Advanced Financial Accounting - II - Preston University

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Counter Inc. issued $1,500,000 of convertible 10-year bonds on July 1, 2007. The bonds provide for 12% interestpayable semiannually on January 1 and July 1. The discount in connection with the issue was $34,000 which isbeing amortized monthly on. a straight-line basis.The bonds are convertible after one year into 8 shares of Counter In.c.'s $100 par value common stock for each$1,000 of bonds.On August 1,2008, $150,000 of bonds were turned in for conversion into common. Interest has been accruedmonthly and paid as due. At the time of conversion any accrued interest on bonds being converted is paid in cash.INSTRUCTIONS:(Round to nearest dollar)Prepare the journal entries to record the conversion amortization and interest in connection with the bonds as ofthe following dates:i. August 1, 2008, (Assume the book value method is used).ii. August 31, 2008,iii. December 31, 2008, including closing entries for end-of-year.Presented below is information taken from a bond investment amortization schedule with related fair valuesprovided. These bonds are classified as available-for-sale.12/31/06 " 12/31/07 12/31/08Amortized cost $491,150 $519,442 $550,000Fair value $499,000. $506,000 $550,000INSTRUCTIONS:iv Indicate whether the bonds were purchased at a discount or at a premium.ii. Prepare the adjusting entry to record the bonds at fair value at December 31, 2006. The Securities Fair ValueAdjustment account has a debit balance of $ 1,000 prior to adjustment. ,iii. Prepare the adjusting entry to record the bonds at fair value at December 31, 2007. 'Stine Leasing Company agrees to lease machinery to Potter Corporation on January I, 2007. The followinginformation relates to the lease agreement:a. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of9 years.b. The cost of the machinery is $420,000 and the fair value of the assets on January 1,2007, is $560,000.c. At the end of the lease term the asset reverts to the lessor. At the end of the lease term the asset has aguaranteed residual value of $80,000. Potter depreciates all of its requirement on a straight-line basis.d. The lease agreement requires equal annual rental payments, beginning on January 1, 2007.e. The collectability of the lease payments is reasonably predictable, and there are no important uncertaintiessurrounding the amount of costs yet to be incurred by the lessor. ,f. Stine desires a 10% rate of return on its investments. Potter's incremental borrowing rate is 11%, and thelessor's implicit rate is unknown.INSTRUCTIONS:(Assume the accounting period ends on December 31)i. Discuss the nature of this lease for the both the lessee and the lessor.ii. Calculate the amount of the annual rental payment required.iii. Compute the present value of the minimum lease payments.iv. Prepare the journal entries Potter would make in 2007 and 2008 related to the lease arrangement.v. Prepare the journal entries Stine would make in 2007 and 2008.Page 2 of3
The comparative balance sheets for Shenandoah Corporation show the following information.December 312008 2007Cash $ 38,500 $13,000Accounts receivable 12,250 10,000Inventory 12,000 9,000Investments -0- 3,000Building -0- 29,750Equipment 40,000 20,000Patent 5,000 6,250$107,750 $91,000Allowances for doubtful accounts 3,000 4,500Accumulated depreciation on equipment 2,000 4,500Accumulated depreciation on building -0- 6,000Accounts payable 5,000 3,000Dividends payable -0- 5,000Notes payable, short-term (nontrade) 3,000 4,000Long-term notes payable 31,000 25,000Common stock 43,000 33,000Retained earnings20,750 6^00$107,750 $91,000Additional data related to 2008 are as follows:i. Equipment that had cost $11,000 and was 30% depreciated at time of disposal was sold for $2,500.ii. $10,000 of the long-term note payable was paid by issuing common stock. .iii. Cash dividends paid were $5,000.iv. On January 1, 2008, the building was completely destroyed by a flood. Insurance proceeds on the buildingwere $30,000 (net of $2,000) taxes).v. Investments (available-for-sale) were sold at $3,700 above their cost. The company has made similar salesand investments in the past.vi. Cash of $15,000 was paid for the acquisition of equipment.vii. A long-term note for $16,000 was issued for the acquisition of equipment.viii. Interest of $2,000 and income taxes of $6,500 were paid in cash.INSTRUCTIONS:Prepare a statement of cash flows using the indirect method. Flood damage is unusual and infrequent in that part ofthe country.Friendly Corporation is a diversified company that operates in five different industries: A, B, C, D, and E. Thefollowing information relating to each segment is available for 2007:A R c D F.Sales $40,000 $80,000 $580,000 $35,000 $55,000Cost of goods sold 19,000 50,000 270,000 19,000 30,000Operating expenses 10,000 . 40,000 235,000 12,000 18,000Total expenses 29,000 90,000 505,000 31,000 48,000Operating profit(loss) $11,000 $(10,000) $ 75.000 $ 4,000 $ 7,000Identifiable assets $35,000 $60,000 $500,000 $65,000 $50,000Sales of segments B and C included intersegment sales of $20,000 and $100,000, respectively"INSTRUCTIONS:a. Determine which of the segments are reportable based on the:i. Revenue test. ii. Operating profit (loss) test. Iii. Identifiable assets test.b. Prepare the necessary disclosures required by FASB No. 131. .Page 3 o
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Advanced Financial Accounting - II - Preston University

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