Intermediate Accounting - Abellano [PDF]

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FRIA MAE ABELLANO BSMAC 3 BLOCK E



INTERMEDIATE ACCOUNTING E13-1. (Statement of Financial Position Classification) How would each of the following items be reported on the statement of financial position? a) Accrued vacation pay b) Income taxes payable c) Service warranties on appliance sales d) Social security taxes payable e) Personal injury claim pending f) Unpaid bonus to officers g) Deposit received from customers to guarantee performance of a contract h) Sales taxes payable i)



Gift certificates sold to customers but not yet redeemed



j) Premium offers outstanding k) Accounts Payable l)



Employee payroll deductions unremitted



m) Current maturities of long-term debts to be paid from current assets. n) Cash dividends declared but unpaid o) Dividends in arrears on preference shares p) Loans from officers



ANSWER: a) Current Liability b) Current Liability c) Current liability or Non-current liability depending on term of warranty d) Current Liability e) Footnote disclosure (assume possible not probable) f) Current Liability g) Current liability or Non-current depending upon the time involved h) Current Liability i)



Current Liability



FRIA MAE ABELLANO BSMAC 3 BLOCK E j) Current Liability k) Current Liability l)



Current Liability



m) Current Liability n) Current Liability o) Footnote Disclosure p) Separate presentation in either current or non-current liability section



E13-21. (Financial Statement Impact of Liability Transactions). Presented below is a list of possible transactions. 1. Purchased inventory for €80,000 on account (assume perpetual system is used). 2. Issued an €80,000 note payable in payment on account (see item 1 above). 3. Recorded accrued interest on the note from item 2 above. 4. Borrowed €100,000 from the bank by signing a 6-month, €112,000, zero-interest-bearing note. 5. Recognized 4 months' interest expense on the note from item 4 above. 6. Recorded cash sales of €75,260, which includes 6% sales tax. 7. Recorded wage expense of €35,000. The cash paid was €25,000; the difference was due to various amounts withheld. 8. Recorded employer's payroll taxes. 9. Accrued accumulated vacation pay. 10. Recorded an asset retirement obligation. 11. Recorded bonuses due to employees. 12. Recorded a contingent loss on a lawsuit that the company will probably lose. 13. Accrued warranty expense. 14. Paid warranty costs that were accrued in item 13 above. 15. Recorded sales of product and related service-type warranties. 16. Paid warranty costs under contracts from item 15 above. 17. Recognized warranty revenue (see item 15 above) 18. Recorded estimated liability for premium claims outstanding.



FRIA MAE ABELLANO BSMAC 3 BLOCK E



INSTRUCTIONS: Set up a table using the format shown below and analyze the effect of the 18 transactions on the financial statement categories indicated. # 1



ASSETS



LIABILITIES



EQUITY



NET INCOME



Use the following code: I: INCREASE



D: DECREASE



NE: NO NET EFFECT



#



ASSETS



LIABILITIES



EQUITY



NET INCOME



1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18



I NE NE I NE I D NE NE I NE I NE D NE D NE NE



I NE I I I I I I I I I I I D I NE D I



NE NE D NE D I D D D NE D I D NE D D I D



NE NE D NE D I D D D NE D I D NE D D I D



E14-1. Presented below are various account balances. a. Bank loans payable of a winery due March 10, 2014. (The product requires aging for 5 years before sale). b. Serial bonds payable, P1,000,000, of which P250,000 are due each July 31. c. Amounts withheld from employees' wages for income taxes. d. Notes payable due January 15, 2013. e. Credit balances in customers' accounts arising from returns and allowances after collection in full of account.



FRIA MAE ABELLANO BSMAC 3 BLOCK E f.



Bonds payable of P 2,000,000 maturing June 30, 2012



g. Overdraft of P 1,000 in a bank account. (No other balances are carried at this bank). h. Deposits made by customers who have ordered goods.



Instructions: Indicate whether each of the items above should be classified on December 31, 2011, as a current liability, a long-term liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case. ANSWER: a. Current liability IF current assets are used to satisfy debt. b. Current liability, P 250,000; long-term liability, P 750,000. c. Current liability d. Probably noncurrent, although if operating cycle is greater than one year and current assets are used this item would be classified as current. e. Current liability f.



Current liability unless (a) a fund for liquidation has been accumulated which is not classified as a current asset or (b) arrangements have been made for refinancing.



g. Current liability h. Current liability



E14-2. Classification. The following items are found in the financial statements. a. Interest expense (credit balance) b. Bond issue costs c. Gain on repurchase of debt d. Mortgage payable (payable in equal amounts over next 3 years). e. Debenture bonds payable (maturing in 5 years) f. Notes payable (due in 4 years) g. Income bonds payable (due in 3 years)



FRIA MAE ABELLANO BSMAC 3 BLOCK E



Instructions: Indicate how each of these items should be classified in the financial statements. ANSWER: a. Reclassify to interest payable on statement of financial position. b. Reduction of the issue amount of the bond payable. c. Classify as part of other gains and losses on the income statement. d. Classify one-third as current liability and the remainder as long-term liability on statement of financial position.



e. Classify as long-term liability on statement of financial position. f. Classify as long-term liability on statement of financial position. g. Classify as long-term liability on statement of financial position.



P14-1. (ANALYSIS OF AMORTIZATION SCHEDULE AND INTEREST ENTRIES). The following amortization and interest schedule reflect the issuance of 10-year bonds by Capulet Corporation on January 1, 2004 and the subsequent interest payment and charges. The company’s year-end is December 31 and financial statements are prepared once yearly.



YEAR 1/1/2004 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013



INSTRUCTIONS:



AMORTIZATION SCHEDULE AMOUNT CASH INTEREST AMORTIZED P 11 OOO 11 OOO 11 OOO 11 OOO 11 OOO 11 OOO 11 OOO 11 OOO 11 OOO 11 OOO



P 11 322 11 361 11 404 11 452 11 507 11 567 11 635 11 712 11 797 11 894



P 5 651 5 329 4 968 4 564 4 112 3 605 3 038 2 403 1 691 894



BOOK VALUE P 94 349 94 671 95 032 95 436 95 888 96 395 96 962 97 597 98 309 99 106 100 000



FRIA MAE ABELLANO BSMAC 3 BLOCK E a) Indicate whether the bons were issued at a premium or a discount and how you can determine this fact from the schedule. b) Determine the stated interest rate and effective interest rate. c) On the basis of the schedule, prepare the journal entry to record the issuance of the bonds on January 1, 2004. d) On the basis of the schedule, prepare the journal entry or entries to reflect the bond transactions and accruals for 2004. (Interest is paid January 1) e) On the basis of the schedule, prepare journal entry or entries to reflect the bond transactions and accruals for 2011. Capulet Corporation does not use reversing entries.



ANSWER: a. The bonds were sold at a discount of P 5, 651. Evidence of the discount is the January 1, 2004 book value of P 94, 349 which is less than the maturity value of P 100, 000 in 2013.



b. The stated rate is 11% (11,000/100,000). The effective rate is 12% (11,322/94,349) c.



JANUARY 1, 2004 Cash



P 94,349



Bonds Payable



P 94,349



d. DECEMBER 31, 2004 Interest Expense Bonds Payable Interest Payable



P 11,322 P 322 P 11,000



e. JANUARY 1, 2011 Interest Payable Cash



P 11,000 P 11,000



DECEMBER 31, 2011 Interest Expense Bonds Payable Interest Payable



P 11,712 P 712 P 11,000