Intermediate Accounting II – ACCT 2322
Exam 2 Study Guide: Chapters 14 - 16
Exam 2 may be comprised of multiple choice, matching, short answer and problem questions. The study questions and sample problems below should help you prepare for the exam. Please note that the study format may not directly match the exam format.
Solutions to identification questions and problems can be found at the end of this study guide.
1. List and discuss the four criteria used to classify leases.
2. Explain the concept of “Substance over Form” as it relates to accounting for leases.
3. Describe the advantages and disadvantages of bond financing.
4. Explain how the amount reported as bond interest expense is determined.
5. Distinguish between direct financing and sales-type leases.
6. Discuss the difference between how bonds are accounted for by the issuer and investor.
7. Describe early extinguishment of bonds.
8. Explain the circumstances under which a bond would sell
a) at a discount
b) at a premium
9. Define the following terms relating to bonds and notes:
a. Face value
b. Stated (or contract) rate
c. Effective interest rate
d. Carrying value
e. Convertible bond
f. Installment note
g. Lease residual value
Problem 1
On July 1, 2014, Macon Operations sold $20 million of 10% convertible bonds that mature on July 1, 2024. The bonds sold at 102. Interest is payable each year on January 1 and July 1. Each $1,000 bond is convertible into 5 shares of Macon’s no par common stock. On June 30, 2015, ½ of the outstanding bonds were converted to stock when Macon’s common stock had a market price of $10 per share.
Required:
1) Journalize the entry to record the issuance of the bonds
2) Journalize the entry to record the first interest payment on January 1, 2015. The straight-line method of amortization is used.
3) Journalize the entry to record conversion of ½ of the bonds on June 30, 2015
Problem 2
Information for Kent Corp for the year 2013:
Pretax accounting income / $193,000Permanent differences / (15,000)
Temporary difference – depreciation / (25,000)
Taxable income / $153,000
Current balance in Deferred Tax Liability / $3,900
Tax Rate / 30%
Required: Prepare the journal entry to record Kent’s income taxes for 2013
Problem 3
On January 1, 2013, Mania Enterprises issued 12% bonds dated January 1, 2013, with a face amount of $20 million. The bonds mature in 2022 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.
Required:
1) Determine the price of the bonds at January 1, 2013.
2) Prepare the journal entry to record the bond issuance by Mania on January 1, 2013.
3) Prepare the journal entry to record interest on June 30, 2013, using the effective interest method.
4) Prepare the journal entry to record interest on December 31, 2013, using the effective interest method.
Problem 4
On January 1, 2013, Gibson Corporation entered into a four-year operating lease for manufacturing equipment. Annual lease payments of $20,000 were due to Bender Company each January 1 beginning January 2013. The equipment cost Bender $100,000 and are expected to have a useful life of 10 years with a residual value of $10,000.
Required:
1) Journalize the entries required by Gibson Corporation for 2013.
2) Journalize the entries required by Bender Company for 2013.
Problem 5
A company purchased new office equipment for a total of $250,000 on January 1, 2015. The company paid $40,000 cash and signed a $210,000, 3-year, 8% note for the remaining balance. The note is to be paid in three annual end-of-year payments of $81,487 each, with the first payment on December 31, 2015. Each payment includes interest on the unpaid balance plus principal.
Required: Complete the note amortization table below:
12/31/2015
12/31/2016
12/31/2017
Problem 6
Southern leased high-tech electronic equipment from Eastley Leasing on January 1, 2013. Eastley purchased the equipment from International Machines at a cost of $112,080. Accounting methods used include the Effective Interest Method and straight-line depreciation.
Required:
1) Journalize the entries required by Southern for 2013.
2) Journalize the entries required by Eastley for 2013.
It may be helpful to prepare an amortization schedule to allocate quarterly interest and lease payments.
Problem 7
Allmond Corporation, organized on January 3, 2013, had pretax accounting income of $14 million and taxable income of $20 million for the year ended December 31, 2013. The 2013 tax rate is 35%. The only difference between accounting income and taxable income is estimated product warranty costs. Expected payments and scheduled tax rates (based on recent tax legislation) are as follows:
2015 / $1,000,000 / 30%
2016 / $1,000,000 / 30%
2017 / $2,000,000 / 25%
Required:
1) Determine the amounts necessary to record Allmond's income taxes for 2013 and prepare the appropriate journal entry.
2) Prepare the journal entry for Allmond’s 2013 income tax.
3) What is Allmond's 2013 net income?
Schedule for Requirement 1
Temporary Difference / Tax Rate / TotalsWarranty costs reversing in:
2014
2015
2016
2014
Deferred tax asset/liability
Income taxable in current year
Income tax expense
Problem 8
Fores Construction Company reported a pretax operating loss of $135 million for financial and tax reporting purposes in 2013. The enacted tax rate is 40%. There were no temporary differences at the beginning of the year. Taxable income in Fores's two previous years of operation is shown below. Fores elects the carryback option.
Required:
1) Prepare the journal entry to record the income tax benefit from the 2013 operating loss. Complete the schedule below to determine the amounts necessary for the journal entry.
2) Determine the net loss that will be reported on the 2013 income statement including the income tax benefit.
Intermediate Accounting I - ACCT 2322
Exam 1 Study Guide: Chapters 14 – 16
Answer Key
Problem 1
Computations
1) Cash 20,400,000 $20,000,000 X 1.02
Premium on Bonds Payable 400,000
Convertible Bonds Payable 20,000,000 Face Value
2) Interest Expense 980,000 To balance
Premium on Bonds Payable 20,000 $400,000/10 years/2
Cash 1,000,000 $20,000,000 X 5%
3) Convertible Bonds Payable 10,000,000 ½ Face Value
Premium on Bonds Payable 190,000 ($400,000-$20,000)/2
Common Stock 10,190,000 To balance
Problem 2
DR CR Computations
Income Tax Expense 49,500 To balance
Deferred Tax Liability 3,600 ($25,000 X 30%) - $3,900
Income Tax Payable 45,900 $153,000 X 30%
Problem 3
Problem 4
Since this is an operating lease, the lessee simply records rent expense. The lessor records rent revenue and is also responsible for all costs related to the asset including depreciation.
Gibson (Lessee)
Date / DR / CR / ComputationsJan 1 / Rent Expense / 20,000
Cash / 20,000
Bender (Lessor)
Date / DR / CR / ComputationsJan 1 / Cash / 20,000
Rent Revenue / 20,000
Dec 31 / Depreciation Exp / 9,000 / ($100,000 - $10,000)/10
Accum Dep / 9,000
Problem 5
Payment Date / Cash Payment / Interest Expense / Principal Reduction / Ending Principal Balance
12/31/2015 / $81,487 / $16,800
($210,000 X 8%) / $64,687
($81,487-$16,800) / $145,313
($210,000-$64,687)
12/31/2016 / $81,487 / $11,625
($145,313 X 8%) / $69,862
($81,487-$11,625) / $75,451
($145,313-$69,862)
12/31/2017 / $81,487 / $6,036
(to balance) / $75,451
(to eliminate principal) / $0
Problem 6
Southern (Lessee)
January 1, 2013
Leased equipment 112,080
Lease payable 112,080
Lease payable 15,000
Cash (lease payment) 15,000
April 1, 2013
Interest expense (2% x [$112,080 – 15,000]) 1,942
Lease payable (difference) 13,058
Cash (lease payment) 15,000
July 1, 2013
Interest expense (2% x $84,022: from schedule) 1,680
Lease payable (difference) 13,320
Cash (lease payment) 15,000
October 1, 2013
Interest expense (2% x $70,702: from schedule) 1,414
Lease payable (difference) 13,586
Cash (lease payment) 15,000
December 31, 2013
Interest expense (2% x $57,116: from schedule) 1,142
Interest payable 1,142
Depreciation expense ($112,080 ÷ 2 years) 56,040
Accumulated depreciation 56,040
Problem 6
Eastley (Lessor)
January 1, 2013
Lease receivable (fair value) 112,080
Inventory of equipment (lessor’s cost) 112,080
Cash (lease payment) 15,000
Lease receivable 15,000
April 1, 2013
Cash (lease payment) 15,000
Lease receivable (difference) 13,058
Interest revenue (2% x [$112,080 – 15,000]) 1,942
July 1, 2013
Cash (lease payment) 15,000
Lease receivable (difference) 13,320
Interest revenue (2% x $84,022: from schedule) 1,680
October 1, 2013
Cash (lease payment) 15,000
Lease receivable (difference) 13,586
Interest revenue (2% x $70,702: from schedule) 1,414
December 31, 2013
Interest receivable 1,142
Interest revenue (2% x $57,116: from schedule) 1,142
Problem 7
Requirement 1
Temporary Difference / Tax Rate / TotalsWarranty costs reversing in:
2014 / $2,000,000 / 35% / $700,000
2015 / $1,000,000 / 30% / $300,000
2016 / $1,000,000 / 30% / $300,000
2014 / $2,000,000 / 25% / $500,000
Deferred tax asset/liability / $1,800,000
Income taxable in current year / $20,000,000 / 35% / $7,000,000
Income tax expense / $5,200,000
Requirement 2
Account / Debit / CreditIncome Tax Expense / 5,200,000
Deferred Tax Asset / 1,800,000
Income Tax Payable / 7,000,000
Requirement 3
Net Income:
Income Before Taxes $14,000,000
Income Tax Expense 5,200,000
Net Income $ 8,800,000
Problem 8
Requirement 1
Account / Debit / CreditIncome Tax Refund Receivable
($30,000,000+$12,000,000) / 42,000,000
Deferred Tax Asset / 12,000,000
Income Tax Benefit / 54,000,000
Requirement 2
Net Loss:
Operating Loss Before Taxes $135,000,000
Less: Income Tax Benefit 54,000,000
Net Operating Loss $ 81,000,000
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