of $277,000 and $6,000 for the payment of legal fees to protect a copyright from infringement. The cash flows from investing activities section also included inflows from the sale of land in the amount of $187,000 and the sale of a trademark in the amount of $121,000.
Required:
1. Determine the book values of the assets that ware sold during 1998.
2. Reconstruct the amount of property, plant, and equipment, net of accumulated depreciation that was reported on the company's balance sheet at December 31, 1997 .
3. Reconstruct the amount of intangibles, net of accumulated amortization, that was reported on the company's balance sheet at December 31,1997
Question:29.
The following events took place at Tasty-Toppings Inc., a pizza shop that specializes in home delivery, during 1998:
a. January 1, purchased a truck for $16,000 and added a cab and oven at a cost of $10,900. The company uses straight-line depreciation for its trucks.
b. January 1, purchased equipment for $2,700 from a competitor who was retiring. The equipment is expected to last three years with zero salvage value. The company uses the double declining-balance method to depreciate its equipment.
c. April 1, sold a truck for $1,500. The truck had been purchased for $8,000 exactly five years earlier, had an expected salvage value of $1,000. and was depreciated over an eight-year life using the straight-line method.
d. July 1, purchased a $14,000 patent for a unique packing process to produce a new product. The patent is valid for 15 more years; however, the company expects to produce and market the product for only four years. The patent's value at the end of the four years is indeterminable.
Required:
For each situation, explain the amount of depreciation or amortization recorded for each asset in the current year and the book value of each asset at the end of the year. For part c, indicate the accumulated depreciation and book value at the time of sale.
Question:30.
Early in its first year of business, Key Inc., a locksmith and security consultant, purchased new equipment. The acquisition included the following costs:
Purchase price $168,000
Tax 16,500
Transportation 4,400
Setup* 1,100
Operating Cost for First Year 26,400
*The equipment was adjusted to Key's specific needs.
The bookkeeper recorded the asset, Equipment, at $216,400. Key used straight-line depreciation. The equipment w3as expected to last 10 years with zero residual value.
Required
1. Was $216,400 the proper amount to record for the acquisition cost? If not, explain how each- expenditure should be recorded.
2. How much depreciation did Key report on its income statement related to this equipment in Year 1? How much should have been reported?
3. If Key's income before the costs associated with the equipment is $55,000, what amount of income did Key report? What amount should it have reported? You may ignore income tax.
4. Explain how Key should determine the amount to capitalize when recording an asset. What is the effect on the income statement and balance sheet of Key's error?
Question:31.
Wagner Company purchased a retail shopping center at a cost of $612,000 on January 1,1997 . Wagner estimated that the life of the building would be 25 years and the residual value at the end of 25 years would be $12,000.
On January 1, 1998 , the company made several expenditures related to building. The entire building was painted and floors were refinished at a cost of $115,200. A local zoning agency required Wagner to install additional fire-protection equipment, including sprinklers and built-in alarms, at a cost of $87,600. With the new fire protection. Wagner believed it was possible to increase the residual value of the building to $30,000.
In 1999 Wagner altered its corporate strategy dramatically. The Company sold the retail shopping center on January 1, 1999 for $360,000 of cash.
Required
1. Determine the amount of depreciation that should be reflected on the income statement for 1997 and 1998.
2. Explain why the cost of the fire-protection equipment was not expensed in 1998. What conditions would have allowed Wagner to expense it? If Wagner has a choice. Would it prefer to expense or capitalize the improvement?
3. What amount of gain or loss did Wagner record when it sold the building? What amount of gain or loss would have been reported if the fire-protection equipment had been expensed in 1998?
Question:32.
Dak Inc purchased Under Company on January 1,1998 , for $500,000. To determine the value of the assets and liabilities purchased, Dak requested an appraisal of assets and liabilities. The appraiser determined that the fair market values of the items purchased as of January 1,1998 , were as follows:
ASSETS FAIR MARKET VALUE
Cash $ 75,000
Receivables 125,000
Building 287,500
LIABILITIES
Accounts payable $125,000
Dak decided to amortize any goodwill in the transaction on a straight-line basis over the maximum possible time period.
On January 1, 1999 , Dak's accountants determined that the goodwill should be amortized over a shorter period of time. Accordingly, Dak Inc. agreed to amortize all remaining goodwill for a period of 10 more years.
Required
1. Determine the amount of goodwill that resulted from the January 1, 1998 , purchase of Under Company and the amount to be amortized in 1998.
2. Determine the amount of goodwill that should be amortized in 1999.
Question:33.
On January 1,1998 , Mansfield Inc. purchased a medium-sized delivery truck for $45,000. Using an estimated useful life of five years and a residual value of $5,000. the annual straight-line depreciation of the trucks was calculated to be $8,000. Mansfield December 31,1999 . Mansfield
Required
1. How would the transactions described above be presented on Mansfield December 1, 1998 and 1999?
2. Why would Mansfield
Question:34.
Quickster Inc. acquired a single trademark a number of years age. The trademark is being amortized on a straight-line basis over its estimated useful life. The company's comparative alance sheets as of December 31, 1998 and 1997, included the following line item:
12/31/98 12/31/97
Trademark, less accumulated amortization
of $1,661.000 (1998) and $1,510.000
(1997) $1,357,000 $1,508,000
Rquired
1. How much amortization expense was recorded during 1998?
2. What was the trademark's acquisition cost? When was it acquired? What is its estimated useful life? How was the acquisition of the trademark reported on that year's statement of cash flows?
3. Assume that Quickster uses the indirect method to prepare its statement of cash flows. How is the amortization of the trademark reported annually on the statement of cash flows?
4. How would the sale of the trademark on January 1,1999 , for $1,700,000 be reported on the 1999 statement of cash flows?
Question:35.
Chaudhary Property dealer Inc. acquired on January 1, 2004 , a tract of property containing timber at a cost of Rs. 8000,000. After the timber is removed, the land will be worth about Rs. 3,200,000 and will be sold to another party. Costs of developing the site were Rs. 800,000. A building was erected at a cost of Rs.160,000. The building had an estimated physical life of 20 years and wil have an estimated salvage value of Rs. 80,000 when the timber is gone. It was expected that 50,00,000 board feet of timber can be economically cut. During the first year, 16,000,000 board feet were cut.The units-of –production basis is used to depreciate the building.
Required: Prepare the entries to record:
1. The acquisition cost the property.
2. The development costs.
3. Depletion costs for the first year.
4. Depreciation on the building for the first year.
Solution :
1. Land……………………. 3,200,000
Timber Stands …………. 4,800,000
Cash 8,000,000 To record purchase of land and timber
2. Timber Stands ……………………… 800,000
Cash ……………………… 800,000
3. Depletion Expenses (a)………………... 1,792,000
Accumulated Depletion – Timber Stands…….. 1,792,000
To record the depletion expenses for 2004
4. Depreciation Expense – Buildings (b) 25,600
Accumulated Depreciation – Buildings 25,600
To record depreciation expense:
Working notes:
(a)
(Rs.4,800,000+Rs. 800,000)/50,000,000 = Rs. 0.112 per
board foot. Rs. 0.112×16,000,000 = Rs. 1,792,000
(b)
Rs. 160,000- Rs. 80,000 = Rs. 0.0016 per board foot
50,000,000 Rs. 0.0016× 16,000,000 = Rs. 25,600
Question:36.
On January 1, 2003 , Rukmini Company purchased a 10-year sublease on a warehouse for Rs. 300,000. Rukmini will also pay annual rent of Rs. 60,000. Rukmini immediately incurred costs of Rs. 200,000 for improvements to the warehouse, such as lighting fixtures, replacement of a ceiling, heating system, and loading dock. The improvements have an estimated life of 12 years and no residual value.
Required: Prepare the entries to record:
a. The payment for the sublease on a warehouse.
b. The rent payment for the first year.
c. The payment for the improvements.
d. Amortization of the leasehold for the first year.
e. Amortization of the leasehold improvements for the first year.
Solution:
a. Leasehold……………………………………….. 300,000
Cash……................................................. 300,000
To record the purchase of sublease on warehouse
b. Rent Expense……….............................................. 60,000
Cash……………………………………. 60,000
To record the payment of annual rent
c. Leasehold improvements………………………… 200,000
Cash ……………………………………. 200,000
To record payment for leasehold improvements
d. Rent Expense…………………………………….. 30,000
Leasehold ………………………………. 30,000
To record the amortization of leasehold for 2003
e. Rent Expense…………………………………….. 20,000
Leasehold improvements……………….. 20,000
To record the amortization of leasehold improvements for 2003
Question:37.
On January 1, 2002 , Pashupati Soap Industry purchased a machine for Rs. 360,000 cash. The machine has an estimated useful life of six years and an estimated salvage value of Rs. 18,000. The straight-line method of depreciation is being used.
Required:
a. Compute the book value of the machine as of July 1,2005 .
b. Assume the machine was disposed of on July 1, 2005 , Prepare the journal entries to record the disposal of the machine under each of the following independent assumptions:
1. The machine was sold for Rs. 120,000 cash.
2. The machine was sold for Rs. 180,000 cash.
3. The machine and Rs. 24,000 cash were exchanged for a new machine that had a cash price of Rs. 390,000. Use the accounting method rather than the income tax method.
4. The machine was completely destroyed by fire. Cash of Rs. 108,000 is expected to be recovered from the insurance company.
Solution:
a.Pashupati Soap Industry
Schedule to Compute Book Value
Acquisition cost ............................................Rs. 360,000
Less accumulated depreciation:
360,000 – 18,000 = Rs. 57,000
6 years
57,000×31/2 = Rs. 199,500 Rs. 199,500 Book Value………………………… Rs. 160,500  | |||
 | |||
b.
1. Cash………………………………………………. 120,000 Accumulated Depreciation – Machinery…………. 199,500
Loss on disposal of Machinery…………………… 40,500
Machinery …………………………………… 360,000
To record the sale of machinery at a loss
2. Cash………………………………………………. 180,000
Accumulated depreciation – Machinery …………. 199,500
Machinery……………………………………. 360,000
Gain from disposal of Machinery……………. 19,500
To record the sale of machinery at a gain
3. Machinery (New)………………………………….. 390,000
Accumulated depreciation – Machinery…………... 199,500
Loss on disposal of Machinery……………………. 10,500
Machinery (old)………………………………. 360,000
Cash…………………………………………… 240,000
To record exchange of machines
4. Receivable from Insurance Company……………... 108,000
Accumulated Depreciation – Machinery…………… 199,500
Loss on Fire………………………………………… 52,500
Machinery……………………………………… 360,000
To record loss of machinery
|
Unit V.
Accounting for Non – Current Liability
Major Components of Non Current Liabilities:
Debenture/Bonds Payable
Procedures:
Issue of Debenture/Bonds Payable:
Issued at Par
Issued at Discount
Issued at Premium
Calculation of Issue price/Price received
· Identify the Stated/Face/Coupon rate of interest (given with Debenture/Bonds)
· Identify the Expected Yield/Market rate of Interest (given with Debenture/Bonds)
· Convert interest rates into Semi-annual, Quarterly and Monthly as per requirement by dividing the interest rate by 2,4, and 12 respectively.
· Calculate the Cash interest payment by multiplying face value of Debentures/Bonds payable with converted Face interest rate.
Question:38. A-5: (RNS) Comprehensive Debenture Transactions
19X1 Sep. | 1 | Cash | 1,00,000 | |
Debentures Payable | 1,00,000 | |||
Issued 16%, 8-year debentures at par | ||||
Nov. | 1 | Cash | 1,18,218 | |
Discount on Debentures Payable | 31,782 | |||
Debentures Payable | 1,50,000 | |||
Issued 10% 10-year convertible debentures at a discount: Present value of 20 semi-annual interest payments of Rs 7,500 each at 7%: Rs 7,500 x 10.59401 Rs 79,455 Present value of Rs 1,50,000 payable after 20 semi-annual periods at 7%: Rs 1,50,000 x 0.25842 38,763 Present value of the debenture issue 1,18,218 | ||||
Dec. | 31 | Debenture Interest Expense | 5,333 | |
Cash | 5,333 | |||
Paid semi-annual interest on 16% debentures for 4 months | ||||
19X2 Mar. | 31 | Debenture Interest Expense | 10,250.00 | |
Amortization of Discount on Debentures Payable | 646.05 | |||
Accrued Interest Payable | 10,250.00 | |||
Discount on Debentures Payable | 646.05 | |||
To accrue interest of Rs 10,250 as shown below and amortize 5/6 of discount of Rs 775.26 on 10% debentures as shown in the schedule at the end: 10% debentures Rs 1,50,000 x .10 x 5/12 = Rs 6,250 + 16% debentures Rs 1,00,000 x .16 x 3/12 = Rs 4,000 | ||||
Apr. | 30 | Debenture Interest Expense | 1,250.00 | |
Accrued Interest Payable | 6,250.00 | |||
Amortisation of Discount on Debentures Payable | 129.21 | |||
Cash | 7,500.00 | |||
Discount on Debentures Payable | 129.21 | |||
Paid semi-annual interest and amortised 1/6 of discount of Rs 775.26 on 10% debentures | ||||
June | 30 | Debenture Interest Expense | 8,000 | |
Cash | 8,000 | |||
Paid semi-annual interest on 16% debentures | ||||
Oct. | 31 | Debenture Interest Expense | 7,500.00 | |
Amortisation of Discount on Debentures Payable | 829.53 | |||
Cash | 7,500.00 | |||
Discount on Debentures Payable | 829.53 | |||
Paid semi-annual interest and amortised discount on 10% debentures | ||||
Nov. | 30 | Debentures Payable | 1,00,000 | |
Debenture Interest Expense | 6,667 | |||
Cash | 1,04,667 | |||
Gain on Retirement of Debentures | 2,000 | |||
Retired 16% debentures at 98 and paid accrued interest of Rs 6,667 (Rs 1,00,000 x .16 x 5/12 = Rs 6,667) | ||||
19X3 Mar. | 31 | Debenture Interest Expense | 6,250.00 | |
Amortisation of Discount on Debentures Payable | 739.67 | |||
Accrued Interest Payable | 6,250.00 | |||
Discount on Debentures Payable | 739.67 | |||
To accrue interest of Rs 6,250 as shown below and amortise 5/6 of discount of Rs 887.60 on 10% debentures as shown in the schedule at the end: 10% debentures Rs 1,50,000 x .10 x 5/12 = Rs 6,250 | ||||
Apr. | 30 | Debenture Interest Expense | 1,250 | |
Accrued Interest Payable | 6,250 | |||
Amortisation of Discount on Debentures Payable | 147.93 | |||
Cash | 7,500 | |||
Discount on Debentures Payable | 147.93 | |||
Paid semi-annual interest and amortised 1/6 of discount of Rs 887.60 on 10% debentures | ||||
Apr. | 30 | Debentures Payable | 1,50,000 | |
Discount on Debentures Payable | 29,289.62 | |||
Share Capital | 90,000.00 | |||
Share Premium | 30,710.38 | |||
Converted 10% debentures payable into 6,000 equity shares according to terms of conversion |
Debenture Discount Amortisation Schedule(Using Effective Interest rate Method)
A Interest Payment Date | B Interest Expenses Debit (E×0.07) | C Cash Credit (150,000×0.05) | D Discount on Debenture payable Credit (B-C) | E Unamortized Discount on Debenture payable (Previous balance in E-D) | F Carrying Value of Debenture payable (Previous balance in F+D) |
Issue date | 31782.00 | 118,218.00 | |||
1 | 8275.26 | 7,500 | 775.26 | 31,006.74 | 118,993.26 |
2 | 8329.53 | 7,500 | 829.53 | 30,177.21 | 119,822.79 |
3 | 8387.60 | 7,500 | 887.60 | 29,289.62 | 120,710.38 |
4 | 8449.73 | 7,500 | 949.73 | 28,339.89 | 121,660.11 |
5 | 8516.21 | 7,500 | 1,016.21 | 27,323.68 | 122,676.32 |
6 | 8587.34 | 7,500 | 1,087.34 | 26,236.34 | 123,763.66 |
7 | 8663.46 | 7,500 | 1,163.46 | 25,072.88 | 124,927.12 |
8 | 8744.90 | 7,500 | 1,244.90 | 23,827.99 | 126,172.01 |
9 | 8832.04 | 7,500 | 1,332.04 | 22,495.94 | 127,504.06 |
10 | 8925.28 | 7,500 | 1,425.28 | 21,070.66 | 128,929.34 |
11 | 9025.05 | 7,500 | 1,525.05 | 19,545.61 | 130,454.39 |
12 | 9131.81 | 7,500 | 1,631.81 | 17,913.80 | 132,086.20 |
13 | 9246.03 | 7,500 | 1,746.03 | 16,167.77 | 133,832.23 |
14 | 9368.26 | 7,500 | 1,868.26 | 14,299.51 | 135,700.49 |
15 | 9499.03 | 7,500 | 1,999.03 | 12,300.47 | 137,699.53 |
16 | 9638.97 | 7,500 | 2,138.97 | 10,161.51 | 139,838.49 |
17 | 9788.69 | 7,500 | 2,288.69 | 7,872.81 | 142,127.19 |
18 | 9948.90 | 7,500 | 2,448.90 | 5,423.91 | 144,576.09 |
19 | 10120.33 | 7,500 | 2,620.33 | 2,803.58 | 147,196.42 |
20 | 10303.75 | 7,500 | 2,803.75 | -0.17 | 150,000.17 |
Question:39. The following information is available concerning the inventory of Pathak Bros:
Units Unit Cost
Beginning Inventory 2,000 Rs. 100
Purchases:
June 10 4,000 120
During the year, Pathak Bros. sold 10,000 units. Its uses a periodic inventory system.
Required:
a. Calculate ending inventory and cost of goods sold for each the following three methods:
i. Weighted Average
ii. FIFO
iii. LIFO
b. Assume an estimated tax rate of 30%. How much more or less will Pathak pay in taxes by using FIFO instead of LIFO?
Question:40. On July 3, 2003 , an explosion destroyed a fireworks supply company. A small amount of inventory valued at Rs. 4,500 was saved. An estimate of amount of inventory lost is needed for insurance purposes. The following information is available:
Inventory, January 1 Rs. 14,200
Purchases, January – June Rs. 77,000
Sales, January – June Rs. 93,500
The normal gross profit ratio is 70%. The insurance company will pay the supply company rs. 50,000
Required:
a. Using the gross profit method, estimate the amount of inventory lost in the explosion.
b. Prepare the journal entry to record the inventory loss and insurance reimbursement.
Question:41. The following amounts are available from the 2002 annual report of Skylark Company(amounts are in million of Rs.)
Cost of sales, buying and occupancy Rs. 27,257
Merchandise inventories, January 1, 2003 ( at the end of 2002) Rs. 4,816
Merchandise inventories, January 1, 2002 (at the end of 2001)
Required:
a. Compute Skylark’s inventory turnover ratio for 2002
b. What is the average length of time it takes to sell item of inventory? Explain your answer.
Question:42. The following information is available for Kamal’s Enterprises on March 31, 2003
a. The balance on the March 31, 2003 , bank statement is Rs. 650,610
b. Not included on the bank statement is a deposit made by Kamal late on March 31 is the amount of Rs. 42,300.
c. A comparison between the cancelled checks listed on the bank statement and the company records indicated that the following checks are outstanding at March 31:
No. 120 Rs. 4,292
No. 170 Rs. 30,700
No. 200 Rs. 1,058
No. 220 Rs. 7,567
d. The bank acts as a collection agency for checks returned for insufficient funds. The March bank statement indicates that one such check amount of Rs. 4,500 was collected and deposited and a collection fee of Rs. 450 charged.
e. Interest earned on the checking account and credited to Kamal’s account during March was Rs. 430. Miscellaneous bank service charges amounted to Rs. 2,200.
f. A comparision between the deposits listed on the bank statement and the company’s books revealed that a customer’s check in the amount of Rs. 125,000 on the bank statement in March but was never credited to the customer’s account on the company’s account.
g. The comparison of checks cleared as per the bank statement with those as per the books revealed that the wrong amount was charted to the company’s account for a check. The amount of the check was rs. 90,900. The amount charged against the company’s account.
Required:
i. Prepare a bank reconciliation statement
ii. Prepare the necessary journal entries o the books of Kamal Enterprises.
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