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					                                   Exercises for Lesson 1
                            -------------------------
Section 1. Multiple Choice Questions

  1. The information provided by financial reporting pertains to
      a. individual business enterprises, rather than to industries or an
           economy as a whole or to members of society as consumers.
      b. business industries, rather than to individual enterprises or an
           economy as a whole or to members of society as consumers.
      c. individual business enterprises, industries, and an economy as a
           whole, rather than to members of society as consumers.
      d. an economy as a whole and to members of society as consumers,
           rather than to individual enterprises or industries.

  2. An effective capital allocation process
      a. promotes productivity.
      b. encourages innovation.
      c. provides an efficient market for buying and selling securities.
      d. all of these.

  3. Companies that are listed on a stock exchange are required to submit
      their financial statements to the
      a. AICPA.
      b. APB.
      c. FASB.
      d. SEC.

 4. Compared to the accrual basis of accounting, the cash basis of
      accounting overstates income by the net increase during the
      accounting period of the
          Accounts             Accrued
         Receivable      Expenses Payable
     ——————— —————————
      a.    No                    No
      b.    No                    Yes
      c.    Yes                   No
      d.    Yes                   Yes

5. The following information is available concerning the accounts of
      Franz Company:

      Accounts payable, January 1, 2004                                $18,000
      Cash payments on account during 2004                               75,000
      Purchase discounts taken during 2004
         on 2004 purchases                                                    1,200
      Accounts payable, December 31, 2004                                  10,000

      Assuming the company records purchases at the gross amounts, the




                                                   1
      total purchases for 2004 would be
      a. $82,200.
      b. $65,800.
      c. $68,200.
      d. $67,000.


                              -------------------------
Sectin 2. Excercises

 6.The Financial Accounting Standards Board was established because
    many groups interested in financial reporting believed that the
    Accounting Principles Board was not effective. Discuss the apparent
    advantages that the FASB should have over its earlier counterpart,
    the APB.

7. State the accounting assumption, principle, information character-
       istic, or constraint that is most applicable in the following cases.

      (1). All payments less than $25 are expensed as incurred. (Do not use
          conservatism.)                      ________________________________

      (2). The company employs the same inventory valuation method from
          period to period.                ________________________________

      (3). A patent is capitalized and amortized over the periods benefited.
                                                ________________________________

      (4). Assuming that dollars today will buy as much as ten years ago.
                                               ________________________________

      (5). Rent paid in advance is recorded as prepaid rent.
                                                   ________________________________

      (6). Financial statements are prepared each year.
                                                   ________________________________

      (7). All significant post-balance sheet events are reported.
                                                     ________________________________

      (8). Personal transactions of the proprietor are distinguished from
          business transactions.                     ________________________________

Section 3. Problems

 8. Yates Company's records provide the following information concerning
      certain account balances and changes in these account balances dur-
      ing the current year. Transaction information is missing from each




                                                     2
item below.

INSTRUCTIONS
Prepare the ENTRY to record the missing information for each
account. (Consider each independently.)

1. Accounts Receivable: Jan. 1, balance $41,000, Dec. 31,
    balance $50,000, uncollectible accounts written off during the
    year, $6,000; accounts receivable collected during the year,
    $134,000. Prepare the entry to record sales.
2. Allowance for Doubtful Accounts: Jan. 1, balance $4,000,
    Dec. 31, balance $7,500, uncollectible accounts written off
    during the year, $30,000. Prepare the entry to record bad debt
    expense.
3. Accounts Payable: Jan. 1, balance $25,000, Dec. 31, balance
    $34,000, purchases on account for the year, $110,000. Prepare
    the entry to record payments on account.
4. Interest Receivable: Jan. 1 accrued, $3,000, Dec. 31 accrued,
    $2,100, earned for the year, $20,000. Prepare the entry to
    record cash interest received.




                                        3
                                        ANSWER KEY

SECTION 1.
1.A 2.D 3.D 4.B 5.C

SECTI0N 2.
 6. (1). Smaller membership. The FASB is composed of seven members,
          replacing the relatively large 18-member APB.
    (2). Full-time, remunerated membership. FASB members are well-paid,
          full-time members, appointed for renewable five-year terms. The
          APB members were unpaid and part-time.
    (3). Greater autonomy. The APB was a senior committee of the AICPA,
          whereas the FASB is not an organ of any single professional
          organization. It is appointed by and answerable only to the
          Financial Accounting Foundation.
    (4). Increased independence. APB members retained their private
          positions with firms, companies, or institutions. FASB members
          must sever all such ties.
    (5). Broader representation. All APB members were required to be CPAs
          and members of the AICPA. Currently, it is not necessary to be a
          CPA to be a member of the FASB.


 7.     (1). Materiality constraint.
         (2). Consistency characteristic.
         (3). Matching principle or going concern assumption.
         (4). Monetary unit assumption.
         (5). Matching principle or going concern assumption.
         (6). Periodicity assumption.
         (7). Full disclosure principle.
         (8). Economic entity assumption.

8. 1.      Ending balance        $ 50,000    Ending balance      $ 50,000
           Beginning balance        41,000   Plus:Rec. collected   134,000
                            ————————                 Write-offs       6,000
           Difference                 9,000               ————————
           Uncollectible accts.   6,000 OR                         190,000
           Receivables coll.     134,000 —— Less: Beg. balance     41,000
                              ————————                    ————————
           Sales for period     $149,000    Sales for period      $149,000

            Accounts Receivable .................... 149,000
                Sales ..............................       149,000


        2. Ending balance             $ 7,500            Ending balance   $ 7,500
            Beginning balance            4,000            Write-off          30,000




                                                     4
                       ———————                       ———————
   Difference               3,500 OR                      37,500
   Write-off               30,000 —— Beginning balance      4,000
                       ———————                       ———————
   Adjusting entry       $33,500     Adjusting entry    $33,500

   Bad Debt Expense ...................... 33,500
       Allowance for Doubtful Accounts ...                   33,500

3. Ending balance     $ 34,000      Beginning balance $ 25,000
    Beginning balance    25,000      Plus purchases     110,000
                  ————————                      ————————
    Difference             9,000 OR                      135,000
    Purchases            110,000 —— Less ending balance 34,000
                  ————————                      ————————
    Payments             $101,000      Payments           $101,000

   Accounts Payable ................... 101,000
       Cash ...........................         101,000

4. Revenue Earned             $20,000    Beginning balance   $ 3,000
    Less: Dec. 31 acc.       (2,100)  Plus rev. earned        20,000
    Plus: Jan. 1 accrual     3,000 OR                  ———————
                           ——————— ——                        23,000
   Cash received              $20,900    Less ending balance   2,100
                                                       ———————
                                            Cash received     $20,900

   Cash .............................. 20,900
       Interest Receivable ...........              20,900
           (This entry assumes that the
           $20,000 interest earned was
           first recorded as a receivable.)




                                                5
                                   Exercises for Lesson 2

                            -------------------------
Section 1. Multiple Choice Questions

  1. The debit and credit analysis of a transaction normally takes place
      a. before an entry is recorded in a journal.
      b. when the entry is posted to the ledger.
      c. when the trial balance is prepared.
      d. at some other point in the accounting cycle.

  2. When converting from cash basis to accrual basis accounting, which
      of the following adjustments should be made to cash paid for
      operating expenses to determine accrual basis operating expenses?
      a. Add beginning accrued liabilities.
      b. Add beginning prepaid expense.
      c. Subtract ending prepaid expense.
      d. Subtract interest expense.

  3. Which of the following is an acceptable method of presenting the
      income statement?
      a. A single-step income statement
      b. A multiple-step income statement
      c. A consolidated statement of income
      d. All of these


  4. Which of the following is true about intraperiod tax allocation?
      a. It arises because certain revenue and expense items appear in the
           income statement either before or after they are included in the
           tax return.
      b. It is required for extraordinary items and cumulative effect of
           accounting changes but not for prior period adjustments.
      c. Its purpose is to allocate income tax expense evenly over a
           number of accounting periods.
      d. Its purpose is to relate the income tax expense to the items
           which affect the amount of tax.

  5.The single-step income statement emphasizes
     a. the gross profit figure.
     b. total revenues and total expenses.
     c. extraordinary items and accounting changes more than these are
          emphasized in the multiple-step income statement.
     d. the various components of income from continuing operations.

                              -------------------------
Section 2. Exercises




                                                     6
6. What is disclosed in an income statement?       Be specific.

7. Fill in the appropriate blanks for each of the independent
       situations below.
                                               Company A        Company B        Company C
                                       ————————— ——————— ——————
       Sales                              (a) $_______        $343,400        $540,000
       Beginning inventory                      52,600 (d) _______           110,000
       Net purchases                           190,300         255,600    (g) _______
       Ending inventory                         52,200        105,000           63,000
       Cost of goods sold              (b) _______ (e) _______              407,000
       Gross profit                             85,300         98,000    (h) _______
       Operating expenses               (c) _______            50,000          48,000
       Income before taxes                     10,000 (f) _______      (i) _______

                              -------------------------
Section 3.Problems

8. The following information is available for Renn Corporation's first
      year of operations:

             Payment for merchandise purchases                    $350,000
             Ending merchandise inventory                          110,000
             Accounts payable (balance at end of year)              60,000
             Collections from customers                           270,000

      The balance in accounts payable relates only to merchandise pur-
      chases. All merchandise items were marked to sell at 40% above
      cost. What should be the ending balance in accounts receivable,
      assuming all accounts are deemed collectible?

9. Presented below is information related to Gregg Company.

        Retained earnings, December 31, 2003                             $ 650,000
        Sales                                                             1,600,000
        Selling and administrative expenses                                 240,000
        Hurricane loss (pre-tax) on plant (extraordinary item)              250,000
        Cash dividends declared on common stock                               33,600
        Cost of goods sold                                                  960,000
        Gain resulting from computation error on depreciation
            charge in 2002 (pre-tax)                                         520,000
        Other revenue                                                         60,000
        Other expenses                                                        50,000

      INSTRUCTIONS
      Prepare in good form a multiple-step income statement for the year
      2004. Assume a 30% tax rate and that 100,000 shares of common stock
      were outstanding during the year.




                                                    7
                                      ANSWER KEY

Section 1 Multiple Choice Questions

1.A 2.C 3.D 4.D 5.B

     4. $246,000 - $60,000 - $34,000 - $12,000 = $140,000.

Section 2 Exercises

6. An income statement discloses revenues, expenses, gains, and losses.
      It discloses the net income (loss) for a period and earnings per
      share data. The income statement may also include discontinued
      operations (net of tax), extraordinary items (net of tax), and
      cumulative effect of a change in accounting principle (net of tax).

7. (a) $276,000         (d) $94,800         (g) $360,000
       (b) $190,700         (e) $245,400        (h) $133,000
       (c) $75,300          (f) $48,000         (i) $85,000


8. Since this is the first year of operations and there were $270,000
      of accounts receivable collected, one must compute total sales to
      determine the ending balance in accounts receivable. Cost of goods
      sold is $300,000 assuming the accounts payable are for inventory
      (the $350,000 constitutes only payments made for purchases). Since
      the markup is 40% on cost, the sales are $420,000 ($300,000 x
      140%). Sales of $420,000 less collections of $270,000 results in an
      ending accounts receivable balance of $150,000 as calculated below.

                 Cash purchases                        $350,000
                 A/P balance                               60,000
                                                      ————————
                Total purchases                         410,000
                Ending inventory                        110,000
                                                      ————————
                 Cost of goods sold                    300,000
                                                           x 140%
                                                      ————————
                 Sales                                    420,000
                 Less collections                        270,000
                                                      ————————
                    Ending A/R                           $150,000


9.                                    Gregg Company
                                       INCOME STATEMENT




                                                 8
                     For the Year Ended December 31, 2004

Sales                                                         $1,600,000
Cost of goods sold                                                960,000
                                                            ——————————
Gross profit                                                     640,000
Selling and administrative expenses                              240,000
                                                            ——————————
Income from operations                                            400,000
Other revenue                                                      60,000
Other expenses                                                    (50,000)
                                                            ——————————
Income before taxes                                             410,000
Income taxes                                                     (123,000)
                                                            ——————————
Income before extraordinary item                                  287,000
Extraordinary loss, net of applicable income
  taxes of $75,000                                              (175,000)
                                                            ——————————
Net income                                                    $ 112,000

Per share of common stock——
    Income before extraordinary item     $2.87
    Extraordinary item, net of tax      (1.75)
                                       —————
   Net income                           $1.12




                                         9
                                  Exercises for Lesson3
Section 1. Multiple Choice Questions

  1. In a statement of cash flows, payments to acquire debt instruments
      of other entities (other than cash equivalents) should be classified
      as cash outflows for
      a. operating activities.
      b. investing activities.
      c. financing activities.
      d. lending activities.

  2. Free cash flow is calculated as net cash provided by operating
      activities less
      a. capital expenditures.
      b. dividends.
      c. capital expenditures and dividends.
      d. capital expenditures and depreciation.

  3. Which of the following should not be considered as a current asset
      in the balance sheet?
      a. Installment notes receivable due over 18 months in accordance
          with normal trade practice.
      b. Prepaid taxes which cover assessments of the following operating
          cycle of the business.
      c. Equity or debt securities purchased with cash available for
          current operations.
      d. The cash surrender value of a life insurance policy carried by a
          corporation, the beneficiary, on its president.

                              ------------------------------
      A flood damaged a building and contents. Floods are unusual and
      infrequent in this area. The receipts from insurance companies
      totaled $500,000, which was $150,000 less than the book values. The
      tax rate is 30%.

  4. Stark Company sold some of its plant assets during 2004. The
      original cost of the fixed assets was $450,000 and the accumulated
      depreciation at date of sale was $420,000. The proceeds from the
      sale of the plant assets were $63,000. The information concerning
      the sale of the plant assets should be shown on Stark's statement
      of cash flows (indirect method) for the year ended December 31,
      2004, as a(n)
      a. subtraction from net income of $33,000 and a $30,000 increase in
          cash flows from financing activities.
      b. addition to net income of $33,000 and a $63,000 increase in cash
          flows from investing activities.
      c. subtraction from net income of $33,000 and a $63,000 increase in




                                                 10
          cash flows from investing activities.
      d. addition of $63,000 to net income.

 5. In a statement of cash flows, the cash flows from investing
       activities section should report
       a. the issuance of common stock in exchange for a factory building.
       b. stock dividends received.
       c. a major repair to machinery charged to accumulated depreciation.
       d. the assignment of accounts receivable.
                               -------------------------
Section 2. Exercises

6. Define current assets without using the word "asset."

Section 3. Problems


7. Edwards, Inc. has prepared the following comparative balance sheets
      for 2003 and 2004:
                                                                2004        2003
                                                           ————— ————
           Cash                                             $ 198,000    $102,000
           Receivables                                         106,000     78,000
           Inventory                                            100,000   120,000
           Prepaid expenses                                     12,000    18,000
           Plant assets                                        840,000   700,000
           Accumulated depreciation                          (300,000)  (250,000)
           Patent                                             102,000    116,000
                                                       ——————— —————
                                                            $1,058,000  $884,000

           Accounts payable                              $ 102,000   $112,000
           Accrued liabilities                              40,000     28,000
           Mortgage payable                                 ———       300,000
           Preferred stock                                350,000    ———
           Additional paid-in capital——preferred           80,000    ———
           Common stock                                   400,000    400,000
           Retained earnings                               86,000     44,000
                                                       ——————— —————
                                                          $1,058,000 $884,000

      1. The Accumulated Depreciation account has been credited only for
          the depreciation expense for the period.

      2. The Retained Earnings account has been charged for dividends of
          $92,000 and credited for the net income for the year.

          The income statement for 2004 is as follows:




                                                  11
                      Sales                       $1,320,000
                      Cost of sales                726,000
                                                   ——————
                      Gross profit                 594,000
                      Operating expenses            460,000
                                                   ——————
                      Net income                  $ 134,000

INSTRUCTIONS
    (a) From the information above, prepare a statement of cash flows
         (indirect method) for Edwards, Inc. for the year ended
         December 31, 2004.

     (b) From the information above, prepare a schedule of cash provided
          by operating activities using the direct method.




                                             12
                                       ANSWER KEY

Section 1 Multiple Choice Questions
1.b 2.c 3.d 4..c 5c

 4. $63,000 - ($450,000 - $420,000) = $33,000, $63,000 (proceeds).


Section 2 Exercises
6. Current assets are resources (future economic benefits) expected to
      be converted to cash, sold, or consumed in one year or the
      operating cycle, whichever is longer.


7. (a)                              Edwards, Inc.
                                   Statement of Cash Flows
                          For the Year Ended December 31, 2004
                                Increase (Decrease) in Cash

         Cash flows from operating activities
           Net income                                                         $134,000
           Adjustments to reconcile net income to
            net cash provided by operating activities:
                Depreciation expense                         $ 50,000
                Patent amortization                            14,000
                Increase in receivables                       (28,000)
                Decrease in inventory                          20,000
                Decrease in prepaid expenses                    6,000
                Decrease in accounts payable                   (10,000)
                Increase in accrued liabilities                 12,000       64,000
                                                          ————————          ————————
         Net cash provided by operating activities                          198,000

         Cash used in investing activities
           Purchase of plant assets                                       (140,000)

         Cash flows from financing activities
           Payment of cash dividend                            (92,000)
           Retirement of mortgage payable                     (300,000)
           Sale of preferred stock                            430,000
                                                              ————————
         Net cash provided by financing activities                      38,000
                                                                   ————————
         Net increase in cash                                            96,000

         Cash, January 1, 2004                                               102,000




                                                     13
                                                        ————————
Cash, December 31, 2004                                     $198,000


(b)                           Edwards, Inc.
           Schedule of Cash Provided by Operating Activities
                    For Year Ended December 31, 2004

Cash flows from operating activities
  Cash received from customers (1)                             $1,292,000
  Cash paid to suppliers (2)                    $716,000
  Operating expenses paid (3)                     378,000       1,094,000
                                            ————————           —————
Net cash provided by operating activities                      $ 198,000


(1) $1,320,000 - $28,000
(2) $726,000 - $20,000 + $10,000
(3) $460,000 - $50,000 - $14,000 - $6,000 - $12,000




                                            14
                                Exercises for Lesson 4
Section 1. Multiple Choice Questions

  1. Under the completed-contract method
      a. revenue, cost, and gross profit are recognized during the
           production cycle.
      b. revenue and cost are recognized during the production cycle, but
           gross profit recognition is deferred until the contract is
          completed.
      c. revenue, cost, and gross profit are recognized at the time the
          contract is completed.
      d. none of these.

  2. Venice Construction Company uses the percentage-of-completion method
      of accounting. In 2004, Venice began work on a contract it had
      received which provided for a contract price of $10,000,000. Other
      details follow:
                                                                        2004
                                                         ——————————
          Costs incurred during the year                      $4,800,000
          Estimated costs to complete as of
             December 31                                        3,200,000
          Billings during the year                              4,400,000
          Collections during the year                           2,600,000

     What should be the gross profit recognized in 2004?
     a. $400,000.
     b. $5,200,000.
     c. $1,200,000.
     d. $2,000,000.
                             ------------------------------
     In 2004, Drake Corporation began construction work under a three-
     year contract. The contract price is $4,200,000. Drake uses the
     percentage-of-completion method for financial accounting purposes.
     The income to be recognized each year is based on the proportion of
     costs incurred to total estimated costs for completing the contract.
     The financial statement presentations relating to this contract at
     December 31, 2004, follow:

          Balance Sheet
          —————————————
          Accounts receivable——construction
            contract billings                                         $175,000
          Construction in progress                           $525,000
          Less contract billings                             420,000
                                                              ————————
          Costs and recognized profit in excess




                                               15
             of billings                                                          105,000


           Income Statement
           ————————————————
           Income (before tax) on the contract
             recognized in 2004                                               $105,000

  3. What was the initial estimated total income before tax on this
      contract?
      a. $525,000.
      b. $560,000.
      c. $700,000.
      d. $840,000.

 4. Under the cost-recovery method of revenue recognition,
      a. income is recognized on a proportionate basis as the cash is
           received on the sale of the product.
      b. income is recognized when the cash received from the sale of the
           product is greater than the cost of the product.
      c. income is recognized immediately.
      d. none of these.

                            -------------------------
Section 2. Exercises

 5. Tanner Furniture Company concluded its FIRST year of operations in
      which it made sales of $1,500,000, ALL on installment. Collections
      during the year from down payments and installments totaled
      $600,000. Purchases for the year totaled $900,000; the cost of
      merchandise on hand at the end of the year was $180,000.

      INSTRUCTIONS
      Using the installment-sales method, make summary entries to record:
      (a) the installment sales and cash collections;
      (b) the cost of installment sales;
      (c) the unrealized gross profit;
      (d) the realized gross profit.
6. On February 1, 2003, Miley Contractors agreed to construct a
      building at a contract price of $5,600,000. Miley estimated total
      construction costs would be $4,000,000 and the project would be
      finished in 2005. Information relating to the costs and billings for
      this contract is as follows:
                                           2003         2004             2005
                              —————————— ———— ————
      Total costs incurred to date $1,500,000 $2,640,000 $4,600,000
      Estimated costs to complete 2,500,000           1,760,000            -0-
      Customer billings to date        2,200,000      4,000,000       5,600,000




                                                   16
     Collections to date              2,000,000          3,500,000    5,500,000

     INSTRUCTIONS
     Fill in the correct amounts on the following schedule. For
     percentage-of-completion accounting and for completed-contract
     accounting, show the gross profit that should be recorded for 2003,
     2004, and 2005.

        Percentage-of-Completion     Completed-Contract
 ——————————————————              ———————————————
               Gross Profit             Gross Profit
               ————————————        ————————————
     2003      ____________        2003   ____________

         2004        ____________                              2004     ____________

         2005        ____________                              2005     ____________

                            -------------------------
Section 3.Problems

 7. Cherry Construction specializes in the construction of commercial
      and industrial buildings. The contractor is experienced in bidding
      long-term construction projects of this type, with the typical
      project lasting fifteen to twenty-four months. The contractor uses
      the percentage-of-completion method of revenue recognition since,
      given the characteristics of the contractor's business and con-
      tracts, it is the most appropriate method. Progress toward comple-
      tion is measured on a cost to cost basis. Cherry began work on a
      lump-sum contract at the beginning of 2004. As bid, the statistics
      were as follows:

     Lump-sum price (contract price)                                      $4,000,000
     Estimated costs
         Labor                                            $ 850,000
         Materials and subcontractor                       1,750,000
         Indirect costs                                      400,000  3,000,000
                                                        ———————— ——————
                                                                     $1,000,000

     At the end of the first year, the following was the status of the contract:

     Billings to date                                                    $2,230,000
     Costs incurred to date
         Labor                                              $ 414,000
         Materials and subcontractor                         1,098,000
         Indirect costs                                      150,000   1,662,000
                                                                  ————————




                                                   17
Latest forecast total cost                                        3,000,000

It should be noted that included in the above costs incurred to date
were standard electrical and mechanical materials stored on the job
site, but not yet installed, costing $102,000. These costs should
not be considered in the costs incurred to date.

INSTRUCTIONS
(a) Compute the percentage of completion on the contract at the end
      of 2004.
(b) Indicate the amount of gross profit that would be reported on
      this contract at the end of 2004.
(c) Make the journal entry to record the income (loss) for 2004 on
      Cherry's books.
(d) Indicate the account(s) and the amount(s) that would be shown on
      the balance sheet of Cherry Construction at the end of 2004
      related to its construction accounts. Also indicate where these
      items would be classified on the balance sheet. Billings
      collected during the year amounted to $1,960,000.
(e) Assume the latest forecast on total costs at the end of 2004 was
      $4,100,000. How much income (loss) would Cherry report for
      the year 2004?




                                          18
                                             ANSWER KEY

Section 1 Mutiple Chice Questins
1.C 2.C 3.D 4.B

 5. (a) Installment Accounts Receivable ........... 1,500,000
               Installment Sales .......................             1,500,000

            Cash ...................................... 600,000
              Installment Accounts Receivable .........                        600,000

      (b) Cost of Installment Sales ($900,000 -
            $180,000) ................................ 720,000
             Inventory ...............................               720,000

      (c) Installment Sales ......................... 1,500,000
              Cost of Installment Sales ...............                     720,000
              Deferred Gross Profit (52%) .............                       780,000

      (d) Deferred Gross Profit (52% x $600,000) ....             312,000
             Realized Gross Profit on Installment
              Sales ..................................              312,000

6.     Percentage-of-Completion         Completed-Contract
     ————————————————           ——————————————
                  Gross Profit                Gross Profit
           ————————————            ————————————
       2003      $600,000a              2003         ——
                  ————————             ——————————
       2004      $120,000b              2004         ——
                  ————————             ——————————
       2005      $280,000c              2005     $1,000,000d
                  ————————             ——————————
     a $1,500,000
       —————————— x $1,600,000 = $600,000
       $4,000,000

      b   $2,640,000
          —————————— x $1,200,000 = $720,000
          $4,400,000

          Less 2003 gross profit (600,000)
                               ————————
          2004 gross profit       $120,000

      c   Total revenue          $5,600,000
          Total costs             4,600,000
                            ——————————




                                                        19
      Total gross profit  1,000,000
      Recognized to date     (720,000)
    M                 ——————————
      2005 gross profit   $ 280,000

    d   Total revenue         $5,600,000
        Total costs            4,600,000
                      ——————————
        Total gross profit $1,000,000


7. (a) Costs to date                 $1,662,000
          Less materials on job site    (102,000)
                          ——————————
                                      $1,560,000

         Costs Incurred to Date
         ———————————                     = Percentage of Completion
         Total Estimated Costs

          $1,560,000
          —————————— = 52%
          $3,000,000

    (b) 52% x $4,000,000 =    $2,080,000
         Costs incurred         1,560,000
                        ——————————
         Gross profit          $ 520,000

    (c) Construction Expense .................. 1,560,000
         Construction in Process ...............    520,000
           Revenue from Long-Term Project ......                      2,080,000

    (d) Current Assets
         ——————————————
         Accounts receivable $270,000 ($2,230,000 - $1,960,000)

         Current Liability
         —————————————————
           Billings in excess of
            contract costs and
            recognized profit    $150,000 ($2,230,000 - $2,080,000)

    (e) Total loss reported in 2004
            Contract price                               $4,000,000
            Estimated cost to complete                  4,100,000
                                                            ——————————
           Amount of loss to be reported              $ (100,000)




                                                20
                        Exercises for Lesson 5
                           -------------------------
Section 1.Multiple Choice Questions

  1. Which table would show the largest factor for an interest rate of 8%
      for five periods?
      a. Future value of an ordinary annuity of 1
      b. Present value of an ordinary annuity of 1
      c. Future value of an annuity due of 1
      d. Present value of an annuity due of 1

  2. On May 1, 2004, a company purchased a new machine which it does not
      have to pay for until May 1, 2006. The total payment on May 1, 2006
      will include both principal and interest. Assuming interest at a 10%
      rate, the cost of the machine would be the total payment multiplied
      by what time value of money factor?
      a. Future value of annuity of 1
      b. Future value of 1
      c. Present value of annuity of 1
      d. Present value of 1

  3. An amount is deposited for eight years at 8%. If compounding occurs
      quarterly, then the table value is found at
      a. 8% for eight periods.
      b. 2% for eight periods.
      c. 8% for 32 periods.
      d. 2% for 32 periods.

                            ------------------------------
       Consider the following 8% interest factors.

                         Present Value of                Future Value of
                         Ordinary Annuity                 Ordinary Annuity
               —————————————                            —————————
               7 periods     5.2064                             8.92280
               8 periods     5.7466                           10.63663
               9 periods     6.2469                           12.48756

 4. An accountant wishes to find the present value of an annuity of $1
      payable at the beginning of each period at 10% for eight periods.
      The accountant has only one present value table which shows the
      present value of an annuity of $1 payable at the end of each period.
      To compute the present value, the accountant would use the present
      value factor in the 10% column for
      a. seven periods.
      b. eight periods and multiply by (1 + .10).
      c. eight periods.
      d. nine periods and multiply by (1 - .10).




                                                   21
                             -------------------------
Section 2. Exercises

 5. If $10,000 is deposited annually starting on January 1, 2004 and it
       earns 9%, how much will accumulate by December 31, 2013?

 6. Find the present value of an investment in equipment if it is
      expected to provide annual savings of $12,000 for 10 years and to
      have a resale value of $30,000 at the end of that period. Assume an
      interest rate of 9% and that savings are realized at year end.
                             -------------------------
Section 3. Problems

 7. Dolan Company owns a plot of land on which buried toxic wastes have
      been discovered. Since it will require several years and a
      considerable sum of money before the property is fully detoxified
      and capable of generating revenues, Dolan wishes to sell the land
      now. It has located two potential buyers: Buyer A, who is willing
      to pay $385,000 for the land now, and Buyer B, who is willing to
      make 20 annual payments of $60,000 each, with the first payment to
      be made 5 years from today. Assuming that the appropriate rate of
      interest is 9%, to whom should Dolan sell the land? Show
      calculations.




                                                    22
                                        ANSWER KEY

Section 1.Multiple Choice Questions
1.C 2.D 3.D 4..B
 4. $30,000 x (7.5233 - 1) = $195,699 or    $30,000 x 5.9847 x 1.09.
Section2 Exercises


 5. Future value of an annuity due of $10,000 for 10 periods at 9%
      ($10,000 x 15.19293 x 1.09) = $165,603.

 6. Present value of $12,000 for 10 periods at 9%
         (6.41766 x $12,000) =                                $77,012
      Present value of $30,000 discounted for 10
         periods at 9% (.42241 x $30,000) =                  12,672
                                                           ———————
     Present value of investment in equipment               $89,684

 7. Buyer A. The present value of the purchase price is $385,000.

 Buyer B. The present value of the purchase price is:
    Present value of ordinary annuity of $60,000 for 24
       periods at 9%                                                    9.70661
    Less present value of ordinary annuity of $60,000
       for 4 periods (deferred) at 9%                              3.23972
                                                                ————————
     Difference                                                      6.46689
     Multiplied by annual payments                                x $60,000
                                                                ————————
     Present value of payments                                      $388,013

 Conclusion:   Dolan should sell to Buyer B.




                                                23
                                Exercises for Lesson 6

Section 1.Multiple Choice Questions
 1. Linn Co.'s allowance for uncollectible accounts was $184,000 at the
      end of 2004 and $180,000 at the end of 2003. For the year ended
      December 31, 2004, Linn reported bad debt expense of $26,000 in its
      income statement. What amount did Linn debit to the appropriate
      account in 2004 to write off actual bad debts?
      a. $4,000
      b. $22,000
      c. $26,000
      d. $30,000

 2. On the December 31, 2004 balance sheet of Zebb Co., the current
      receivables consisted of the following:

        Trade accounts receivable                                     $ 85,000
        Allowance for uncollectible accounts                          (2,000)
        Claim against shipper for goods lost in transit
          (November 2004)                                              3,000
        Selling price of unsold goods sent by Zebb on
         consignment at 130% of cost (not included in
          Zebb's ending inventory)                                    26,000
        Security deposit on lease of warehouse used for
          storing some inventories                              30,000
                                                           ————————
             Total                                             $142,000

      At December 31, 2004, the correct total of Zebb's current net
      receivables was
      a. $86,000.
      b. $112,000.
      c. $116,000.
      d. $142,000.

 3. If the month-end bank statement shows a balance of $28,000, out-
       standing checks are $12,000, a deposit of $4,000 was in transit at
       month end, and a check for $500 was erroneously charged by the bank
       against the account, the correct balance in the bank account at
       month end is
       a. $19,500.
       b. $20,500.
       c. $12,500.
       d. $35,500.

 4. Which of the following is NOT a permissible method of calculating a
     bonus to an employee?




                                               24
      a. The bonus is based on income before deductions for the bonus and
          income taxes.
      b. The bonus is based on income after deduction of the bonus but
          before deduction of income taxes.
      c. The bonus is based on income after deductions for the bonus and
          income taxes.
      d. All of these are permissible.

Section 2. Exercises

 5. When a company has a policy of making sales for which credit is
     extended, it is reasonable to expect a portion of those sales to be
     uncollectible. As a result of this, a company must recognize bad
     debt expense. There are basically two methods of recognizing bad
     debt expense: (1) direct write-off method, and (2) allowance method.

      INSTRUCTIONS
      (a) Describe fully both the direct write-off method and the
           allowance method of recognizing bad debt expense.

      (b) Discuss the reasons why one of the above methods is preferable
           to the other and the reasons why the other method is not usually
           in accordance with generally accepted accounting principles.

6. A trial balance before adjustment included the following:

                                                    Debit            Credit
                                                 —————              ——————
      Accounts receivable                         $90,000
      Allowance for doubtful accounts                                 730
      Sales                                                          $360,000
      Sales returns and allowances                   8,000

      Give journal entries assuming that the estimate of uncollectibles is
      determined by taking (1) 6% of gross accounts receivable and (2) 2%
      of net sales.

Section 3.Problems

  7. At the financial statement date of December 31, 2004, the
      liabilities outstanding of Nyland Corporation included the
      following:

      1. Cash dividends on common stock, $50,000, payable on January 15,
          2005.
      2. Note payable to Girard State Bank, $470,000, due January 20,
          2005.
      3. Serial bonds, $1,000,000, of which $200,000 mature during 2005.




                                                25
4. Note payable to Third National Bank, $400,000, due January 27,
    2005.

The following transactions occurred early in 2005:

January 15:    The cash dividends on common stock were paid.

January 20:    The note payable to Girard State Bank was paid.

January 25:    The corporation entered into a financing agreement
                 with Girard State Bank, enabling it to borrow up to
                 $500,000 at any time through the end of 2007. Amounts
                 borrowed under the agreement would bear interest at 1%
                 above the bank's prime rate and would mature 3 years
                 from the date of the loan. The corporation
                 immediately borrowed $400,000 to replace the cash used
                 in paying its January 20 note to the bank.

January 26:    40,000 shares of common stock were issued for
                 $400,000. $350,000 of the proceeds was used to
                 liquidate the note payable to Third National Bank.

February 1:    The financial statements for 2004 were issued.

INSTRUCTIONS
Prepare a partial balance sheet for Nyland Corporation, showing the
manner in which the above liabilities should be presented at
December 31, 2004. The liabilities should be properly classified
between current and long-term, and appropriate note disclosure
should be included.




                                         26
                                  ANSWER KEY
Section 1 Multiple Choice Questions
1.b 2.a 3.b 4..d


5. (a) There are basically two methods of recognizing bad debt expense:
            (1) direct write-off and (2) allowance.

           The direct write-off method requires the identification of
           specific balances that are deemed to be uncollectible before any
           bad debt expense is recognized. At the time a specific account
           is deemed uncollectible, the account is removed from accounts
           receivable and a corresponding amount of bad debt expense is
           recognized.

           The allowance method requires an estimate of bad debt expense
           for a period of time by reference to the composition of the
           accounts receivable balance at a specific point in time (aging)
           or to the overall experience with credit sales over a period of
           time. Thus, total bad debt expense expected to arise as a result
           of operations for a specific period is estimated, the valuation
           account (allowance for doubtful accounts) is appropriately
           adjusted, and a corresponding amount of bad debt expense is
           recognized. As specific accounts are identified as
           uncollectible, the account is written off. It is removed from
           accounts receivable and a corresponding amount is removed from
           the valuation account (allowance for doubtful accounts). Net
           accounts receivable do not change, and there is no charge to bad
           debt expense when specific accounts are identified as
           uncollectible and written off using the allowance method.

      (b) The allowance method is preferable because it matches the cost
           of making a credit sale with the revenues generated by the sale
           in the same period and achieves a proper carrying value for
           accounts receivable at the end of a period. Since the direct
           write-off method does not recognize the bad debt expense until a
           specific amount is deemed uncollectible, which may be in a
           subsequent period, it does not comply with the matching
           principle and does not achieve a proper carrying value for
           accounts receivable at the end of a period.

6. (1) Bad Debt Expense.......................... 4,670
              Allowance for Doubtful Accounts ........             4,670


                 Gross receivables                   $90,000




                                                27
                Rate                                  6%
                                                     ———————
                Total allowance needed               5,400
                Present allowance                     (730)
                                                     ———————
                Adjustment needed                    $ 4,670

     (2) Bad Debt Expense .......................... 7,040
             Allowance for Doubtful Accounts.........               7,040
               Sales                                     $360,000
               Sales returns and allowances             8,000
                                                      ————————
               Net sales                                  352,000
               Rate                                              2%
                                                      ————————
               Bad debt expense                         $ 7,040

7. Current liabilities:
        Dividends payable on common stock               $ 50,000
        Notes payable——Girard State Bank                   470,000
        Currently maturing portion of serial
             bonds                                       200,000
                                                    ————————
              Total current liabilities                $ 720,000

     Long-term debt:
       Note payable——Third National Bank,
         refinanced in January, 2005——Note 1    350,000
       Serial bonds not maturing currently      800,000
                                           ————————
         Total long-term debt                  1,150,000
                                           ——————————
              Total liabilities                 $1,870,000

     Note 1: On January 26, 2005, the corporation issued 40,000 shares of
     common stock and received proceeds totaling $400,000, of which
     $350,000 was used to liquidate a note payable that matured on
     January 27, 2005. Accordingly, such note payable has been classified
     as long-term debt at December 31, 2004.




                                               28
                                  Exercises for Lesson 7
                             -------------------------
Section 1.Multiple Choice

  1. Cross Co. accepted delivery of merchandise which it purchased on
      account. As of December 31, Cross had recorded the transaction, but
      did not include the merchandise in its inventory. The effect of this
      on its financial statements for December 31 would be
      a. net income, current assets, and retained earnings were
          understated.
      b. net income was correct and current assets were understated.
      c. net income was understated and current liabilities were
          overstated.
      d. net income was overstated and current assets were understated.

  2. The use of a Discounts Lost account implies that the recorded cost
      of a purchased inventory item is its
      a. invoice price.
      b. invoice price plus the purchase discount lost.
      c. invoice price less the purchase discount taken.
      d. invoice price less the purchase discount allowable whether taken
           or not.

                           ------------------------------
     During 2004, Elway Corporation transferred inventory to Howell
     Corporation and agreed to repurchase the merchandise early in 2005.
     Howell then used the inventory as collateral to borrow from Norwalk
     Bank, remitting the proceeds to Elway. In 2005 when Elway
     repurchased the inventory, Howell used the proceeds to repay its
     bank loan.

  3. This transaction is known as a(n)
      a. consignment.
      b. installment sale.
      c. assignment for the benefit of creditors.
      d. product financing arrangement.

                             ------------------------------
     Dexter, Inc. is a calendar-year corporation. Its financial state-
     ments for the years 2004 and 2003 contained errors as follows:

                                               2004              2003
                                   —————————                ———————
       Ending inventory              $8,000 overstated       $14,000 overstated
       Depreciation expense         $4,000 understated      $16,000 overstated

 4. Howe Company's accounting records indicated the following
      information:




                                                    29
             Inventory, 1/1/04                          $ 300,000
             Purchases during 2004                       1,500,000
             Sales during 2004                           2,000,000

      A physical inventory taken on December 31, 2004, resulted in an
      ending inventory of $350,000. Howe's gross profit on sales has
      remained constant at 30% in recent years. Howe suspects some
      inventory may have been taken by a new employee. At December 31,
      2004, what is the estimated cost of missing inventory?
      a. $50,000.
      b. $75,000.
      c. $100,000.
      d. $150,000.

                            -------------------------
Section 2.Exercises

 5. Part A. Horne Company has a beginning inventory in year one of
      —————— $300,000 and an ending inventory of $385,000. The price
                level has increased from 100 at the beginning of the year to
                110 at the end of year one. Calculate the ending inventory
                under the dollar-value LIFO method.

      Part B. At the end of year two, Horne's inventory is $450,000 in
      —————— terms of a price level of 120 which exists at the end of
                year two. Calculate the inventory at the end of year two
                continuing the use of the dollar-value LIFO method.


 6. The December 31, 2004 inventory of Dwyer Company consisted of four
      products, for which certain information is provided below.

                                                 Estimated    Expected   Normal
            Original         Replacement          Disposal    Selling  Profit
    Product  Cost               Cost                 Cost       Price  on Sales
   ———— ————                 —————               —————       ————— —————
       A    $ 35.00             $ 32.00           $ 6.50     $ 50.00      15%
       B    $ 52.00            $ 51.00            $10.00     $ 60.00      25%
       C    $140.00            $135.00            $25.00     $200.00       30%
       D    $ 24.00             $ 21.00           $ 3.00     $ 35.00      20%

      INSTRUCTIONS
      Using the lower of cost or market approach applied on an individual-
      item basis, compute the inventory valuation that should be reported
      for each product on December 31, 2004.
                            -------------------------
Section 3.Problems




                                                   30
 7. Slone Company sells TVs. The perpetual inventory was stated as
      $30,500 on the books at December 31, 2004. At the close of the
      year, a new approach for compiling inventory was used and apparently
      a satisfactory cut-off for preparation of financial statements was
      not made. Some events that occurred are as follows.

     1. TVs shipped to a customer January 2, 2005, costing $5,000 were
         included in inventory at December 31, 2004. The sale was
         recorded in 2005.

     2. TVs costing $10,000 received December 30, 2004, were recorded as
         received on January 2, 2005.

     3. TVs received during 2004 costing $4,600 were recorded twice in
         the inventory account.

     4. TVs shipped to a customer December 28, 2004, f.o.b. shipping
         point, which cost $15,000, were not received by the customer
         until January, 2005. The TVs were included in the ending
         inventory.

     5. TVs on hand that cost $6,100 were never recorded on the books.

     INSTRUCTIONS
     Compute the correct inventory at December 31, 2004.

8. On December 31, 2004, Beal Company's inventory burned. Sales and
      purchases for the year had been $1,300,000 and $980,000,
      respectively. The beginning inventory (Jan. 1, 2004) was $190,000;
      in the past Beal's gross profit has averaged 40% of selling price.

     INSTRUCTIONS
     Compute the estimated cost of inventory burned, and give entries as
     of December 31, 2004 to close merchandise accounts.




                                              31
                                  ANSWER KEY

Section 1 Multiple Choice Questions
1.A 2.D 3.D 4..A

 4. $2,000,000 x .70 = $1,400,000 (COGS)
      $300,000 + $1,500,000 - $1,400,000 - $350,000 = $50,000.

 5. Part A.
  ——————              Computation of Ending Inventory, Year One
 ——————————————————————————————————
      Ending Inventory Layers at                     Ending Inventory
        at Base-Year     Base-Year                     at Dollar-Value
             Price         Prices      Price Index         LIFO
—————————— ———— ————— ————————————
      $385,000/1.10 =    $300,000 x         1,00     =     $300,000
         $350,000          $50,000 x          1.10     =        55,000
                                                           ————————
                                                               $355,000

       Part B.
       ——————           Computation of Ending Inventory, Year Two
      ——————————————————————————————————
       Ending Inventory Layers at                    Ending Inventory
        at Base-Year    Base-Year                      at Dollar-Value
             Price        Prices     Price Index           LIFO
     ——————— —————— ————— ————————————
       $450,600/1.20 =  $300,000 x        1.00     =       $300,000
           $375,000       $50,000 x         1.10    =          55,000
                           $25,000 x         1.20 =           30,000
                                                       ————————
                                                           $385,000

6.                                                Desig-       Lower of
                                                    nated        Cost or
      Prod.    Ceiling               Floor          Market Cost Market
     ——— ——————                 —————            ————— ———       ———
       A    $50.00 - $6.50      $43.50 - $7.50
               = $43.50              = $36.00        $ 36.00 $ 35.00 $ 35.00

        B    $60.00 - $10.00   $50.00 - $15.00
                = $50.00            = $35.00         $ 50.00 $ 52.00 $ 50.00

        C   $200.00 - $25.00   $175.00 - $60.00
                = $175.00          = $115.00         $135.00 $140.00 $135.00

        D    $35.00 - $3.00     $32.00 - $7.00




                                             32
                  = $32.00                  = $25.00           $ 25.00 $ 24.00 $ 24.00

7. Inventory per books                                                 $30,500
      Add: Shipment received 12/30/04                          $10,000
            TVs on hand                                         6,100 16,100
                                                            —————— ———
                                                                           46,600
             Deduct: TVs recorded twice                            4,600
               TVs shipped 12/28/04                               15,000 19,600
                                                            ——————— ————
     Correct inventory 12/31/04                                            $27,000



 8. Beginning inventory                        $ 190,000
      Add: Purchases                              980,000
                                       ——————————
     Cost of goods available                     1,170,000
     Sales                        $1,300,000
     Less 40%                        (520,000)     780,000
                              —————————— ————
     Estimated inventory lost                 $ 390,000

     Sales .................................... 1,300 000
         Income Summary ........................                    1,300,000

     Cost of Goods Sold .......................      780,000
     Fire Loss ................................  390,000
         Beginning Inventory ...................                      190,000
         Purchases..............................                  980,000




                                                       33
                                   Exercises for Lesson 8
                            -------------------------
Section 1. Multiple choice Questions

  1. When a company holds between 20% and 50% of the outstanding stock of
      an investee, which of the following statements applies?
      a. The investor should always use the equity method to account for
          its investment.
      b. The investor should use the equity method to account for its
          investment unless circumstances indicate that it is unable to
          exercise "significant influence" over the investee.
      c. The investor must use the fair value method unless it can clearly
          demonstrate the ability to exercise "significant influence" over
          the investee.
      d. The investor should always use the fair value method to account
          for its investment.

  2. Under the equity method of accounting for investments, an investor
      recognizes its share of the earnings in the period in which the
      a. investor sells the investment.
      b. investee declares a dividend.
      c. investee pays a dividend.
      d. earnings are reported by the investee in its financial
           statements.

  3. A correct valuation is
      a. available-for-sale at amortized cost.
      b. held-to-maturity at amortized cost.
      c. held-to-maturity at fair value.
      d. none of these.

 4. Byner Corporation accounts for its investment in the common stock
      of Yount Company under the equity method. Byner Corporation
      should ordinarily record a cash dividend received from Yount as
      a. a reduction of the carrying value of the investment.
      b. additional paid-in capital.
      c. an addition to the carrying value of the investment.
      d. dividend income.
                              -------------------------
Section 2. Exercises

 5. Presented below are unrelated cases involving investments in equity
      securities.

      Case I. The fair value of the trading securities at the end of
      ———————            last year was 30% below original cost, and this was




                                                   34
      properly reflected in the accounts. At the end of the current year,
      the fair value has increased to 20% above cost.

      Case II. The fair value of an available-for-sale security has
      ———————— declined to less than forty percent of the original cost.
      The decline in value is considered to be other than temporary.

      Case III. An equity security, whose fair value is now less than
      ————————— cost, is classified as trading but is reclassified as
      available-for-sale.

      INSTRUCTIONS
      Indicate the accounting required for each case separately.
6. On January 2, 2004, Reese Company issued a 5-year, $5,000,000 note
      at LIBOR, with interest paid annually. The variable rate is reset
      at the end of each year. The LIBOR rate for the first year is 6.8%.

      Reese Company decides it prefers fixed-rate financing and wants to
      lock in a rate of 6%. As a result, Reese enters into an interest
      rate swap to apy 7% fixed and receive LIBOR based on $5 million.
      The variable rate is reset to 7.4% on January 2, 2005.

      INSTRUCTIONS
      (a) Compute the net interest expense to be reported for this note
           and related swap transactions as of December 31, 2004.

      (b) Compute the net interest expense to be reported for this note
           and related swap transactions as of December 31, 2005.

                             -------------------------
Section 3. Problems

 7. Yates Co. purchased a put option on Dixon common shares on
      January 7, 2004, for $270. The put option is for 300 shares, and
      the strike price is $64. The option expires on July 31, 2004.
      The following data are available with respect to the put option:

                                       Market Price                Time Value
              Date                    of Dixon Shares            of Put Option
       ————————                     —————————                    ———————
        March 31, 2004                $60 per share                  $150
        June 30, 2004                $62 per share                    68
        July 6, 2004                 $58 per share                    20


      INSTRUCTIONS
      Prepare the journal entries for Yates Co. for the following dates:
      (a) January 7, 2004——Investment in put option on Dixon shares.




                                                    35
         (b) March 31, 2004——Yates prepares financial statements.
         (c) June 30, 2004——Yates prepares financial statements.
         (d) July 6, 2004——Yates settles the put option on the Dixon shares.


                                         ANSWER KEY

Section 1 Mutiple Choice Qeustions
1.b 2.d 3.b 4.a

 5. Case I. At the end of last year, the company would have
      ——————— recognized an unrealized holding loss and recorded a
      Securities Fair Value Adjustment (Trading). At the end of the
      current year, the company would record an unrealized holding gain
      that would be reported in the other revenue and gains section. The
      adjustment account would now have a debit balance.

         Case II. When the decline in value is considered to be other than
         ——————— temporary, the loss should be recognized as if it were
         realized and earnings will be reduced. The fair value becomes a
         new cost basis.

         Case III. The security is transferred at fair value, which is the
         ————————— new cost basis of the security. The Available-for-Sale
         Securities account is recorded at fair value, and the Unrealized
         Holding Loss——Income account is debited for the unrealized loss. The
         Trading Securities account is credited for cost.

 6. (a) and (b)                         12/31/04                    12/31/05
                                   ——————————                       —————
         Variable-rate debt             $5,000,000                  $5,000,000
         Variable rate                      6.8%                          7.4%
                                   ——————————                         ————
         Debt payment                   $ 340,000                   $ 370,000

         Debt payment              $ 340,000                        $ 370,000
         Swap receive variable       (340,000)                       (370,000)
                              ——————————                            ——————
           Net income effect     $       0                        $        0
         Swap payable——fixed          350,000                          350,000
                               —————————                            ——————
         Net interest expense      $ 350,000                        $ 350,000


7. (a)                                      January 7, 2004
                            ———————————————
           Put Option ........................................  270
                Cash ..........................................     270




                                                      36
(b)                                        March 31, 2004
                             ——————————————
  Put Option ........................................ 1,200
       Unrealized Holding Gain or Loss——Income .......                      1,200
        ($4 x 300)

  Unrealized Holding Gain or Loss——Income ...........               120
      Put Option ($270 - $150) ......................               120

 (c)                              June 30, 2004
                          —————————————
  Unrealized Holding Gain or Loss——Income ...........  600
      Put Option ($2 x 300) ......................... 600

  Unrealized Holding Gain or Loss——Income ...........               82
      Put Option ($150 - $68) .......................               82

(d)                             July 6, 2004
                            ————————————
  Unrealized Holding Gain or Loss——Income ...........  48
      Put Option ($68 - $20) ........................ 48

  Cash (400 x $6) ................................... 2,400
      Gain on Settlement of Put Option ..............               1,780
      Put Option* ...................................         620

  *Value of Put Option settlement:

          Put Option
  ————————————+————————————
          270 |
       1,200 |       120
              |      600
              |       82
              |       48
  ————————————+————————————
    620 |




                                                37
                                   Exercises for Lesson 9
                            -------------------------
Section 1. Multiple Choice Questions

  1. The cost of land typically includes the purchase price and all of
      the following costs except
      a. grading, filling, draining, and clearing costs.
      b. street lights, sewers, and drainage systems cost.
      c. private driveways and parking lots.
      d. assumption of any liens or mortgages on the property.

  2. Rich Co. exchanged merchandise that cost $24,000 and normally sold
      for $36,000 for a new delivery truck with a list price of $40,000.
      The delivery truck should be recorded on Rich's books at
      a. $24,000.
      b. $30,000.
      c. $36,000.
      d. $40,000.

                            ------------------------------
      Equipment that cost $55,000 and has accumulated depreciation of
      $25,000 is exchanged for similar equipment with a fair value of
      $40,000 and $10,000 cash is received.

  3. The new equipment should be recorded at
      a. $40,000.
      b. $30,000.
      c. $25,000.
      d. $24,000.

  4. Gomez Corp. incurred $350,000 of research and development costs to
      develop a product for which a patent was granted on January 2, 1999.
      Legal fees and other costs associated with registration of the
      patent totaled $100,000. On March 31, 2004, Gomez paid $150,000 for
      legal fees in a successful defense of the patent. The total amount
      capitalized for the patent through March 31, 2004 should be
      a. $250,000.
      b. $450,000.
      c. $500,000.
      d. $600,000.

 5. Which of the following intangible assets should not be amortized?
     a. Copyrights
     b. Customer lists
     c. Perpetual franchises
     d. All of these intangible assets should be amortized.

                              -------------------------




                                                     38
Section 2. Exercises

6. On March 1, Gatt Co. began construction of a small building. The
      following expenditures were incurred for construction:

            March 1        $ 90,000           April 1      $ 84,000
            May 1            210,000           June 1         300,000
            July 1         100,000

      The building was completed and occupied on July 1. To help pay for
      construction, $60,000 was borrowed on March 1 on a 12%, three-year
      note payable. The only other debt outstanding during the year was a
      $500,000, 10% note issued two years ago.

      INSTRUCTIONS
      (a) Calculate the weighted-average accumulated expenditures.
      (b) Calculate avoidable interest.

7. Presented below is information related to copyrights owned by Yaeger
      Corporation at December 31, 2004:

                  Cost                                        $3,600,000
                  Carrying amount                             3,200,000
                  Expected future net cash flows         2,800,000
                  Fair value                                 1,900,000

      Assume that Yaeger will continue to use this asset in the future.
      As of December 31, 2004, the copyrights have a remaining useful life
      of 5 years.

      INSTRUCTIONS
      (a) Prepare the journal entry (if any) to record the impairment of
           the asset at December 31, 2004.
      (b) Prepare the journal entry to record amortization expense for
           2005.
      (c) The fair value of the copyright at December 31, 2005, is
           $2,000,000. Prepare the journal entry (if any) necessary to
           record this increase in fair value.
                              -------------------------
Section 3. Problems

 8. Finney Company exchanged machinery with an appraised value of
      $585,000, a recorded cost of $900,000 and Accumulated Depreciation
      of $450,000 with Penny Corporation for machinery Penny owns. The
      machinery has an appraised value of $565,000, a recorded cost of
      $1,080,000, and Accumulated Depreciation of $594,000. Penny also
      gave Finney $20,000 in the exchange. Assume depreciation has already
      been updated.




                                                39
      INSTRUCTIONS
      (a) Prepare the entries on both companies' books assuming that it is
           considered an exchange of dissimilar assets. (Round all compu-
           tations to the nearest dollar.)

      (b) Prepare the entries on both companies' books assuming that it is
           considered an exchange of similar assets. (Round all compu-
           tations to the nearest dollar.)

9. On July 1, 2004, Nyland Company purchased for $1,440,000,
      snow-making equipment having an estimated useful life of 5 years
      with an estimated salvage value of $60,000. Depreciation is taken
      for the portion of the year the asset is used.

      INSTRUCTIONS
      (a) Complete the form below by determining the depreciation expense
           and year-end book values for 2004 and 2005 using the

           1. sum-of-the-years'-digits method.
           2. double-declining-balance method.

    Sum-of-the-Years'-Digits Method                  2004        2005
   ———————————————                             ———————— —————
    Equipment                                     $1,440,000 $1,440,000

      Less: Accumulated Depreciation                 ________         ________

      Year-End Book Value                             ________         ________

      Depreciation Expense for the Year               ________         ________


      Double-Declining-Balance Method
      ———————————————————————————————
      Equipment                       $1,440,000 $1,440,000

      Less: Accumulated Depreciation                    ________        ________

      Year-End Book Value                               ________        ________

      Depreciation Expense for the Year                ________         ________

      (b) Assume the company had used straight-line depreciation during
           2004 and 2005. During 2006, the company determined that the
           equipment would be useful to the company for only one more year
           beyond 2006. Salvage value is estimated at $80,000. Compute the
           amount of depreciation expense for the 2006 income statement.




                                               40
                                           ANSWER KEY

Section 1 Mutiple Chioce Questions
1.C 2.C 3.D 4.A 5.C

  4. $100,000 + $150,000 = $250,000.


 6. (a)                          Capitalization Weighted-Average
    Date            Expenditures       Period       Accum. Expend.
  —————            ——————— ——————— —————————
   March 1           $ 90,000           4/12           $ 30,000
   April 1            84,000           3/12              21,000
   May 1             210,000           2/12              35,000
   June 1            300,000           1/12              25,000
   July 1            100,000             0                   -0-
                                                ————————
                                                        $111,000

 (b) Weighted-Average                      Avoidable
      Accum. Expend.                 Rate  Interest
    —————————                       ——— —————————
           $ 60,000                  .12     $ 7,200
             51,000                   .10   $ 5,100
    ————————                              ———————
           $111,000                          $12,300

 7. (a)                                    December 31, 2004

            Loss on Impairment ...................... 1,300,000
                Copyrights ..........................             1,300,000

            Carrying amount               $3,200,000
            Fair value                    1,900,000
                                           ——————————
            Loss on impairment           $1,300,000


      (b)                                     December 31, 2005

            Amortization ............................   380,000
               Copyrights ..........................                380,000

            New carrying amount     $1,900,000
            Useful life            ÷ 5 years
                              ——————————
            Amortization per year $ 380,000




                                                        41
       (c) No entry necessary. Restoration of any impairment loss is not
          permitted for assets held for future use.

8. (a) Dissimilar Assets
       —————————————————
            Finney
       ——————
            Machinery ........ 565,000                 Cost         $900,000
            Cash .............    20,000                        A/D          450,000
                                                           ————————
          Accum. Deprec.——                                 BV           450,000
            Machinery ...... 450,000                       FV          585,000
                                                              ————————
             Gain on Ex-                                    Gain      $135,000
               change of
          Plant Assets..                     135,000
             Machinery .....                     900,000

          Penny              —————
          Machinery ........   585,000                            Cost $1,080,000
          Accum. Deprec.——           594,000                     A/D      594,000
            Machinery ......                                    ——————————
                                                                 BV        486,000
            Gain on Ex-                                          FV       565,000
             change of                                          ——————————
             Plant Assets..                     79,000            Gain $ 79,000
           Machinery .....                   1,080,000
            Cash ..........                      20,000

      (b) Similar Assets
          ——————————————
           Finney
           ——————
           Machinery ........................... 434,615
           Cash ................................ 20,000
           Accum. Depre.——Machinery ............            450,000
                Gain on Exchange ................                          4,615
                Machinery .......................                     900,000

           $20,000 ÷ ($20,000 + $565,000) x $135,000 = $4,615

           Penny
           —————
           Machinery .......................... 506,000
           Accum. Depreciation——Machinery .....                594,000
               Machinery ......................                    1,080,000
               Cash ...........................                       20,000




                                                  42
9. (a) Sum-of-the-Years'-Digits         2004           2005
    —————————————                     ———————          ————————
           Accumulated Depreciation       $ 230,000       $644,000
           Book Value                       1,210,000      796,000
           Depreciation Expense                230,000      414,000

          Double-Declining-Balance
          ————————————————————————
          Accumulated Depreciation $ 288,000   $748,800
          Book Value                 1,152,000    691,200
          Depreciation Expense       288,000    460,800

     (b) Cost          $1,440,000
          Depreciation    (414,000)
          Salvage           (80,000)
            ——————————
          $ 946,000 x 1/2 = $473,000, 2006 depreciation




                                           43
                                  Exercises for Lesson 10
                            -------------------------
Section 1. Multiple Choice Questions

  A schedule of machinery owned by Colsen Co. is presented below:

                                    Estimated      Estimated
                      Total Cost Salvage Value Life in Years
                 —————————— ——————— ———————
            Machine A  $260,000     $20,000             12
            Machine C   390,000       30,000            10
            Machine M  195,000       15,000             6

      Colsen computes depreciation by the composite method.

  1. The composite rate of depreciation (in percent) for these assets is
      a. 10.18.
      b. 10.77.
      c. 11.03.
      d. 11.67.

  2. The following is true of depreciation accounting.
      a. It is not a matter of valuation.
      b. It is part of the matching of revenues and expenses.
      c. It retains funds by reducing income taxes and dividends.
      d. All of these.

  3. If income tax effects are ignored, accelerated depreciation methods
       a. provide funds for the earlier replacement of fixed assets.
       b. increase funds provided by operations.
       c. tend to offset the effect of steadily increasing repair and
            maintenance costs on the income statement.
       d. tend to decrease the fixed asset turnover ratio.

  4. Mintz Company acquired a tract of land containing an extractable
      natural resource. Mintz is required by the purchase contract to
      restore the land to a condition suitable for recreational use after
      it has extracted the natural resource. Geological surveys estimate
      that the recoverable reserves will be 4,000,000 tons, and that the
      land will have a value of $1,000,000 after restoration. Relevant
      cost information follows:

                 Land                                    $7,000,000
                 Estimated restoration costs        1,500,000

      If Mintz maintains no inventories of extracted material, what should
      be the charge to depletion expense per ton of extracted material?



                                                   44
      a. $2.13
      b. $1.88
      c. $1.76
      d. $1.50

 5. Use of the sum-of-the-years'-digits method
      a. results in salvage value being ignored.
      b. means the denominator is the years remaining at the beginning of
          the year.
      c. means the book value should not be reduced below salvage value.
      d. all of these.
                              -------------------------
Section 2. Exercises

6. Hale Co. uses the composite method to depreciate its equipment.
      the following totals are for all of the equipment in the group:

          Initial Residual   Depreciable Depreciation
           Cost      Value         Cost     Per Year
       ————— ————           ——————— ————————
         $600,000  $100,000     $500,000      $50,000

      INSTRUCTIONS
      (a) What is the composite rate of depreciation? (To nearest tenth
           of a percent.)

      (b) A machine with a cost of $20,000 was sold for $15,000 at the end
           of the third year. What entry should be made?

 7. Place T or F in front of each of the following statements.

      ___ 1. The straight-line method of depreciation is based on the
              assumption that depreciation expense can be regarded as a
              constant function of time.

      ___ 2. Plant assets should be written down (below cost) when their
              market value has declined temporarily.

      ___ 3. The accounting profession has developed specifically
              recommended procedures for recording appraisal increases
              with respect to plant assets.

      ___ 4. An asset's cost minus its accumulated depreciation equals
              its book value.

      ___ 5. The sum-of-the-years'-digits method of depreciation ignores
              salvage value in the computation of an asset's depreciable
              value.




                                                 45
     ___ 6. When using the double-declining-balance method of determin-
             ing depreciation, a declining percentage is applied to a
             constant book value.

     ___ 7. The book value of plant assets declines more rapidly under
             decreasing-charge methods than under the straight-line
             method.

     ___ 8. Accounting depreciation is computed by determining the
             change in the market value of a company's plant assets
             during the period under review.

     ___ 9. The methods of depreciation based upon output assume that
             obsolescence will not significantly affect the usefulness
             of the asset.

     ___ 10. The correction of prior periods' depreciation estimates
              would be disclosed on the retained earnings statement.


                            -------------------------
Section 3. Problems

 8. A truck was acquired on July 1, 2001, at a cost of $270,000. The
      truck had a six-year useful life and an estimated salvage value of
      $30,000. The straight-line method of depreciation was used. On
      January 1, 2004, the truck was overhauled at a cost of $25,000,
      which extended the useful life of the truck for an additional two
      years beyond that originally estimated (salvage value is still
      estimated at $30,000). In computing depreciation for annual
      adjustment purposes, expense is calculated for each month the asset
      is owned.

     INSTRUCTIONS
     Prepare the appropriate entries for January 1, 2004 and
     December 31, 2004.




                                                   46
                                                ANSWER KEY

Section 1 .Multiple Chioce Questions
1.A 2.D 3.C 4..B 5.C

  1. ($260,000 - $20,000) ÷ 12 = $20,000
      ($390,000 - $30,000) ÷ 10 = 36,000
      ($195,000 - $15,000) ÷ 6 = 30,000
       ———————— ———————
       $845,000                   $86,000

          $86,000
          ———————— = 10.18
          $845,000

4. ($7,000,000 + $1,500,000 - $1,000,000) ÷ 4,000,000 = $1.88.


6. (a)    $50,000
             ————————— = 8.3%
             $600,000 ————

         (b) Cash ................................  15,000
              Accumulated Depreciation ............          5,000
                 Equipment ........................                   20,000

 7. 1. T            3. F          5. F          7. T         9. T
       2. F            4. T          6. F          8. F       10. F

 8. Cost                                                                   $270,000
      Less salvage value                                                    30,000
                                                                      ————————
         Depreciable base, July 1, 2001                                    240,000
         Less depreciation to date [($240,000 ÷ 6) x 2 1/2]              (100,000)
                                                                      ————————
         Depreciable base, Jan. 1, 2004 (unadjusted)                       140,000
         Overhaul                                                            25,000
                                                                      ————————
         Depreciable base, Jan. 1, 2004 (adjusted)                        $165,000

January 1, 2004
      ———————————————
      Accumulated Depreciation ....................... 25,000
          Cash ........................................     25,000
      December 31, 2004
      —————————————————
      Depreciation Expense ........................... 30,000
          Accumulated Depreciation ($165,000/5.5 yrs)..                        30,000




                                                       47
Lesson 11
1
a. What is the essential nature of a partnership? What distinguishes
    it from other forms of business organizations?


b. What note disclosure must accompany the financial statements of
    a partnership?


c. A business operated in 20X2 and earned profits, but at a very low
    level: $15,000. Why might it be better for tax purposes to have
    this entity organized as a partnership rather than a corporation?


d. Explain the nature of a limited partnership.


e. What is mutual agency?


f. Compare the entity view of a firm to the proprietary view in terms
    of how payments made to employees are classified in the two different
    financial statements.


2. Rankin and Bui organized the RB Partnership on January 1, 20X2. Rankin had $25,000 in
his capital account at the beginning of the year, and Bui had $30,000 in her account.
Required
If the partnership’s net income, computed without regard to salaries
or interest, is $20,000 for 20X2, indicate its division between the
partners under the following independent profit?sharing conditions:

a. Interest at 4% is allowed on opening capital balance and the remainder
    is divided equally.


b. A salary of $9,000 is to be allocated to Bui; 4% interest is allowed
    for each partner on opening capital balance; residual profits or
    losses are divided 60% to Rankin and 40% to Bui.




                                           48
c. Salaries are allowed for Rankin and Bui in the amounts of $8,300
   and $19,500 respectively, and residual profits or residual losses
   are divided based on the partner’s relative capital balances at
   the beginning of the year.


3 Journalize the admission of Banks to the partnership of Walton and Rose in each of the
following independent cases. The capital balances of Walton and Rose are $10,000 each and
they share profits and losses equally.


a. Banks is admitted to a one-third interest in capital, profits, and
   losses, with a contribution of $10,000 to the partnership.


b. Banks is admitted to a one-fourth interest in capital, profits,
   and losses, with a contribution of $12,000 to the partnership. Use
   the bonus method. Total capital of the new partnership is to be
   $32,000.


c. Banks is admitted to a one-fifth interest in capital, profits, and
   losses upon contributing $3,000 to the partnership. Use the asset
   revaluation method; goodwill should be recognized. Total capital
   of the new partnership is to be $25,000.


d. Banks is admitted to a one-fifth interest in capital, profits, and
   losses by the purchase of one-fifth of the interests of Walton and
   Rose, paying the money directly to the old partners. Total capital
   of the new partnership is to be $20,000.


e. Banks is admitted to a one-third interest in capital, profits, and
   losses upon contributing $7,000 to the partnership, after which
   each partner is to have an equal capital equity in the new partnership.
   Use the bonus method.




                                            49
f. Banks is admitted to a one-fifth interest in capital, profits, and
   losses upon contributing $7,000 to the partnership. The total new
   capital will be $35,000. Use the asset revaluation method and
   recognize goodwill.


4. Wylie, MacIntosh, and Smith are partners who share income and losses in a 2:2:1 ratio.
The capital balances for the partners are currently $50,000, $30,000, and $20,000, respectively.
Assume Wylie decides to retire from the partnership.

a. Provide the journal entry to record Wylie’s retirement if Wylie
   is paid $38,000 in total settlement of his share, and the bonus
   method is used.

b. Provide the journal entry to record Wylie’s retirement if Wylie
   is paid $68,000 in total settlement of his share, and the bonus
   method is used.


c. Provide the journal entry to record Wylie’s retirement if Wylie
   is paid $68,000 in total settlement of his share, and the asset
   revaluation method is used (goodwill is recognized).


5. Ray, Mona, and Matt, partners in the Quality Photography Partners, prepare to liquidate
their business. On December 31, 20X3, the partnership account balances are as follows:
                           QUALITY PHOTOGRAPHY PARTNERS
                                      Balance Sheet
                                   December 31, 20X3


Cash                                  $ 5,430          Trade payables           $13,910
Other assets                          61,870           Loans from partners:
                                                          Ray                     8,000
                                                          Mona                    4,000
                                                          Matt                    9,000


                                                       Capital balances:



                                              50
                                                                    Ray                       18,100
                                                                    Mona                       3,090
                                                                    Matt                      11,200
                                             $67,300                                         $67,300


Ray, Mona, and Matt share profits and losses 50:30:20. Cash for capital
and loan balances is to be distributed at the end of the liquidation
process.


Here is a summary of transactions for the three-month liquidation
period.


                                                                                                 Newly
                                                                                             discovered
                                                                                             unrecorded
              Liquidation of non-cash assets Liquidation                                    partnership
                             Book value           Cash realizedexpenses paidliability

January                         $24,700                $18,180              $    860                    —
February                        33,170                 26,810                    800             $2,000*
March                             4,000                    3,000                     —                  —


* The partnership bookkeeper failed to record a property tax liability
  in December 20X0.


Required
Prepare a partnership liquidation schedule by month, showing the cash
distribution at the end of March.

Note:
Show cash collected in a given month NET of liquidation expenses. Any debit balances in partner accounts
should be first applied to that partner’s loan balance, if any, and then absorbed by the other partners. No
partner will invest additional resources.




                                                      51
Lesson 12
  1. Which of the following statements is correct?
     a. A company may exclude a short-term obligation from current
liabilities if the firm intends to refinance the obligation on a
long-term basis.
     b. A company may exclude a short-term obligation from current
liabilities if the firm can demonstrate an ability to consummate
        a refinancing.
     c. A company may exclude a short-term obligation from current
liabilities if it is paid off after the balance sheet date and
        subsequently replaced by long-term debt before the balance sheet
is issued.
     d. None of these.

  2. Stone, Inc. issued bonds with a maturity amount of $200,000 and
a maturity ten years from date of issue. If the bonds were issued
at a premium, this indicates that
     a. the effective yield or market rate of interest exceeded the
(stated) nominal rate.
     b. the nominal rate of interest exceeded the market rate.
     c. the market and nominal rates coincided.
     d. no necessary relationship exists between the two rates.

  3. Garret Music Shop gives its customers coupons redeemable for a
poster plus a Dixie Chicks CD. One coupon is issued for each dollar
of sales. On the surrender of 100 coupons and $5.00 cash, the poster
and CD are given to the customer. It is estimated that 80% of the
coupons will be presented for redemption. Sales for the first period
were $1,050,000, and the coupons redeemed totaled 510,000.
     Sales for the second period were $1,260,000, and the coupons
redeemed totaled 1,275,000. Garret Music Shop bought 30,000 posters
at $2.00/poster and 30,000 CDs at $6.00/CD.

     INSTRUCTIONS
     Prepare the following entries for the two periods assuming all
the coupons expected to be redeemed from the first period were redeemed
by the end of the second period.

            Entry                          Period 1        Period 2
    ——————————————————————————————————
    (a) To record coupons redeemed




    (b) To record estimated liability




                                   52
  4. Prepare journal entries to record the following retirement. (Show
computations and round to the nearest dollar.)

    The December 31, 2004 balance sheet of Marin Co. included the
following items:
        7.5% bonds payable due December 31, 2012        $800,000
        Unamortized discount on bonds payable            32,400

    The bonds were issued on December 31, 2002 at 95, with interest
payable on June 30 and December 31. (Use straight-line amortization.)

    On April 1, 2005, Marin retired $160,000 of these bonds at 101
plus accrued interest.

  5. Elton, Inc., which owes Boston Co. $900,000 in notes payable,
is in financial difficulty. To eliminate the debt, Boston agrees to
accept from Elton land having a fair market value of $680,000 and a
recorded cost of $510,000.

    INSTRUCTIONS
    (a) Compute the amount of gain or loss to Elton, Inc. on the transfer
(disposition) of the land.
    (b) Compute the amount of gain or loss to Elton, Inc. on the settlement
of the debt.
    (c) Prepare the journal entry on Elton's books to record the
settlement of this debt.
    (d) Compute the gain or loss to Boston Co. from settlement of its
receivable from Elton.
    (e) Prepare the journal entry on Boston's books to record the
settlement of this receivable.


Lesson 13
1. The pre-emptive right enables a stockholder to
    a. share proportionately in any new issues of stock of the same
class.
    b. receive cash dividends before other classes of stock without
the pre-emptive right.
    c. sell capital stock back to the corporation at the option of
the stockholder.




                                    53
    d. receive the same amount of dividends on a percentage basis as
the preferred stockholders.

  2. Stockholders' equity is generally classified into two major
categories:
     a. contributed capital and appropriated capital.
     b. appropriated capital and retained earnings.
     c. retained earnings and unappropriated capital.
     d. earned capital and contributed capital.

  3. Direct costs incurred to sell stock such as underwriting costs
should be accounted for as
          1. a reduction of additional paid-in capital.
          2. an expense of the period in which the stock is issued.
          3. an intangible asset.
     a. 1
     b. 2
     c. 3
     d. 1 or 3

  4. In 2003, Nichols Co. issued 200,000 of its 500,000 authorized
shares of $10 par value common stock at $35 per share. In January,
2004,
     Nichols repurchased 10,000 shares at $30 per share. Assume these
are the only stock transactions the company has ever had.

    INSTRUCTIONS
    (a) What are the two methods of accounting for treasury stock?
    (b) Prepare the journal entry to record the purchase of treasury
stock by the cost method.
    (c) 3,000 shares of treasury stock are reissued at $33 per share.
        Prepare the journal entry to record the reissuance by the cost
method.

  5. Describe the journal entry for a stock dividend on common stock
(which has a par value).

  6. Spencer, Inc., has $600,000 of 8% preferred stock and $900,000
of common stock outstanding, each having a par value of $10 per share.
No dividends have been paid or declared during 2003 and 2004. As of
December 31, 2005, it is desired to distribute $306,000 in dividends.

    INSTRUCTIONS
    How much will the preferred and common stockholders receive under
each of the following assumptions:

    (a) The preferred is noncumulative and nonparticipating.
    (b) The preferred is cumulative and nonparticipating.
    (c) The preferred is cumulative and fully participating.




                                  54
    (d) The preferred is cumulative and participating to 12% total.

Lesson 14
1. Convertible bonds
    a. have priority over other indebtedness.
    b. are usually secured by a first or second mortgage.
    c. pay interest only in the event earnings are sufficient to cover
the interest.
    d. may be exchanged for equity securities.

  2. When the cash proceeds from a bond issued with detachable stock
warrants exceeds the sum of the par value of the bonds and the fair
market value of the warrants, the excess should be credited to
     a. additional paid-in capital from stock warrants.
     b. retained earnings.
     c. a liability account.
     d. premium on bonds payable.

  3. The date on which to measure the compensation element in a stock
option granted to a corporate employee ordinarily is the date on which
the employee
     a. is granted the option.
     b. has performed all conditions precedent to exercising the option.
     c. may first exercise the option.
     d. exercises the option.

  4. What accounting treatment is required for convertible debt? Why?
     What accounting treatment is required for debt issued with stock
warrants? Why?

 5. Define the following:
    (a) The computation of earnings per common share
    (b) Complex capital structure
    (c) Basic earnings per share
    (d) Diluted earnings per share

  6. For each of the unrelated transactions described below, present
the entry(ies) required to record the bond transactions.

     1. On August 1, 2004, Ryan Corporation called its 10% convertible
bonds for conversion. The $6,000,000 par bonds were converted into
240,000 shares of $20 par common stock. On August 1, there was $525,000
of unamortized premium applicable to the bonds. The fair market value
of the common stock was $20 per share. Ignore all interest payments.

    2. Garnett, Inc. decides to issue convertible bonds instead of
common stock. The company issues 10% convertible bonds, par $2,000,000,




                                   55
at 97. The investment banker indicates that if the bonds had not been
convertible they would have sold at 94.

     3. Gomez Company issues $3,000,000 of bonds with a coupon rate
of 8%. To help the sale, detachable stock warrants are issued at the
rate of ten warrants for each $1,000 bond sold. It is estimated that
the value of the bonds without the warrants is $2,961,000 and the value
of the warrants is $189,000. The bonds with the warrants sold at 101.


Lesson 15
1. Which of the following is an advantage of leasing?
    a. Off-balance-sheet financing
    b. Less costly financing
    c. 100% financing at fixed rates
    d. All of these

  2. Which of the following is a correct statement of one of the
capitalization criteria?
     a. The lease transfers ownership of the property to the lessor.
     b. The lease contains a purchase option.
     c. The lease term is equal to or more than 75% of the estimated
economic life of the leased property.
     d. The minimum lease payments (excluding executory costs) equal
or exceed 90% of the fair value of the leased property.

  3. In the earlier years of a lease, from the lessee's perspective,
the use of the
     a. capital method will enable the lessee to report higher income,
compared to the operating method.
     b. capital method will cause debt to increase, compared to the
operating method.
     c. operating method will cause income to decrease, compared to
the capital method.
     d. operating method will cause debt to increase, compared to the
capital method.

  4. Explain the procedures used to account for a direct financing
lease.

  5. Silas Corp. is a manufacturer of truck trailers. On January 1,
2004, Silas Corp. leases ten trailers to Polley Company under a six-year
noncancelable lease agreement. The following information about the
lease and the trailers is provided:

    1. Equal annual payments that are due on December 31 each year
provide Silas Corp. with an 8% return on net investment (present value
factor for 6 periods at 8% is 4.62288).




                                   56
    2. Titles to the trailers pass to Polley at the end of the lease.

    3. The fair value of each trailer is $60,000. The cost of each
trailer to Silas Corp. is $54,000. Each trailer has an expected useful
life of nine years.

    4. Collectibility of the lease payments is reasonably predictable
and there are no important uncertainties surrounding the amount of
costs yet to be incurred by Silas Corp.

    INSTRUCTIONS
    (a) What type of lease is this for the lessor? Discuss.
    (b) Calculate the annual lease payment. (Round to nearest dollar.)
    (c) Prepare a lease amortization schedule for Silas Corp. for the
first three years.
    (d) Prepare the journal entries for the lessor for 2004 and 2005
to record the lease agreement, the receipt of the lease rentals, and
the recognition of income (assume the use of a perpetual inventory
method and round all amounts to the nearest dollar).

  6. Kiner, Inc. enters into a lease agreement as lessor on January
1, 2004, to lease an airplane to National Airlines. The term of the
noncancelable lease is eight years and payments are required at the
end of each year. The following information relates to this agreement:

    1. National Airlines has the option to purchase the airplane for
$8,000,000 when the lease expires at which time the fair value is expected
to be $14,000,000.

    2. The airplane has a cost of $35,000,000 to Kiner, an estimated
useful life of fourteen years, and a salvage value of zero at the end
of that time (due to technological obsolescence).

    3. National Airlines will pay all executory costs related to the
leased airplane.

    4. Annual year-end lease payments of $5,338,396 allow Kiner to
earn an 8% return on its investment.

    5. Collectibility of the payments is reasonably predictable, and
there are no important uncertainties surrounding the costs yet to be
incurred by Kiner.

    INSTRUCTIONS
    (a) What type of lease is this? Discuss.
    (b) Prepare a lease amortization schedule for the lessor for the
first two years (2004-2005). (Round all amounts to nearest dollar.)




                                    57
    (c) Prepare the journal entries on the books of the lessor to record
the lease agreement, to reflect payments received under the lease,
and to recognize income, for the years 2004 and 2005.


Lesson 16
  1. The rationale for interperiod income tax allocation is to
     a. recognize a tax asset or liability for the tax consequences
of temporary differences that exist at the balance sheet date.
     b. recognize a distribution of earnings to the taxing agency.
     c. reconcile the tax consequences of permanent and temporary
differences appearing on the current year's financial statements.
     d. adjust income tax expense on the income statement to be in
agreement with income taxes payable on the balance sheet.

  2. Interperiod income tax allocation causes
     a. tax expense shown on the income statement to equal the amount
of income taxes payable for the current year plus or minus the change
in the deferred tax asset or liability balances for the year.
     b. tax expense shown in the income statement to bear a normal relation
to the tax liability.
     c. tax liability shown in the balance sheet to bear a normal relation
to the income before tax reported in the income statement.
     d. tax expense in the income statement to be presented with the
specific revenues causing the tax.

 3. An example of a permanent difference is
    a. proceeds from life insurance on officers.
    b. interest expense on money borrowed to invest in municipal bonds.
    c. insurance expense for a life insurance policy on officers.
    d. all of these.

  4. (a) Describe a deferred tax asset.
     (b) When should a deferred tax asset be reduced by a valuation
allowance?

  5. In 2003, its first year of operations, Landon Corp. has a $700,000
net operating loss when the tax rate is 30%. In 2004, Landon has $300,000
taxable income and the tax rate remains 30%.

    INSTRUCTIONS
    Assume the management of Landon Corp. thinks that it is more likely
than not that the loss carryforward will not be realized in the near
future because it is a new company (this is before results of 2004
operations are known).

    (a) What are the entries in 2003 to record the tax loss carryforward?




                                    58
    (b) What entries would be made in 2004 to record the current and
deferred income taxes and to recognize the loss carryforward?
        (Assume that at the end of 2004 it is more likely than not
that the deferred tax asset will be realized.)

  6. The following information is available for the first three years
of operations for Taylor Company:

    1. Year   Taxable Income
    ———— ———————
       2003      $250,000
       2004       160,000
       2005       200,000

    2. On January 2, 2003, heavy equipment costing $800,000 was
purchased. The equipment had a life of 5 years and no salvage value.
The straight-line method of depreciation is used for book purposes
and the tax depreciation taken each year is listed below:
                          Tax Depreciation
           ———————————————————————
         2003     2004     2005      2006      Total
       ————— ———— ————— ———— —————
        $264,000 $360,000 $120,000 $56,000        $800,000

     3. On January 2, 2004, $210,000 was collected in advance for rental
of a building for a three-year period. The entire $210,000 was reported
as taxable income in 2004, but $140,000 of the $210,000 was reported
as unearned revenue at December 31, 2004 for book purposes.

    4. The enacted tax rates are 40% for all years.

    INSTRUCTIONS
    (a) Prepare a schedule comparing depreciation for financial
reporting and tax purposes.

    (b) Determine the deferred tax (asset) or liability at the end
of 2003.

    (c) Prepare a schedule of future taxable and (deductible) amounts
at the end of 2004.

    (d) Prepare a schedule of the deferred tax (asset) and liability
at the end of 2004.

    (e) Compute the net deferred tax expense (benefit) for 2004.

    (f) Prepare the journal entry to record income tax expense, deferred
income taxes, and income tax payable for 2004.




                                   59
Lesson 17
  1. In a defined benefit plan, the process of funding refers to
     a. determining the projected benefit obligation.
     b. determining the accumulated benefit obligation.
     c. making the periodic contributions to a funding agency to insure
that funds are available to meet retirees' claims.
     d. determining the amount that might be reported for pension
        expense.

  2. In a defined contribution plan, a formula is used that
     a. defines the benefits that the employee will receive at the time
of retirement.
     b. ensures that pension expense and the cash funding amount will
be different.
     c. requires an employer to contribute a certain sum each period
based on the formula.
     d. ensures that employers are at risk to make sure funds are available
at retirement.

  3. Differing measures of the pension obligation can be based on
     a. all years of service——both vested and nonvested——using current
salary levels.
     b. only the vested benefits using current salary levels.
     c. both vested and nonvested service using future salaries.
     d. all of these.

  4. Presented below is information related to Major Department Stores,
Inc. pension plan for 2004.

    Accumulated benefit obligation (at year end)
$450,000
    Service cost                                    390,000
    Funding contribution for 2004                        375,000
    Settlement rate used in actuarial computation              10%
    Expected return on plan assets                            9%
    Amortization of prior service cost                      75,000
    Amortization of unrecognized net gains                  36,000
    Projected benefit obligation (at beginning of period)
360,000
    Market-related asset value (at beginning of period)
270,000

    INSTRUCTIONS
    (a) Compute the amount of pension expense to be reported for 2004.
        (Show computations.)




                                    60
    (b) Prepare the journal entry to record pension expense and the
employer's contribution for 2004.

  5. Marin Company has 200 employees who are expected to receive benefits
under the company's defined benefit pension plan. The total number
of service-years of these employees is 2,000. The actuary for the
company's pension plan calculated the following net gains and losses:
                 For the Year Ended
                     December 31           (Gain) Or Loss
                 ——————       ————————
                        2003                 $440,000
                        2004                 (396,000)
                        2005                  660,000

    Prior to 2003, there was no unrecognized net gain or loss.

    Information about the company's projected benefit obligation and
market-related asset values follows:

            As of January 1

      ———————————————————
                                      2003      2004         2005
                              ————— ————— ——————
    Projected benefit obligation        $1,400,000    $1,560,000
$1,960,000
    Market-related asset values     1,120,000      1,640,000
1,700,000

    INSTRUCTIONS
    Based on the above information about Marin Company, prepare a
schedule which reflects the amount of unrecognized net gain or loss
to be amortized by the company as a component of pension expense for
the years 2003, 2004, and 2005. The company amortizes unrecognized
net gains or losses using the straight-line method over the average
service life of participating employees.

  6. Presented below is information related to the pension plan of
Vector Inc. for the year 2004.

    1. The service cost of pension expense is $450,000 using the
projected benefits approach.

    2. The projected benefit obligation and the accumulated benefit
obligation at the beginning of the year are $560,000 and $525,000,
respectively. The expected return on plan assets is 9% and the
settlement rate is 10%




                                   61
     3. The unrecognized prior service cost at the beginning of the
year is $260,000. The company has a workforce of 200 employees, all
who are expected to receive benefits under the plan. The total number
of service-years is 1,000 and the service-years attributable to 2004
is 200. The company has decided to use the years-of-service method
of amortization for these costs.

     4. At the beginning of the period, the market-related asset value
was $525,000 and the fair value of pension plan assets, $530,000. The
company had an unrecognized net loss at the beginning of the period
of $170,000. Any amortization of unrecognized net loss is recognized
on a straight-line basis over the average remaining service-life of
the employees.

    5. The contribution made to the pension fund in 2004 was $435,000.

    INSTRUCTIONS
    (a) Determine the pension expense to be reported on the income
statement for 2004. (Round all computations to the nearest dollar.)

    (b) Prepare the journal entry(ies) to record pension expense for
2004.


Lesson 18
1. Which of the following is NOT a change in accounting principle?
    a. A change from LIFO to FIFO for inventory valuation
    b. Using a different method of depreciation for new plant assets
    c. A change from full-cost to successful efforts in the extractive
industry
    d. A change from completed-contract to percentage-of-completion

  2. A company changes from percentage-of-completion to
completed-contract, which is the method used for tax purposes. The
entry to record this change should include a
     a. debit to Construction in Process.
     b. debit to Cumulative Effect of Change in Accounting in the amount
of the difference on prior years, net of tax.
     c. debit to Retained Earnings in the amount of the difference on
prior years, net of tax.
     d. credit to Deferred Tax Liability.

  3. Which of the following disclosures is required for a change from
LIFO to FIFO?
     a. The cumulative effect on prior years, net of tax, in the current
income statement
     b. The justification for the change
     c. Pro forma data on income and earnings per share




                                   62
    d. All of these are required.

  4. Show how the following independent errors will affect net income
on the Income Statement and the stockholders' equity section of the
Balance Sheet using the symbol + (plus) for overstated, - (minus) for
understated, and 0 (zero) for no effect.
                                              2004
2005
                             ———————————     ——————————
                       Income    Balance         Income    Balance
                       Statement   Sheet          Statement    Sheet
                      ————— ————       ———— —————
     1. Ending inventory in
        2004 overstated.
     ———————————————————————————————————
     2. Failed to accrue 2004
        interest revenue.
     ————————————————————————————————————
     3. A capital expenditure
        for factory equipment
        (useful life, 5 years)
        was erroneously
        charged to maintenance
        expense in 2004.
     ————————————————————————————————————
     4. Failed to count office
        supplies on hand at
        12/31/04. Cash expen-
        ditures have been
        charged to an office
        supplies expense
        account during the
        year 2004.
     ——————————————————————————————————
     5. Failed to accrue 2004
        wages.
     ——————————————————————————————————
     6. Ending inventory in
        2004 understated.
     ——————————————————————————————————
     7. Overstated 2004 depre-
        ciation expense; 2005
        expense correct.
     ——————————————————————————————————

 5. Discuss the accounting procedures for and illustrate the following:

    (a) Change in estimate
    (b) Change in entity




                                  63
    (c) Correction of an error

  6. Rand Company's net incomes for the past three years are presented
below:
                2005              2004              2003
             —————                 ——————             —————
             $400,000              $375,000                $300,000

    During the 2005 year-end audit, the following items come to your
attention:

    1. Rand bought a truck January 1, 2002 for $160,000 with a $10,000
estimated salvage value and a six-year life. The company debited an
expense account and credited cash on the purchase date for the entire
cost of the asset. (Straight-line method)

    2. During 2005, Rand changed from the straight-line method of
depreciating its cement plant to the double-declining-balance method.
The following computations present depreciation on both bases:

                             2005          2004        2003
                           ————       ———     ———
          Straight-line             30,000      30,000      30,000
          Double-declining          38,500     50,000       60,000

       The net income for 2005 was computed on the
double-declining-balance method.

    3. Rand, in reviewing its provision for uncollectibles during
2005,has determined that 1% is the appropriate amount of bad debt expense
to be charged to operations. The company had used 1/2 of 1% as its
rate in 2004 and 2003 when the expense had been $15,000 and $10,000,
respectively. The company recorded bad debt expense under the new
rate for 2005. The company would have recorded $5,000 less of bad
debt expense on December 31, 2005 under the old rate.

     INSTRUCTIONS
     (a) Prepare in general journal form the entry necessary to correct
the books for the transaction in part 1 of this problem, assuming that
the books have not been closed for the current year.

    (b) Present comparative income statement data for the years 2003
to 2005 in accordance with generally accepted accounting principles
starting with income before cumulative effect of accounting changes.
Prepare pro forma amounts. Ignore all income tax effects.

     (c) Assume that the beginning retained earnings balance (unadjusted)
for 2003 was $1,050,000. At what adjusted amount should this beginning




                                    64
retained earnings balance for 2003 be stated, assuming that comparative
financial statements were prepared?

     (d) Assume that the beginning retained earnings balance (unadjusted)
for 2005 is $1,500,000 and that non-comparative financial statements
are prepared. At what adjusted amount should this beginning retained
earnings balance be stated?


Lesson 19
1. The information provided by financial reporting pertains to
    a. individual business enterprises, rather than to industries or
an economy as a whole or to members of society as consumers.
    b. business industries, rather than to individual enterprises or
an economy as a whole or to members of society as consumers.
    c. individual business enterprises, industries, and an economy
as a whole, rather than to members of society as consumers.
    d. an economy as a whole and to members of society as consumers,rather
than to individual enterprises or industries.

 2. An effective capital allocation process
    a. promotes productivity.
    b. encourages innovation.
    c. provides an efficient market for buying and selling securities.
    d. all of these.

  3. Which of the following statements is NOT an objective of financial
reporting?
     a. Provide information that is useful in investment and credit
decisions.
     b. Provide information about enterprise resources, claims to those
resources, and changes to them.
     c. Provide information on the liquidation value of an enterprise.
     d. Provide information that is useful in assessing cash flow
prospects.

  4. The Financial Accounting Standards Board was established because
many groups interested in financial reporting believed that the
Accounting Principles Board was not effective. Discuss the apparent
advantages that the FASB should have over its earlier counterpart,
the APB.

  5. Presented below are four independent, unrelated statements
regarding the formulation of generally accepted accounting principles.
Each     statement contains some incorrect or debatable statement(s).

                              Statement I
                              ———————————




                                    65
    The users of financial accounting statements have coinciding and
conflicting needs for statements of various types. To meet these needs,
and to satisfy the financial reporting responsibility of management,
accountants prepare different sets of financial statements for
different users.

                            Statement II
                            ————————————
     The FASB should be responsive to the needs and viewpoints of the
entire economic community, not just the public accounting profession.
The FASB therefore will succeed because it will deal effectively with
all interested groups.

                             Statement III
                             —————————————
     Due to some well-publicized instances of corporate fraud, domestic
and foreign bribery, and sudden bankruptcies, the Congress of the United
States began in the mid-seventies to inquire into the structure and
practices of the accounting profession and the accounting and auditing
standard-setting process. As a consequence of these investigations
and reports submitted by the committees, the government has now
     (1) assumed full responsibility through the Securities and Exchange
Commission (SEC) for the development and enforcement of financial
accounting and reporting standards and
     (2) assumed full responsibility through the General Accounting
Office (GAO) for the development and enforcement of auditing standards.

                             Statement IV
                             ————————————
    The Securities and Exchange Commission is very concerned about
financial reporting and has formulated a committee called the Accounting
Standards Executive Committee (AcSEC) to provide input to the FASB.
In addition, after each FASB Statement is issued, the AcSEC issues
Statements of Position stating its position on the FASB statement.

     INSTRUCTIONS
     Evaluate each of the independent statements and identify the areas
of fallacious reasoning in each. Explain why the reasoning is incorrect.
Complete your discussion of each statement before proceeding to the
next statement.

  6. Yates Company's records provide the following information
concerning certain account balances and changes in these account
balances during the current year. Transaction information is missing
from each item below.

    INSTRUCTIONS
    Prepare the ENTRY to record the missing information for each account.
(Consider each independently.)




                                   66
     1. Accounts Receivable: Jan. 1, balance $41,000, Dec. 31, balance
$50,000, uncollectible accounts written off during the year, $6,000;
accounts receivable collected during the year, $134,000. Prepare the
entry to record sales.
     2. Allowance for Doubtful Accounts: Jan. 1, balance $4,000, Dec.
31, balance $7,500, uncollectible accounts written off during the year,
$30,000. Prepare the entry to record bad debt expense.
     3. Accounts Payable: Jan. 1, balance $25,000, Dec. 31, balance
$34,000, purchases on account for the year, $110,000. Prepare the
entry to record payments on account.
     4. Interest Receivable: Jan. 1 accrued, $3,000, Dec. 31 accrued,
$2,100, earned for the year, $20,000. Prepare the entry to record
cash interest received.


Lesson 20
  1. An example of an inventory accounting policy that should be disclosed
in a Summary of Significant Accounting Policies is the
     a. amount of income resulting from the involuntary liquidation
of LIFO.
     b. major backlogs of inventory orders.
     c. method used for pricing inventory.
     d. composition of inventory into raw materials, work-in-process,
and finished goods.

  2. All of the following information about each operating segment
must be reported except
     a. unusual items.
     b. interest revenue.
     c. cost of goods sold.
     d. depreciation and amortization expense.

  3. If a cumulative effect type accounting change is made in other
than the first period of an enterprise's fiscal year, the cumulative
effect of the change should be
     a. included in net income of the period of change.
     b. reported as an adjustment of prior years' financial statements.
     c. excluded from net income of the period of change and reported
as a cumulative effect in the first quarter.
     d. reported as an extraordinary item in the period of change.

  4. Recent proposals by investors and others have suggested that
corporations include financial forecasts in their annual reports. It
further has been suggested that the CPA attest to those forecasts.

    INSTRUCTIONS
    (a) What arguments are advanced to support the publication of such
forecasts?




                                    67
    (b) What arguments are advanced that oppose the publication of
such forecasts?

 5. The following data is given:

December 31
———————————————————
                                   2004                          2003
                              ————————     ————————
         Cash                   $ 45,000                    $ 50,000
         Accounts receivable (net)       80,000
60,000
       Inventories                     90,000                 110,000
       Plant assets (net)                 400,000
325,000

             Accounts payable               55,000
40,000
       Wages payable              10,000                       5,000
       Bonds payable              70,000                       70,000
       10% Preferred stock, $40 par     100,000
100,000
       Common stock, $10 par        120,000                      90,000
       Paid-in capital               80,000                      65,000
       Retained earnings            220,000                     175,000


         Net credit sales                         700,000
         Cost of goods sold                       450,000
         Net income                             84,000

    INSTRUCTIONS
    Compute the following ratios:

    (a) Acid-test ratio at 12/31/04

    (b) Receivables turnover in 2004

    (c) Inventory turnover in 2004

    (d) Profit margin on sales in 2004

    (e) Rate of return on common stock equity in 2004

    (f) Book value per share of common stock at 12/31/04

  6. A central issue in reporting on operating segments of a business
enterprise is the determination of which segments are reportable.




                                  68
    INSTRUCTIONS
    1. What are the tests to determine whether or not an operating
segment is reportable?

    2. What is the test to determine if enough operating segments have
been separately reported upon, and what is the guideline on the maximum
number of operating segments to be shown?




                                  69
Lesson 11-20 习题答案
Lesson 11
Question 1
a. A partnership is a union of two or more individuals associated in a joint profit-making
   endeavour. Certain characteristics of a partnership distinguish it from both a sole
   proprietorship and a corporation. A partner can act in the name of the enterprise and,
   in this capacity, bind his or her fellow partners to contracts and agreements. The
   partnership often offers an advantage over the sole proprietorship in that greater
   amounts of capital may be accumulated and various personal skills may be pooled.

   Unlike a corporation, a partnership lacks continuous life and imposes unlimited
   personal liability on the partners for partnership debts. In many instances, partnership
   interests cannot be easily transferred. A partnership can be formed and dissolved
   more easily than a corporation. From a tax standpoint, the general rule is that
   partnerships are not subject to income tax; rather, each partner’s share of partnership
   net income is included in determining the tax levied against the partner, whether or
   not the partnership income is distributed to the partners in the form of asset
   withdrawals. Corporations, on the other hand, are subject to income tax. In addition,
   dividend payments are possible in a corporation and are included in determining the
   shareholders’ taxable income at a different rate than salary payments. Furthermore,
   dividends do not reduce corporate taxable income.

b. The CICA Handbook requires the following disclosures in the financial statements of
   a partnership:
    name of the partnership and all partners;
    the fact that the business is not incorporated and that the financial statements do not
     include personal assets and liabilities of the partners;
    salaries/interest paid to partners, if any, or a disclosure note that states that no
     salaries/interest were charged against income;
    a disclosure note stating that no income taxes were charged in the statements; and
    a schedule showing how the owner equity changed during the period, by source.

c. There may be tax advantages to operating a business as a partnership when profit
   levels are low because partnership profits are taxed at personal tax rates that are lower
   than for corporations at low income levels.

d. A limited partnership is one with two classes of partners:
   1. One or more general partners, with unlimited liability and an active role in
      management.




                                            70
     2. Limited partners, whose liability is limited to their initial investment, but whose
        role in management is passive.

     Limited partnerships are often formed for real estate investments that have a positive
     cash flow, but that report a loss after amortization of the real estate. Limited partners
     can claim their share of the resulting loss, up to the extent of their at-risk amount or
     cost of their investment, to reduce their taxable income, without any fear of unlimited
     personal liability.

e. Partners have a mutual agency relationship, in that any partner can commit the
   partnership — and thus, all the partners — to legal contracts. Partners are thus agents
   for each other while they are partners. Since they have unlimited personal liability for
   the debts and liabilities of the partnership, this agency relationship is obviously very
   significant. A partner’s authority to contract may be limited by an agreement between
   the partners, but third parties must be made aware of any restriction before it is
   effective.

f. Payments to employees are classified as an expense when following the proprietary
   view of the firm. They are classified as a distribution of earnings under the entity
   view.

Question 2
a.
                                            Rankin                  Bui               Total
Interest on capital balances:
  0.04  $25,000                           $   1,000                              $  1,000
  0.04  $30,000                                                $  1,200             1,200
Residual profits divided equally*              8,900               8,900            17,800
Total                                      $   9,900            $ 10,100          $ 20,000
* ($20,000 – $1,000 – $1,200) ÷ 2

b.
                                            Rankin                  Bui               Total
Salary                                                          $   9,000         $    9,000
Interest on capital balances:
  0.04  $25,000                           $   1,000                                 1,000
  0.04  $30,000                                                   1,200             1,200
Residual profits divided 60:40*                5,280               3,520             8,800
Total                                      $   6,280            $ 13,720          $ 20,000

*($20,000 – $9,000 – $1,000 – $1,200)  60% = $5,280
 ($20,000 – $9,000 – $1,000 – $1,200)  40% = $3,520




                                               71
c.
                                                                Rankin                              Bui          Total
Salaries                                                       $     8,300                   $ 19,500          $ 27,800
Residual profits divided based on
 capital ratios:
 ($25,000  $55,000)  ($7,800*)                                   (3,545)                                       (3,545)
 ($30,000  $55,000)  ($7,800*)                                                               (4,255)           (4,255)
Total                                                          $     4,755                   $ 15,245          $ 20,000

* ($20,000 – $27,800 = ($7,800))

Question 3
a.
Cash.............................................................................................    10,000
    Banks, capital ........................................................................                   10,000
New capital ($20,000 + $10,000) = $30,000
1/3 thereof = (1/3  $30,000) = $10,000

b.
Cash.............................................................................................    12,000
   Banks, capital ........................................................................                     8,000
   Walton, capital ......................................................................                      2,000
   Rose, capital ..........................................................................                    2,000

New capital = ($20,000 + $12,000) = $32,000
1/4 thereof = (1/4  $32,000) = $8,000
Bonus = ($12,000 – $8,000) = $4,000

c.
Cash.............................................................................................     3,000
Goodwill .....................................................................................        2,000
   Banks, capital ........................................................................                     5,000

New capital (given) = $25,000
1/5 thereof = (1/5  $25,000) = $5,000
Goodwill = ($5,000 – $3,000 tangible) = $2,000


Note:
Goodwill must be recognized since the tangible assets of the partnership are only $23,000
($20,000 + $3,000) and you are told that the new capital is to be $25,000. The new partner is allocated all of
this goodwill as it is awarded to his capital account.




                                                                   72
d.
Walton, capital ............................................................................         2,000
Rose, capital ................................................................................       2,000
   Banks, capital ........................................................................                    4,000

New capital (given) = $20,000; 1/5 thereof = (1/5  $20,000) = $4,000
Transfer from Walton: (1/2  $4,000) = $2,000
Transfer from Rose: (1/2  $4,000) = $2,000
e.
Cash.............................................................................................    7,000
Walton, capital ............................................................................         1,000
Rose, capital ................................................................................       1,000
   Banks, capital ........................................................................                    9,000
Total capital is $27,000 ($20,000 + $7,000).

Desired capital balance of each partner: (1/3  $27,000) = $9,000
Transfer from Walton: ($10,000 – $9,000) = $1,000
Transfer from Rose: ($10,000 – $9,000) = $1,000
f.
Goodwill .....................................................................................       8,000
   Walton, capital ......................................................................                     4,000
   Rose, capital ..........................................................................                   4,000

Total new capital                             $ 35,000

4/5 thereof                                   $ 28,000
Present capital                                 20,000
Goodwill                                      $ 8,000

Cash.............................................................................................    7,000
   Banks, capital ........................................................................                    7,000

Question 4
a.
Wylie, capital ..............................................................................       50,000
   MacIntosh, capital ($12,000  (2 ÷ (2+1)) ...........................                                      8,000
   Smith, capital ($12,000  (1 ÷ (2+1)) ...................................                                  4,000
   Cash.......................................................................................               38,000
b.
Wylie, capital ..............................................................................       50,000
MacIntosh, capital ($18,000  (2 ÷ (2+1)) .................................                         12,000
Smith, capital ($18,000  (1 ÷ (2+1)) .........................................                      6,000
   Cash.......................................................................................               68,000



                                                                   73
c.
Goodwill ..................................................................................... 45,000
   MacIntosh, capital ($45,000  (2 ÷ (2+2+1)) .......................                                            18,000
   Smith, capital ($45,000  (1 ÷ (2+2+1)) ...............................                                         9,000
   Wylie, capital ($45,000  (2 ÷ (2+2+1))...............................                                         18,000
Wylie’s capital account must increase by $18,000 ($68,000 – $50,000)
Wylie has a 40% interest: 2 ÷ (2+2+1) = 40%
$18,000 ÷ .4 = $45,000

Wylie, capital ..............................................................................       68,000
   Cash.......................................................................................                    68,000
Question 5
Partnership liquidation schedule
                               QUALITY PHOTOGRAPHY PARTNERS
                                 Schedule of Partnership Liquidation
                                             Dr (Cr)
                              Assets       Liabilities                      Ray                        Mona                       Matt
                          Cash    Non-cash                            Capital   Loan             Capital    Loan        Capital      Loan
Profit-and-loss
  ratio                                                                    50%                        30%                    20%
Preliquidation
  balances      $ 5,430 $ 61,870 $ (13,910)                       $(18,100) $ (8,000)            $ (3,090)   $ (4,000) $(11,200) $ (9,000)
Realization
  and loss        17,320 (24,700)                                     3,690                        2,214                  1,476
Balances          22,750  37,170   (13,910)                         (14,410)      (8,000)           (876)     (4,000)    (9,724)     (9,000)
Payment of
  liabilities    (13,910)           13,910*
Balances,
  Jan. 31, 20X4    8,840  37,170        —                           (14,410)      (8,000)           (876)     (4,000)    (9,724)     (9,000)
Realization
  and loss        26,010 (33,170)                                     3,580                        2,148                  1,432
Balances          34,850   4,000        —                           (10,830)      (8,000)          1,272      (4,000)    (8,292)     (9,000)
Unrecorded
  tax liability                     (2,000)                            1,000                         600                    400
Balances          34,850   4,000    (2,000)                           (9,830)     (8,000)          1,872      (4,000)    (7,892)     (9,000)
Payment of
  liabilities     (2,000)            2,000*
Balances,
  Feb. 29, 20X4   32,850   4,000        —                             (9,830)     (8,000)          1,872      (4,000)    (7,892)     (9,000)
Realization
  and loss         3,000  (4,000)                                        500                         300                    200
Balances          35,850      —         —                             (9,330)     (8,000)          2,172      (4,000)    (7,692)     (9,000)
Offset of
  Mona’s
  capital/loan                                                                                    (2,172)      2,172
Pay loan
  balances       (18,828)                                                          8,000                       1,828                  9,000
Balances          17,022      —         —                             (9,330)         —               —           —      (7,692)         —




                                                                 74
Payments to
  partners,
  capital         (17,022)                            9,330                                        7,692
Balances,
  Mar. 31, 20X4 $      — $       — $          — $        — $        —     $    —     $     — $         — $           —

               * It is likely creditors would be paid as soon as possible. However, as long as creditors are paid
                 prior to distributions to the partners, this payment may be delayed, perhaps until all assets are
                 sold.



Lesson 12
MChoice
1     d
2     b

  1. The company must both intend to refinance the obligation on a
long-term basis and demonstrate the ability to consummate the
refinancing to exclude a short-term obligation from current
liabilities.

  3.          Entry                        Period 1     Period 2
——————————————————————————————————————————————————————————————
     (a) Estimated Liability for Premiums                   9,900
        Premium Expense                      15,300       28,350
          [(510,000 ÷ 100) x ($8.00 - $5)]
        Cash (510,000 ÷ 100) x $5            25,500       63,750
           Inventory of Premium Posters
            and CDs                          40,800      102,000

—————————————————————————————————————————————————————————————————
———

     (b) Premium Expense                                         9,900*                    1,890
           Estimated Liability for
            Premiums                                                9,900                   1,890

          *[(1,050,000 x .80) - 510,000] ÷ 100 x $3.00

  4. Interest Expense .................... 3,200
      Cash ($160,000 x 7.5% x 3/12) ..............                                       3,000
      Discount on Bonds Payable
        ($32,000 x 1/5 x 1/8 x 3/12) .............                                                   200

     Bonds Payable......................... 160,000
     Loss on Redemption of Bonds ..........   7,800
       Discount on Bonds Payable
         [(1/5 x $32,000) - $200] ..........                                              6,200
       Cash.................................                                             161,600



                                                 75
 5. (a) Fair market value of the land               $680,000
       Cost of the land to Elton, Inc.                510,000
                                                     ————————
        Gain on disposition of land                  $170,000

    (b) Carrying amount of debt                      $900,000
       Fair market value of the land given            680,000
                                                      ————————
        Gain on settlement of debt                   $220,000

    (c) Notes   Payable ................... 900,000
         Land   ...........................                510,000
         Gain   on Disposition of Land ......              170,000
         Gain   on Settlement of Debt ........             220,000

    (d) Carrying amount of receivable        $900,000
       Land received in settlement            680,000
                                               ————————
        Loss on settled debt                 $220,000

    (e) Land .............................. 680,000
       Allowance for Doubtful Accounts .... 220,000
         Notes Receivable .................                 900,000


Lesson 13
Mchoice:
   1     a
   2     d
   3     a

  4. (a) The two methods of accounting for treasury stock are the cost
method and the par value method.

    (b) Treasury Stock ................        300,000
         Cash .........................                  300,000

    (c) Cash ...........................    99,000
         Paid-in Capital from Treasury Stock...            9,000
         Treasury Stock ........................          90,000

  5. A stock dividend results in the transfer from retained earnings
to paid-in capital of an amount equal to the market value of each share,
if the dividend is less than 20-25%, or par value of each share, if
the dividend is greater than 20-25%. Retained Earnings is debited for
the total amount transferred, Common Stock Dividend Distributable is
credited for the total par value of the shares, and, for a small stock



                                   76
dividend, the excess of market value over par value is credited to
Paid-in Capital in Excess of Par.

 6. (a)                           Preferred        Common      Total
                                  —————————       ————————   ————————
    Current year's dividend
      (8% of $600,000)             $ 48,000        $   ——     $ 48,000
    Remainder to common                            258,000     258,000
                                  ————————        ————————   ———————
                                   $ 48,000       $258,000   $306,000

    (b)                            Preferred       Common     Total
                                  —————————       ———————— ————————
    Dividends in arrears, 8%
      of $600,000 for two years    $ 96,000        $  ——      $ 96,000
    Current year's dividend          48,000           ——        48,000
    Remainder to common                            162,000     162,000
                                   ————————        ———————— ————————
                                   $144,000        $162,000 $306,000

    (c)                            Preferred       Common     Total
                                  —————————       ———————— ————————
    Dividends in arrears, 8%
      of $600,000 for two years    $ 96,000        $ ——       $ 96,000
    Current year's dividend          48,000         72,000     120,000
    Participating dividend 6%
      ($90,000 ÷ $1,500,000)         36,000         54,000    90,000
                                   ————————       ———————— ————————
                                   $180,000       $126,000 $306,000

    (d)                             Preferred       Common     Total
                                   —————————       ———————— ————————
    Dividends in arrears, 8%
      of $600,000 for two years        $ 96,000     $ ——      $ 96,000
    Current year's dividend             48,000      72,000   120,000
    Participating dividend (4%)         24,000      36,000    60,000
    Remainder to common                   ——         30,000    30,000
                                       ————————   ———————— ————————
                                       $168,000   $138,000 $306,000


Lesson 14
MChoice
1     d     MChoice
2     d     MChoice
3     a     MChoice




                                  77
  4. Convertible debt is treated solely as debt. One reason is that
the debt and conversion option are inseparable. The holder cannot sell
one and retain the other. The two choices are mutually exclusive.
     Another reason is that the valuation of the conversion option or
the debt security without the conversion option is subjective because
these values are not established separately in the marketplace.

    When debt is issued with stock warrants, the warrants are given
separate recognition. After issue, the debt and the detachable warrants
trade separately. The proceeds may be allocated to the two elements
based on the relative fair values of the debt security without the
warrants and the warrants at the time of issuance. The proceeds allocated
to the warrants should be accounted for as paid-in capital.

  5. (a) Earnings per common share is computed by dividing net income
less preferred dividends by the weighted average of common shares
outstanding.

    (b) A complex capital structure exists when a corporation has
convertible securities, options, warrants or other rights that upon
conversion or exercise could dilute earnings per share.

    (c) Basic earnings per share is earnings per share computed based
on the common shares outstanding during the period.

    (d) Diluted earnings per share is earnings per share computed based
on common stock and all dilutive potentially common shares that were
outstanding during the period.

 6. 1.Bonds Payable ................. 6,000,000
      Premium on Bonds Payable ......      525,000
        Common Stock .................                     4,800,000
        Paid-in Capital in Excess of Par .                    1,725,000

    2.Cash ...........................       1,940,000
       Discount on Bonds Payable .....          60,000
         Bonds Payable ................                    2,000,000

    3.Cash ...........................     3,030,000
       Discount on Bonds Payable ......      151,800
         Bonds Payable ................               3,000,000
         Paid-in Capital——Stock Warrants .                181,800
          ($189,000 ÷ $3,150,000 x $3,030,000 = $181,800)


Lesson 15




                                   78
MChoice
1     d
2     c
3     b

  4. The lessor records the gross amounts of the minimum lease
payments(excluding executory costs) and the unguaranteed residual
value (a    guaranteed residual value is included in the minimum lease
payments) as Lease Receivable and removes the asset from the books.

    The lessor records payments received as a reduction in the
receivable. Interest revenue is recognized by using the effective
interest method. The implicit interest rate is applied to the declining
balance of the Lease Receivable balance. The implicit rate is the rate
of interest that will discount the gross minimum lease payments
(excluding executory costs) and the unguaranteed residual value to
the fair value of the asset the inception of the lease.

  5. (a) It is a sales-type lease to the lessor, Silas Corp. Silas's
(the manufacturer) profit upon sale is $60,000, which is recognized
in the year of sale (2004). It is not an operating lease because title
to the assets passes to the lessee, the present value ($600,000) of
the minimum lease payments equals or exceeds 90%($540,000) of the fair
value of the leased trailers, collectibility is reasonably assured,
and no important uncertainties surround the amount of unreimbursable
costs yet to be incurred by the lessor. The remaining accounting
treatment is similar to that accorded a direct financing lease.

    (b) ($60,000 x 10) ÷ 4.62288 = $129,789.

    (c)           Lease Amortization Schedule (Lessor)

                   Annual      Interest       Lease
                   Lease       on Lease     Receivable     Lease
         Date      Rental     Receivable     Recovery Receivable
       ————————   ————————    ——————————    —————————— ——————————
       1/1/04                                            $600,000
       12/31/04   $129,789     $48,000        $81,789     518,211
       12/31/05    129,789      41,457         88,332     429,879
       12/31/06    129,789      34,390         95,399     334,480

    (d)                  January 1, 2004
       Lease Receivable ..................... 600,000
       Cost of Goods Sold ................... 540,000
         Sales Revenue ..........................      600,000
         Inventory ..............................     540,000

                         December 31, 2004
       Cash ..................................     129,789




                                  79
         Lease Receivable ....................              81,789
         Interest Revenue ....................               48,000
                         December 31, 2005
       Cash .................................     129,789
         Lease Receivable ....................              88,332
         Interest Revenue ....................              41,457

  6. (a) The lease is a direct financing type lease from the lessor's
point of view or a capital lease from the lessee's point of view. The
lease contains a bargain purchase option which satisfies one of the
criteria for classification as a direct financing lease. The option
to buy for $8,000,000 at the termination of the lease when the asset
is expected to have a fair value of $14,000,000 constitutes a bargain
purchase option. Additionally, the payments are collectible, and there
are no uncertainties as to future lessor costs.

    (b)            Lessor's Lease Amortization Schedule

                 Annual         Interest   Lease
                  Lease         on Lease Receivable Lease
     Date        Rental       Receivable Recovery    Receivable
   ————————     ——————————    —————————— —————————— ———————————
  1/1/04                                              $35,000,000
12/31/04 $5,338,396*         $2,800,000   $2,538,396    32,461,604
12/31/05    5,338,396          2,596,928   2,741,468    29,720,136

     *[$35,000,000 - ($8,000,000 x .54027)] ÷ 5.74664 = $5,338,396.

                           January 1, 2004
    (c) Lease Receivable ................ 35,000,000*
         Airplanes ......................            35,000,000

                             December 31, 2004
          Cash ............................. 5,338,396
            Lease Receivable ...............           2,538,396
            Interest Revenue ...............           2,800,000

                           December 31, 2005
        Cash ............................. 5,338,396
                 Lease Receivable ..............
2,741,468
          Interest Revenue ..............            2,596,928


Lesson 16
MChoice
1     a
2     a




                                   80
3       d

  4. (a) A deferred tax asset is the deferred tax consequences
attributable to deductible temporary differences and operating loss
carryforwards.

     (b) A deferred tax asset should be reduced by a valuation allowance
if, based on all available evidence, it is more likely than not that
some portion or all of the deferred tax asset will not be realized.
More likely than not means a level of likelihood that is at least slightly
more than 50%.

    5. (a) Deferred Tax Asset ($700,000 x 30%) .. 210,000
            Benefit Due to Loss Carryforward .......                   210,000

            Benefit Due to Loss Carryforward ...... 210,000
              Allowance to Reduce Deferred Tax Asset
               to Expected Realizable Value ..........                 210,000

      (b) Income Tax Expense ($300,000 x 30%) ...            90,000
           Deferred Tax Asset ...................                     90,000

            Allowance to Reduce Deferred Tax Asset
             to Expected Realizable Value .......... 90,000
              Benefit Due to Loss Carryforward .......                  90,000

    6. (a)           Depreciation
                     for Financial     Depreciation for Temporary
         Year      Reporting Purposes     Tax Purposes   Difference
         ————      —————————————————— ———————————————— ——————————
         2003          $160,000           $264,000      $(104,000)
         2004           160,000            360,000        (200,000)
         2005           160,000            120,000           40,000
         2006           160,000             56,000          104,000
         2007           160,000              -0-           160,000
                      ————————           ————————      —————————
                      $800,000           $800,000          $   -0-

     (b)            2004       2005     2006     2007    Total
Future taxable   ————————— ——————— ———————— ———————— ————————
 (deduct.) amounts:
Depreciation $(200,000) $40,000 $104,000 $160,000 $104,000
 Deferred tax
   liability:   $104,000 x 40% = $41,600 at the end of 2003.

    (c)                       2005            2006        2007     Total
Future taxable               ———————        ————————    ————————   ————————
(deductible) amounts:
   Depreciation            $40,000      $104,000       $160,000    $304,000




                                       81
   Rent                   (70,000)      (70,000)           (140,000)

    (d)                    Future
                          Taxable          Deferred Tax
       Temporary       (Deductible)   Tax —————————————————————
      Differences         Amounts     Rate (Asset)    Liability
      ————————————    ————————————   ———— ————————    —————————
      Depreciation      $304,000    40%                $121,600
      Rent              (140,000)    40%   $(56,000)
                        ————————            ————————   ————————
            Totals       $164,000          $(56,000)    $121,600

    (e) Deferred tax asset at end of 2004               $(56,000)
       Deferred tax asset at beginning of 2004               -0-
                                                         ————————
          Deferred tax (benefit)                          $(56,000)

          Deferred tax liability at end of 2004           $121,600
          Deferred tax liability at beginning of 2004       41,600
                                                          ————————
          Deferred tax expense                              $ 80,000

          Deferred tax (benefit)                    $(56,000)
          Deferred tax expense                        80,000
                                                      ————————
          Net deferred tax expense for 2004        $ 24,000

    (f) Income Tax Expense ($64,000 + $24,000) ..         88,000
       Deferred Tax Asset ......................          56,000
         Deferred Tax Liability ................                80,000
         Income Tax Payable ($160,000 x 40%) .....               64,000


Lesson 17
MChoice
1     c
2     c
  3     d

  4. (a) Service cost
$390,000
        Interest on projected benefit obligation
          ($360,000 x 10%)
36,000
        Expected return on plan assets ($270,000 x 9%) (24,300)
        Amortization of prior service cost              75,000
        Amortization of unrecognized net gains         (36,000)
                                                      ————————



                                   82
          Pension expense——2004                             $440,700

       (b) Pension Expense .................... 440,700
            Prepaid/Accrued Pension Cost ......                65,700
            Cash .............................               375,000

 5.            CORRIDOR TEST AND GAIN/LOSS AMORTIZATION SCHEDULE

                Beginning of Year            Cumulative
             ———————————————————————          (Gain) Or
              PBO      Plan Assets Corridor    Loss Amortization
        —————————— ——————————— ———————— —————————— ———————————
2003     $1,400,000 $1,120,000 $140,000 $ -0-           $ -0-
2004      1,560,000    1,640,000   164,000  440,000      27,600*
2005      1,960,000    1,700,000   196,000   16,400**     -0-

       Average Service Years = 2,000 ÷ 200 = 10 years
        *$440,000 - $164,000 = $276,000 ÷10 = $27,600
       **$440,000 - $396,000 - $27,600 = $16,400.

 6. (a) Service cost (projected benefits approach)           $450,000
       Interest on projected benefit obligation
         (10% x $560,000)                                     56,000
       Expected return on plan assets (9% x $525,000)         (47,250)
       Amortization of prior service cost (1)                  52,000
       Amortization of loss (2)                              22,800
                                                          ————————
            Pension expense                                $533,550
         (1) $260,000
             ———————— = $260
               1,000

             200 x $260 = $52,000

          (2) Market-related asset value            $525,000
                                                         10%
                                                      ————————
                                                     $ 52,500

             Projected benefit obligation           $560,000
                                                        10%
                                                     ————————
                                                    $ 56,000

             Net loss (beginning of period)          $170,000
             Higher of 10% of projected benefit
               obligation or market-related asset
               value                                   56,000
                                                      ————————




                                    83
            Amount to be amortized                $114,000

            1,000   Expected Future Years of Service
            ————— = ———————————————————————————————— = 5 years
             200          Number of Employees

            $114,000
            ———————— = $22,800
             5 years

      (b) Pension Expense .....................   533,500
           Prepaid/Accrued Pension Cost .......                98,550
           Cash .............................               435,000


Lesson 18
MChoice
1     b
2     c
3     b

 4.                                2004            2005
                           —————————————————— ——————————————————
                               Income Balance Income     Balance
                             Statement Sheet Statement Sheet
                            ————————— ——————— ————————— ———————
      1. Ending inventory in
         2004 overstated.            +       +       -       0

      2. Failed to accrue 2004
         interest revenue.              -   -        +          0

      3. A capital expenditure for
         factory equipment (useful
         life, 5 years) was
         erroneously charged to
         maintenance expense in
         2004.                          -    -       +          -

      4. Failed to count office
         supplies on hand at
         12/31/04. Cash expendi-
         tures have been charged
         to Office Supplies
         Expense during the year
         2004.                          -    -       +          0

      5. Failed to accrue 2004



                                   84
       wages.                          +          +         -        0

    6. Ending inventory in
       2004 understated.               -          -          +        0

    7. Overstated 2004 depreci-
       ation expense; 2005
       expense correct.                -          -         0        -

  5. (a) Accounting estimates will change as new events occur, as more
experience is acquired, or new information is obtained. Examples of
changes in estimate are: (a) collectibility of receivables, (b)
inventory obsolescence, (c) estimated lives or residual values, and
(d) warranty costs. Changes in estimates are handled prospectively;
that is, in current and future periods. No restatement of previous
financial statements is made.

     (b) A change in accounting entity results in financial statements
of a different entity. Examples of changes in entity are: (a)
consolidated statements replacing individual statements, (b)
different subsidiaries in the group for which consolidated statements
are presented, (c) different companies included in combined financial
statements, and (d) a pooling of interests. The financial statements
of all prior periods presented should be restated to show the financial
information for the new reporting entity for all periods.

    (c) Examples of accounting errors are: (a) a change from an
accounting principle that is not generally accepted to an accounting
principle that is accepted, (b) mathematical mistakes, (c) changes
in estimates that occur because the estimates are not made in good
faith, (d) an oversight, (e) a misuse of facts, and (f)
misclassification of an asset as an expense or vice versa. Corrections
of errors are recorded in the year discovered, are treated as prior
period adjustments, and the beginning balance of retained earnings
is adjusted.

 6. (a)Equipment ........................    160,000
       Depreciation Expense .............     25,000
         Accumulated Deprec. (4 years, 02-05)                     100,000
         Retained Earnings .................                       85,000

    (b)                                   2005           2004       2003
                                       ————————        ———————— ————————
Income before cumulative
   effect of accounting changes $375,000*             $350,000*   275,000*
Cumulative effect on prior
   years of retroactive appli-
   cation of new depreciation
method                         (50,000)




                                  85
                                   ————————    ————————      ————————
                                   $325,000    $350,000      $275,000

    *Reduced by $25,000 depreciation expense.
Pro forma amounts: Net income     $375,000    $330,000         $245,000

      (c) Retained earnings (unadjusted)        $1,050,000
         Correction of 2002 error
           ($160,000 - $25,000)                    135,000
                                                ——————————
          Retained earnings (adjusted)         $1,185,000

      (d) Retained earnings (unadjusted)        $1,500,000
         Correction of error
           ($160,000 - $75,000)                    85,000
                                               ——————————
          Retained earnings (adjusted)         $1,585,000

Lesson 19
MChoice
1     a
2     d
3     c

  4. 1. Smaller membership. The FASB is composed of seven members,
replacing the relatively large 18-member APB.
     2. Full-time, remunerated membership. FASB members are well-paid,
full-time members, appointed for renewable five-year terms. The APB
members were unpaid and part-time.
     3. Greater autonomy. The APB was a senior committee of the AICPA,
whereas the FASB is not an organ of any single professional organization.
It is appointed by and answerable only to the Financial Accounting
Foundation.
     4. Increased independence. APB members retained their private
positions with firms, companies, or institutions. FASB members must
sever all such ties.
     5. Broader representation. All APB members were required to be
CPAs and members of the AICPA. Currently, it is not necessary to be
a CPA to be a member of the FASB.

 5.                          Statement I
                            ———————————
    It is true that users of financial accounting statements have
coinciding and conflicting needs for statements of various types.
However, to meet these needs, accountants generally prepare a single
set of general-purpose financial statements, rather than a number of
different types of financial statements. It may be argued that
accountants often do prepare special statements for particular purposes,




                                   86
but in general the accounting profession has relied on general purpose
financial statements prepared in conformance with generally accepted
accounting principles.

                           Statement II
                           ————————————
    It is true that the FASB should be responsive to the needs of the
entire economic community, not just the public accounting profession.
However, it is not clear whether the FASB will succeed. The FASB will
have the best chance of survival if it deals with problems promptly,
sets proper priorities, takes whatever action it thinks is right and
in the public interest, and handles pressures responsibly without
overreacting to them.

                           Statement III
                           —————————————
     The first sentence of Statement III is correct in that during the
mid-seventies Congress, through the Moss and Metcalf Committees, did
make inquiries into the accounting profession's practices and the
accounting and auditing standard-setting process. In fact, the reports
submitted by these committees contained some incorrect conclusions
and some very strong remedies, but the government has not assumed
responsibility for either accounting or auditing standard-setting or
their enforcement. Instead, the accounting profession has taken
significant steps to overcome the criticisms which emanated from the
congressional inquiries and has retained in the private sector both
the accounting and auditing tandards-setting functions. At the present
time the government appears willing to permit the accounting profession
to develop its own standards and to regulate itself with minimal
intervention. The AICPA formed the Special Committee on Financial
Reporting in 1991.
     The Committee's charge was to recommend (1) the nature of
information that should be made available to others by management and
(2) the extent to which auditors should report on the various elements
of that information. The Committee's report was made in October 1994.

                           Statement IV
                           ————————————
    The Accounting Standards Executive Committee (AcSEC) was
established within the American Institute of Certified Public
Accountants, not     the Securities and Exchange Commission, to respond
to pronouncements of the FASB. The AcSEC does issue Statements of
Position, but issues them before the FASB sets standards on the issue.

 6. 1. Ending balance       50,000  Ending balance      $ 50,000
      Beginning balance     41,000   Plus:Rec. collected 134,000
                          ————————      Write-offs        6,000
  Difference                9,000                      ————————
  Uncollectible accts.      6,000 OR                     190,000




                                  87
  Receivables coll.       134,000 ——   Less: Beg. balance    41,000
                          ————————                       ————————
  Sales for period       $149,000      Sales for period    $149,000

      Accounts Receivable ................ 149,000
         Sales ..............................             149,000


2. Ending balance        $ 7,500     Ending balance    $ 7,500
   Beginning balance        4,000     Write-off          30,000
                         ———————                       ———————
  Difference                3,500 OR                    37,500
  Write-off                30,000 —— Beginning balance   4,000
                         ———————                        ——————
  Adjusting entry         $33,500      Adjusting entry  $33,500

      Bad Debt Expense ...................... 33,500
         Allowance for Doubtful Accounts ...         33,500

 3. Ending balance         $ 34,000     Beginning balance   $ 25,000
   Beginning balance         25,000     Plus purchases      110,000
                         ————————                          ——————
   Difference               9,000 OR                       35,000
   Purchases              110,000 ——   Less ending balance 34,000
                          ————————                         ——————
 Payments                $101,000      Payments           101,000

      Accounts Payable ................... 101,000
         Cash ...........................          101,000

4. Revenue Earned          $20,000      Beginning balance     $ 3,000
  Less: Dec. 31 acc.       (2,100)     Plus rev. earned       20,000
  Plus: Jan. 1 accrual      3,000 OR                           ——————
                         ——————— ——                          23,000
  Cash received           $20,900       Less ending balance     2,100
                                                            ———————
                                       Cash received          20,900

       Cash ..............................     20,900
          Interest Receivable ...........             20,900
            (This entry assumes that the $20,000 interest earned was
first recorded as a receivable.)


Lesson 20
MChoice
1     c
2     c




                                  88
3     c

  4. (a) The BASIC ARGUMENT for the publication of financial forecasts
in corporate annual reports is to provide the investor with additional
information about the future activities of the            company upon
which to base investment decisions. A SECOND      ARGUMENT is that some
investors have access to the forecast data          currently; it would
be more equitable if all investors had       access to such information.
The attestation by the CPA to such         forecast data would provide
the forecast data with reliability          and permit the investor to
have confidence in the forecast. A           THIRD ARGUMENT is that
circumstances now change so rapidly that        historical information
is no longer adequate for prediction.

     (b) ONE ARGUMENT raised against the publication of such forecasts
is the expectation that management would present a conservative forecast
in order to "look good" when actual results of the year are in. A
SECOND POINT often considered is the prospect that the forecast would
provide competitors with confidential             information thus
endangering business strategy and the          performance of the firm.
A THIRD ARGUMENT is that forecasts are narrow estimates, which makes
them difficult to interpret given that the future is not a certainty,
and as a result investors may be mislead by them.

        The attestation by CPAs also can be questioned. There may be
a conflict of interest because the forecast in the current year report
and the actual results of the next year are both audited by the CPA.
There would be concern that the reported results might be adjusted
so that the forecast appears to be borne out.




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