INTERMEDIATE
ACCOUNTING II WEEK 2 ASSIGNMENT EXERCISES
E14-16 E14-18 P14-21 P 15-3
E14-16
Error in amortization schedule
Wilkins
Food Products, Inc. acquired a packaging machine from Lawrence Specialists
Corporation. Lawrence completed construction of the machine on January 1, 2009.
In payment for the machine Wilkins issued a three-year installment note to be
paid in three equal payments at the end of each year. The payments include
interest at the rate of 10%.
Lawrence
made a conceptual error in preparing the amortization schedule, which Wilkins
failed to discover until 2011. The error had caused Wilkins to understate
interest expense by 45,000 in 2009 and 40,000 in 2010.
Required:
1.
Determine which accounts are incorrect as a result of these errors at January
1, 2011, before adjustments. Explain your answer. (Ignore income taxes)
2.
Prepare a journal entry to correct the error.
3. What
other step(s) would be taken in connection with the error.
E14-18 Installment note;
amortization schedule
American
Food Services, Inc. acquired a packaging machine from Barton and Barton
Corporation. Barton and Barton completed construction of the machine on January
1, 2011. In payment for the 4 million machine, American Food Services issued a
four-year installment note to be paid in four equal monthly payments at the end
of each month. The payments include interest at the rate of 12%.
Required:
1.
Prepare the journal entry for American Food Services’ purchase of the machine
on January 1, 2011.
2.
Prepare an amortization schedule for the four-year term of the installment
note.
3.
Prepare the journal entry for the first installment payment on December 31,
2011.
4.
Prepare the journal entry for the third installment payment on December 31,
2011.
P14-21 Report bonds at fair
value; quarterly reporting
Appling
Enterprises issued 8% bonds with a face amount of 400,000 on January 1, 2011.
The bonds sold for 331,364 and mature in 2030 (20 years). For bonds of similar
risk and maturity the market yield was 10%. Interest is paid semiannually on
June 30 and December 31. Appling determines interest expense at the effective
rate. Appling elected the option to report these bonds at their fair value. The
fair values of the bonds at the end of each quarter during 2011 as determined
by their market values in the over-the-counter market were the following:
March 31
$350,000
June 30
340,000
September
30 335,000
December
31 342,000
Required:
1. By
how much will Appling’s earnings be increased or decreased by the bon ds
(ignoring taxes) in the March 31 quarterly financial statements?
2. By
how much will Appling’s earnings be increased or decreased by the bonds
(ignoring taxes) in the June 30 quarterly financial statements?
3. By
how much will Appling’s earnings be increased or decreased by the bonds
(ignoring taxes) in the September 30 quarterly financial statements?
4. By
how much will Appling’s earnings be increased or decreased by the bonds
(ignoring taxes) in the December 31 annual financial statements?
P
15-3 Direct financing and sales-type lease; lessee and lessor
Rand
Medical manufactures lithotripters. Lithotripsy uses shock waves instead of
surgery to eliminate kidney stones. Physicians’
Leasing purchased a lithotripter from Rand for 2,000,000 and leased it to
Mid-South Urologists Group, Inc. on January 1, 2011.
Lease
Description
Quarterly
lease payments $130,516-beginning of each period
Lease
term 5 years (20 quarters)
No
residual value; no BPO
Economic
life of lithotripter 5 years
Implicit
interest rate and lessee’s incremental borrowing rate 12 %
Fair
Value of asset $2,000,000
Collectively
of the lease payments is reasonably assured, and there are no lessor costs yet
to be incurred.
Required:
1.
How should this lease be classified by Mid-South Urologist Group and by
Physicians’Leasing?
2.
Prepare appropriate entries for both Mid –South Urologist Group and Physicians’
Leasing from the inception of the lease through
the second rental on April 1, 2011. Depreciation is recorded at the end of each
fiscal year (December 31).
TUTORIAL
PREVIEW
P15-3
Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead
of surgery to eliminate kidney stones. Physicians’
Leasing purchased a lithotripter from Rand for 2,000,000 and leased it to
Mid-South Urologists Group, Inc. on January 1, 2011.
1.
How should this lease be classified by Mid-South Urologist Group and by
Physicians’Leasing?
Requirement 1
Capital
lease to lessee; Direct
financing lease to lessor.
Since the present value of minimum lease payments (same for both
the lessor and the lessee) is equal to (>90%) the fair value of the asset,
the 90% recovery criterion is met.
Calculation of the Present Value of Minimum Lease Payments
Present value of
periodic lease payments
$130,516 x
15.32380** = $2,000,000
(rounded)
** present value of an annuity due of $1: n=20, i=3%
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