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ACC 306 Week 1 Assignment E13-21, E13-22, P12-1, P12-7,P12-10,
P12-14, P13-6
ACC 306 Week 1 Quiz
ACC 306 Week 1 DQ 1 Equity Method
ACC 306 Week 1 DQ 1 Accounting Pronouncements
ACC 306 Week 1 DQ 2 Judgment Case 13-9
ACC 306 Week 2 Quiz
ACC 306 Week 2 DQ 1 Ethics Case 14-8 Hunt Manufacturing Debt for
equity swaps
ACC 306 Week 2 DQ 2 Ethics Case 15-4 Leasehold Improvements
ACC 306 Week 2 Assignment E 14-16, E 14-18, E 15-25, P14-21, P15-
3
ACC 306 Week 3 Assignment E 16-24, E 16-25, E 17-10, E 17-19, P
16-7, P 17-16
ACC 306 Week 3 Quiz
ACC 306 Week 3 Ethics Case 17-6 401(k) plan contributions

ACC 306 Week 3 Integrating Case 16-5 accounting changes and error
correction
ACC 306 Week 4 Communication Case 18-10
ACC 306 Week 4 Quiz
ACC 306 Week 4 Ethics Case 19-7 International Network Solutions
ACC 306 Week 4 Assignment E 18-18, E 18-24, E 19-2, E 19-5, E 19-9,
E 19-24, P 18-5
ACC 306 Week 5 Analysis Case 20-10
ACC 306 Week 5 Ethics Case 20-5 Softening the blow
ACC 306 Week 5 Ethics Case 21-7
ACC 306 Week 5 Assignment E 20-18, P 21-11, P 21-14
ACC 306 Week 5 Final Lease Paper (2 Papers)
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ACC 306 Week 1 Assignment E13-21, E13-22, P12-1,
P12-7,P12-10, P12-14, P13-6
ACC 306 Week 1 Assignment E13-21, E13-22, P12-1, P12-7,P12-10,
P12-14, P13-6

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ACC 306 Week 1 DQ 1 Accounting Pronouncements
Accounting Pronouncements. The Financial Accounting Standards
Board has issued accounting pronouncements that affect how accounting
transactions should be treated. These pronouncements may affect all
companies or just specific industries, but no pronouncements have been
issued that affect social media companies, like Zynga and Facebook. In
the Forbes article, “Social Media's Phony Accounting,” written by
Francine McKenna, the author discusses how these new rules are being
invented. Read the article and then:
a. Discuss the methods that have been invented and how management
estimates can manipulate the resulting income from these transactions.
Provide examples to support your opinion.
b. Should these invented rules be implemented without authoritative
approval?
c. Should these new rules be labeled as Generally Accepted Accounting
Principles (GAAP)?

You must respond to at least two of your classmates’ postings by Day 7
to receive full credit.
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ACC 306 Week 1 DQ 1 Equity Method
P 12–13 - Miller Properties - Equity method ● LO5 LO6
On January 2, 2011, Miller Properties paid $19 million for 1 million
shares of Marlon Company’s 6 million outstanding common shares.
Miller’s CEO became a member of Marlon’s board of directors during
the first quarter of 2011.
The carrying amount of Marlon’s net assets was $66 million. Miller
estimated the fair value of those net assets to be the same except for a
patent valued at $24 million above cost. The remaining amortization
period for the patent is 10 years.
Marlon reported earnings of $12 million and paid dividends of $6
million during 2011. On December 31, 2011, Marlon’s common stock
was trading on the NYSE at $18.50 per share.
Required:

1. When considering whether to account for its investment in Marlon
under the equity method, what criteria should Miller’s management
apply?
2. Assume Miller accounts for its investment in Marlon using the equity
method. Ignoring income taxes, determine the amounts related to the
investment to be reported in its 2011:
a. Income statement.
b. Balance sheet.
c. Statement of cash flows.
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ACC 306 Week 1 DQ 2 Judgment Case 13-9
Judgment Case 13–9 - Valleck Corporation - Loss contingency and full
disclosure ● LO5 LO6
In the March 2012 meeting of Valleck Corporation’s board of directors,
a question arose as to the way a possible obligation should be disclosed
in the forthcoming financial statements for the year ended December 31.
A veteran board member brought to the meeting a draft of a disclosure
note that had been prepared by the controller’s office for inclusion in the
annual report. Here is the note:

On May 9, 2011, the United States Environmental Protection Agency
(EPA) issued a Notice of Violation (NOV) to Valleck alleging violations
of the Clean Air Act. Subsequently, in June 2011, the EPA commenced
a civil action with respect to the foregoing violation seeking civil
penalties of approximately $853,000. The EPA alleges that Valleck
exceeded applicable volatile organic substance emission limits. The
Company estimates that the cost to achieve compliance will be
$190,000; in addition the Company expects to settle the EPA lawsuit for
a civil penalty of $205,000 which will be paid in 2014.
“ Where did we get the $205,000 figure? ” he asked. On being informed
that this is the amount negotiated last month by company attorneys with
the EPA, the director inquires, “Aren’t we supposed to report a liability
for that in addition to the note? ”
Required:
Explain whether Valleck should report a liability in addition to the note.
Why or why not? For full disclosure, should anything be added to the
disclosure note itself?
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Acc 306 Week 1 Homework (Be 13-1, Be 13-4, E 13-2, E
13-10, Be 13-7, P 13-8, Be14-8, Be14-12, E14-5, E14-19,
P14-3, P14-4)

BE 13-1
BE 13-4
E 13-2
E 13-10
BE 13-7
P 13-8
BE14-8
BE14-12
E14-5
E14-19
P14-3
P14-4
BE13-1
On April 1, Lopez Sales, Inc. purchased inventory costing $458,400
using a 5-month trade note payable. The note carries an annual interest
rate of 4%. Lopez has a December 31 year-end. Prepare the journal
entries required. The company uses the perpetual inventory system.
What is interest expense during the current year?
The conceptual framework defines liabilities as "probable future
sacrifices of economic benefits arising from present obligations of a
particular entity to transfer assets or provide services to other entities in

the future as a result of past transactions or events." This definition
includes three characteristics:
1. The entity will probably need to make a future sacrifice to satisfy the
obligation (for example, disburse cash).
2. The entity has little or no option to avoid a future sacrifice.
BE 13-4
Sentinel Boutique sold $1,300 of gift cards, and received cash on May
25. On June 29, customers redeemed $650
of the gift cards, purchasing merchandise that cost Sentinel$424. The
store uses a perpetual inventory system. Prepare the journal entries to
record the activities related to the gift cards.
E 13-2
On May 1 of the current year, Manny Home and Casualty, Inc. collected
$792,000 for three-year insurance policies.
Manny has a December 31 year-end.
The conceptual framework defines liabilities as "probable future
sacrifices of economic benefits arising from present obligations of a
particular entity to transfer assets or provide services to other entities in
the future as a result of past transactions or events." This definition
includes three characteristics:

1. The entity will probably need to make a future sacrifice to satisfy the
obligation (for example, disburse cash).
2. The entity has little or no option to avoid a future sacrifice.
3. The transaction or event giving rise to the obligation has already
occurred.
Operating liabilities are obligations arising from the firm's primary
business operations, including short-term obligations such as
E 13-10
Ashly Electronics, Inc. manufactures and distributes LCD televisions.
Every television manufactured by Ashly carries an assurance-type
warranty covering all parts and labor to protect against defects for a two-
year period. During the current year, Ashly's sales amounted to
$10,008,000. Ashly estimates that the total costs of providing the
assurance-type warranty will be 3% of sales. Actual repair costs for the
first year after the sale were $219,000 with $151,500 for parts and
$67,500 for labor (paid). During the second year, the company incurred
$296,000 in total repairs with $153,500 for parts and $142,500 for labor
(paid).
A warranty is a company's promise or guarantee to repair or replace any
defective goods for a specified period of time after the date of purchase.
There are two types of warranties:

BE 13-7
Cole Products manufactures wireless routers for home use. The
company reported total sales on account of $11,500,000
during the current year. The cost of the merchandise sold was
$5,900,000.
(Click the icon to view the warranty contract information.)
Cole offers an assurance-type warranty that covers all repair costs,
including parts and labor, for one year after the date of sale. The
company estimates that warranty costs will amount to 4% of total sales.
In the year in which it sold the products, the company also sold 55,000
service-type warranties at a price of $95 per contract, and received cash.
Cole
sold the contracts at the end of the year and did not recognize any
warranty revenue in the year of the sale. The service-type warranty
covers all parts and labor for three years after the expiration of the
assurance-type warranty. The company estimates that the service-type
warranty will be used 85% in the first year of the contract, 14% in the
second year, and 1%
in the third year.
During the year of the sale, customers made warranty claims of
$291,000 against the assurance-type warranty. Of this amount, $200,000
was paid for parts and the $91,000 balance was incurred for labor
(unpaid). During the following year, the company incurred $189,000 in
actual warranty claims that are now only covered under the service-type

warranty contract. The repair costs included $104,000 in parts and
$85,000 in labor (unpaid).
A warranty is a company's promise or guarantee to repair or replace any
defective goods for a specified period of time after the date of purchase.
There are two types of warranties: assurance-type warranties and
service-type
P 13-8
Humphrey Corporation employs 44 production workers and pays them
all the same salary. Humphrey employs 14
administrative staff personnel and pays them all the same salary. The
following annual information is available for each employee group.
(Click the icon to view the annual information for each employee
group.)
Payroll taxes payable are liabilities that companies incur related to the
payment of employee salary and wages. Payroll taxes include:
• Social Security taxes
• Unemployment taxes
• Income taxes withheld
Both employers and employees bear the responsibility for payroll taxes.
In addition to an employee's salary, an employer is responsible for
paying certain taxes, such as unemployment taxes and a portion of
Social Security taxes. These payroll taxes are considered part of the
company's wage expense in addition to the employee's salary.

Employees also pay taxes—such as a portion of Social Security and
income taxes—that the employer deducts from their gross wages and
remits to the appropriate taxing jurisdictions and agencies. That is, the
employer collects the tax for the government agencies imposing the tax
and has an obligation to remit the amounts withheld, but does not incur
an expense.
BE14-8
Fill in the missing items for each of the cases below:(Use a financial
calculator or a spreadsheet application when necessary to make the
appropriate calculations. Round all intermediary and final percentage
calculations to the nearest hundredth percent, (X.XX%) or four decimal
places .XXXX. Round all dollar values to the nearest dollar. Enter
applicable discount amounts with a parentheses or a minus sign.)
BE14-12
On January 1, Modine Company issued $1,100,000 par value, 6%, 5-
year bonds (i.e., there were 1100$1,000 par value bonds in the issue).
Interest is payable semiannually each January 1 and July 1 with the first
interest payment due at the end of the period on July 1. Modine paid
$3,000 in underwriting fees. Determine the issue price of the bonds,
assuming that the market rate of interest is 12% and prepare the journal
entry to record the bond issue under IFRS using the net method.

A bond payable is a debt instrument typically issued for a period greater
than a year to raise capital that requires the debtor to repay the principal
balance at a specified date in the future, referred to as the maturity date.
Bonds usually involve interest payments at fixed time intervals (for
example, quarterly). When a company issues a bond, it becomes the
debtor and the purchaser of the bond is the creditor. Bonds are offered to
the public and can usually be traded in the secondary market. A
company issues bonds to a large number of lenders in the market, and
each lender extends credit to the corporation. This feature contrasts to a
note payable, where there is one debtor and one creditor that transact
directly.
Corporations can issue bonds at:
E14-5
On January 1, 2016, the Yankee Road Corporation, a U.S. GAAP
reporter, issued $1,300,000 par value, 7%, five-year bonds. Interest is
payable semiannually each January 1 and July 1 with the first interest
payment due at the end of the period on July 1, 2016.
The market rate of interest on the date of the bond issue was 10%.
The company's fiscal year ends on December 31.

directly.
E14-19
TFC Associates issued 3,100 of its $1,000, 9%, five-year par value
bonds. There are no bond issue costs. Interest is paid annually. The
market rate on the date of issue was 11%. The market price of TFC
Associates common shares on the date the bonds are issued is $80 per
share. The bonds were sold with 46,500 warrants to acquire 46,500
shares of the company's $2 par value common stock for $70 per share.
That is, each bond carries 30 warrants. TFC Associates has existing
bonds outstanding that trade without warrants at $910. There are other
TFC Associates warrants outstanding that trade for $70 each.
P14-3
On January 1, 2016, Pure Products issued $800,000 par value, 10%,
five-year bonds. Interest is payable semiannually at the end of the
period. The market rate of interest on the date of the bond issue was 8%.

directly.
P14-4
Lambda Manufacturing Company issued $1,200,000 par value, 16%,
five-year bonds dated January 1, 2016. The bonds pay interest
semiannually each June 30 and December 31. Lambda issued the bonds
on April 30, 2016, when the market rate of interest was 18%. Bond issue
costs were $55,000.
directly.

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ACC 306 Week 1 Quiz (2 Set)
QUESTION 1
On January 1, 2015, Watson Corp. issued $900,000 par value, 8%, three-
year bonds when the market rate of interest was 8%. Interest is payable
semiannually each June 30 and December 31. Watson incurred bond
issue costs of $29,000. Under IFRS, what is the journal entry when
Watson issued the bonds? (Record debits first, then credits. Exclude
explanations from any journal entries.)
QUESTION 2
On January 1, 2016, the Bionic Corporation issued $48,000 par value,
8%, four-year bonds that mature on December 31, 2019. Interest is
payable semiannually each June 30 and December 31. The historical
market rate of interest is 10%. Bionic paid $6,000 in underwriting fees.
What is the journal entry to record the bond issuance? Prepare the
amortization table. Prepare the journal entries for the first year of the
bond issue. What is the carrying value of the bonds on December 31,
2016?

Prepare the amortization table for the bond issue, assuming that Bionic
uses the effective interest rate method of amortization. (Round each
calculation to the nearest whole number and then use the rounded value
for each subsequent calculation in the table. Enter a "0" for any zero
amounts. Assume that any rounding differences have been adjusted for.)
QUESTIONS 3
Rundell Motors, Inc. employs 1,200 hourly employees. During the
current year, employees earned 2,500 weeks of vacation, but 460
employees elected to carryover a total of 900 vacation weeks to the
following year. Employees took the remaining 1,600 weeks of vacation
during the current year. Rundell typically follows a policy that all
accumulated vacation days are lost by the employee either upon
termination or at retirement. Using an average wage rate of $850 per
week, prepare the journal entries required to record Rundell's vacation
accrual. (Record debits first, then credits. Exclude explanations from
journal entries.)
Begin by preparing the journal entry for the compensation expense
related to the 1,600 vacation weeks taken during the current year.
QUESTION 4

On July 1, year 1, Planet Corporation sold Ken Company 10-year, 8%
bonds with a face amount of $500,000 for $520,000. The market rate
was 6%. The bonds pay interest semiannually on June 30 and December
31. For the six months ended December 31, year 1, what amount should
Planet report as bond interest expense and long-term liability in the
balance sheet and income statement for Year 1?

QUESTIONS 5
In August of 2015, a customer at Oh So Yummy Restaurant slipped on a
wet floor and broke a hip. The customer sued the corporation in
September 2015. The company's attorneys believe that it is 99% likely
that Oh So Yummy will lose this case and estimate that the loss will
range between $550,000 and $1,050,000. There is no best estimate in
this range of possible losses. What is the journal entry to record the
contingent liability on the December
QUESTION 6
Reese Buys, Inc. offers a One-year assurance-type warranty on each
television sold. The company also sells a three-year
service-type warranty contract for its televisions. On January 1, 2015,
Reese Buys sold $540,000 of service-type warranties and received cash.
The service-type warranty contracts are effective immediately and cover
the period from

January 1, 2015, through December 31, 2017. Reese Buys incurred costs
of $88,000 in 2016 related to the warranties, where $59,000 of this cost
was for parts and the remaining $29,000 was for labor (unpaid). Provide
the necessary journal entries to account for the service-type warranty
contract over the January 1, 2015, through December 31, 2017, period.
(Record debits first, then credits. Exclude explanations from any journal
entries.)Begin by preparing the journal entry for service-type warranty
contract sales for January 1, 2015.
QUESTION 7
During the fourth quarter ended December 31, year 1, Lighting Fixtures
Inc. (LFI) had average outstanding revolving bank loans of $1.2 million.
Assume that the quarterly interest charges associated with these loans
was $7,500. If LFI makes the interest payment to the banks on January
15, year 2, what is the journal entry (if any) made by the company on
December 31 to reflect the above?
QUESTION 8
Emil Associates manufactures and distributes component parts for car
audio systems. Emil's
assurance-type warranty covers all repair costs, including parts and
labor, for two
years after the date of sale. During the current year, Emil sold
$4,200,000 of component parts to several manufacturers of car audio

systems. The company estimates that warranty costs will be 5% of sales.
Emil did not make any repairs in the year of the sale. However, during
the following year, the company incurred $68,000 in warranty claims.
The repair costs include $35,000 in parts and $33,000 in labor (unpaid).
Emil uses the accrual-basis to account for its assurance-type warranty
costs. What journal entries are necessary to record these transactions?
entries.)
First, record the journal entry for the sale. Do not record the entry for the
estimated warranty expense in the year of the sale. We will do that in the
next step.
QUESTION 9
Far Out Producers is involved in two product liability lawsuits and a
third lawsuit that the company brought against a competitor for patent
infringement. At December 31, Year 1, the company's attorneys
informed management of the following:
t• It is probable that Far Out will lose one of the product liability
lawsuits, although the actual settlement could be as low as $800,000 and
as high as $2,000,000.
• It is possible that the company could lose $1,000,000 in the second
product liability lawsuit.

• It is probably that Far Out will win $500,000 in the patent infringement
case.
What should Far Out report on its December 31, Year 1 balance sheet
for these contingencies?
QUESTION 10
Assume that Alva Company issued a $176,000 face value, five-year,
zero-coupon bond on January 1 of the current year. The current market
interest rate is 2%.
What is the bond issue price? Prepare an amortization table using the
effective interest rate method. What are the journal entries to record the
issuance and interest for the first year?
Determine the issue price of the bond. (Use the present value and future
value tables, the formula method, a financial calculator, or a spreadsheet
for your calculations. If using present and future value tables or the
formula method, use factor amounts rounded to five decimal places,
X.XXXXX. Round your final answers to the nearest whole dollar.)
SECOND ATTEMPT
QUESTION 1
On January 1, 2016, the Ansara Corporation issued $47,000 par value,
6%, four-year bonds that mature on December 31,
2019. The market rate of interest was 10%. Ansara pays interest
semiannually on June 30 and December 31. Ansara paid $4,800 in

underwriting costs. Assume Ansara Corporation decides to retire the
debt on December 31, 2017, for
$35,100.
What gain or loss should Ansara report in its 2017 financial statements?
What is the journal entry to record the derecognition?
Determine the gain or loss that Ansara should report in its 2017 financial
statements. (Use a minus sign or parentheses for any loss amounts.)
QUESTION 2
Boyd Associates manufactures and distributes component parts for car
audio systems. Boyd's assurance-type warranty covers all repair costs,
including parts and labor, for two years after the date of sale. During the
current year, Boyd
sold $4,700,000 of component parts to several manufacturers of car
audio systems. The company estimates that warranty costs will be 7% of
sales. Boyd did not make any repairs in the year of the sale. However,
during the following year, the company incurred $73,000 in warranty
claims. The repair costs include $40,000 in parts and $33,000 in labor
(unpaid).
Boyd uses the accrual-basis to account for its assurance-type warranty
costs. What journal entries are necessary to record these transactions?
entries.)

QUESTION 3
Worked Solution
QUESTION 4
Cole's Department Stores, Inc. records $135,000 in gift card sales and
receives cash in year 1. Customers used 25% of the gift cards to
purchase merchandise in year 2. Cost of sales is 40% of total sales.
Cole's uses the perpetual inventory system. Record the sale and
redemption of the gift cards in years 1 and 2, respectively. (Record
debits first, then credits. Exclude explanations from any journal entries.)
QUESTION 5
Assume that Bellati Company issued a $116,000 face value, five-year,
zero-coupon bond on January 1 of the current year. The current market
interest rate is 2%.

What is the bond issue price? Prepare an amortization table using the
effective interest rate method. What are the journal entries to record the
issuance and interest for the first year?
Determine the issue price of the bond. (Use the present value and future
value tables, the formula method, a financial calculator, or a spreadsheet
for your calculations. If using present and future value tables or the
formula method, use factor amounts rounded to five decimal places,
X.XXXXX. Round your final answers to the nearest whole dollar.)
QUESTION 6
On July 1, year 1, Cobb Company issued 9% bonds in the face amount
of $1,000,000 that mature in 10 years. The bonds were issued for
$939,000 to yield 10%, resulting in a bond discount of $61,000. Cobb
uses the effective interest method of amortizing bond discount. Interest
is payable annually on June 30.
At June 30, year 3, Cobb's unamortized bond discount should be:
QUESTION 7

Byrd Buys, Inc. offers a one-year assurance-type warranty on each
television sold. The company also sells a three-year
service-type warranty contract for its televisions. On January 1, 2015,
Byrd Buys sold $420,000 of service-type warranties and received cash.
The service-type warranty contracts are effective immediately and cover
the period from January 1, 2015, through December 31, 2017. Byrd
Buys incurred costs of $88,000 in 2016 related to the warranties, where
$55,000 of this cost was for parts and the remaining $33,000 was for
labor (unpaid). Provide the necessary journal entries to account for the
service-type warranty contract over the January 1, 2015, through
December 31, 2017, period. (Record debits first, then credits. Exclude
Begin by preparing the journal entry for service-type warranty contract
sales for January 1, 2015.
QUESTION 8
Salvo Company issued $792,000 par value, five-year, 2% bonds on June
1, 2016. The bonds are dated January 1, 2016,
and pay interest semiannually each June 30 and December 31. The
bonds are sold at par plus accrued interest because they are sold between
interest dates. The company's fiscal year ends on December 31. Prepare

the journal entries required to issue the bonds on June1, 2016, and
record the first interest payment on June 30, 2016.
entries.)
First, prepare the journal entry required to issue the bonds on June1,
2016.
QUESTION 9
Far Out Producers is involved in two product liability lawsuits and a
third lawsuit that the company brought against a competitor for patent
infringement. At December 31, Year 1, the company's attorneys
informed management of the following:
t• It is probable that Far Out will lose one of the product liability
lawsuits, although the actual settlement could be as low as $800,000 and
as high as $2,000,000.
• It is possible that the company could lose $1,000,000 in the second
product liability lawsuit.

t• It is probably that Far Out will win $500,000 in the patent
infringement case.
What should Far Out report on its December 31, Year 1 balance sheet
for these contingencies?
QUESTION 10
During the fourth quarter ended December 31, year 1, Lighting Fixtures
Inc. (LFI) had average outstanding revolving bank loans of $1.2 million.
Assume that the quarterly interest charges associated with these loans
was $7,500. If LFI makes the interest payment to the banks on January
15, year 2, what is the journal entry (if any) made by the company on
December 31 to reflect the above?
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ACC 306 Week 1 Quiz

Question 1: Which of the following may create employer liabilities in
connection with their payrolls?
Question 2: Current liabilities are normally recorded at the amount
expected to be paid rather than at their present value. This practice can
be supported by GAAP according to the concept of:
Question 3: The investment category for which the investor's "positive
intent and ability to hold" is important is:
Question 4: Which of the following investment securities held by
Zoogle Inc. may be classified as held-to-maturity securities in its balance
sheet?
Question 5: Large, highly rated firms sometimes sell commercial paper:
Question 6: If Pop Company exercises significant influence over Son
Company and owns 40% of its common stock, then Pop Company:
Question 7: A contingent loss should be reported in a footnote to the
financial statements rather than being accrued if:
Question 8: Assume that, on 1/1/06, Matsui Co. paid $1,200,000 for its
investment in 60,000 shares of Yankee Inc. Further, assume that Yankee
has 200,000 total shares of stock issued. The book value and fair value
of Yankee's identifiable net assets were both $4,000,000 at 1/1/06. The
following information pertains to Yankee during 2006:
• Net Income$200,000
• Dividends declared and paid$60,000
• Market price of common stock on 12/31/06
• $22/share

What amount would Matsui report in its year-end 2006 balance sheet for
its investment in Yankee?
Question 9: Other things being equal, most managers would prefer to
report liabilities as noncurrent rather than current. The logic behind this
preference is that the long-term classification permits the company to
report:
Question 10: Which of the following investment securities held by
Zoogle Inc. are not reported at fair value in its balance sheet?
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ACC 306 Week 2 Assignment E 14-16, E 14-18, E 15-25,
P14-21, P15-3
ACC 306 Week 2 Assignment E 14-16, E 14-18, E 15-25, P14-21, P15-
3
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ACC 306 Week 2 DQ 1 Ethics Case 14-8 Hunt
Manufacturing Debt for equity swaps

Ethics Case 14–8 - Hunt Manufacturing - Debt for equity swaps; have
your cake and eat it too ● LO5
The cloudy afternoon mirrored the mood of the conference of division
managers. Claude Meyer, assistant to the controller for Hunt
Manufacturing, wore one of the gloomy faces that were just emerging
from the conference room. “Wow, I knew it was bad, but not that bad,”
Claude thought to himself. “I don’t look forward to sharing those
numbers with shareholders.”
The numbers he discussed with himself were fourth quarter losses which
more than offset the profits of the first three quarters. Everyone had
known for some time that poor sales forecasts and production delays had
wreaked havoc on the bottom line, but most were caught off guard by
the severity of damage.
Later that night he sat alone in his office, scanning and rescanning the
preliminary financial statements on his computer monitor. Suddenly his
mood brightened. “This may work,” he said aloud, though no one could
hear. Fifteen minutes later he congratulated himself, “Yes!”
The next day he eagerly explained his plan to Susan Barr, controller of
Hunt for the last six years. The plan involved $300 million in convertible
bonds issued three years earlier.
Meyer: By swapping stock for the bonds, we can eliminate a
substantial liability from the balance sheet, wipe out most of our interest
expense, and reduce our loss. In fact, the book value of the bonds is

significantly more than the market value of the stock we’d issue. I think
we can produce a profit.
Barr: But Claude, our bondholders are not inclined to convert the bonds
Meyer: Right. But, the bonds are callable. As of this year, we can call
the bonds at a call premium of 1%. Given the choice of accepting that
redemption price or converting to stock, they’ll all convert. We won’t
have to pay a cent. And, since no cash will be paid, we won’t pay taxes
either.
Required:
Do you perceive an ethical dilemma? What would be the impact of
following up on Claude’s plan? Who would benefit? Who would be
injured?
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ACC 306 Week 2 DQ 2 Ethics Case 15-4 Leasehold
Improvements
American Movieplex, a large movie theater chain, leases most of its
theater facilities. In conjunction with recent operating leases, the
company spent $28 million for seats and carpeting. The question being
discussed over break- fast on Wednesday morning was the length of the
depreciation period for these leasehold improvements. The company

controller, Sarah Keene, was surprised by the suggestion of Larry
Person, her new assistant.
Keene: Why 25 years? We’ve never depreciated leasehold
improvements for such a long period.
Person: I noticed that in my review of back records. But during
our expansion to the Midwest, we don’t need expenses to be any higher
than necessary.
Keene: But isn’t that a pretty rosy estimate of these assets’ actual
life? Trade publications show an average depreciation period of 12
years.
Required:
1. How would increasing the depreciation period affect American
Movieplex’s income?
2. Does revising the estimate pose an ethical dilemma?
3. Who would be affected if Person’s suggestion is followed?
*********************************
ACC 306 Week 2 Homework (BE 15-12, E 15-5, E 15-19,
P15-3, P15-4, BE 16-6, BE 16-12, E 16-5, P 16-5, P 16-6)

BE 15-12
E 15-5
E 15-19
P15-3
P15-4
BE 16-6
BE 16-12
E 16-5
P 16-5
P 16-6
BE 15-12
The Scow Company declared its quarterly cash dividend on March 31st
of the current year. The dividend of $0.30 per share was to be paid on
May 1st to the shareholders of record as of April 18th. The company
reported 135,000 shares issued with 18,000 shares held in the treasury.
Prepare the journal entries required to record the cash dividend for the
quarter on the dates of declaration, record, and payment.
Dividends represent a return to shareholders on their investment in the
corporation. Cash dividends, distributions that firms make to the
shareholders in cash, are the most common type of dividend. However,
there are other types of dividends, namely stock dividends, property

dividends, and liquidating dividends. In this exercise, we are told that
Scow declared and paid cash dividends.
E 15-5
The following shareholders’ equity section was taken from the books of
the Kendra Corporation at the beginning of the current year
When a company repurchases its shares, the company can hold these
shares in treasury for future use or can retire the shares. Treasury shares
are a corporation's own stock that are authorized, issued, and previously
outstanding that the corporation buys back. Usually, the corporation
intends to reissue treasury shares for some specific purpose.
Firms typically record treasury stock in a contra-stockholders' equity
account and report treasury stock as a reduction of total stockholders'
equity on the balance sheet. Treasury shares reduce the number of shares
outstanding, do not have voting rights, and cannot receive cash
dividends. However, treasury shares do split and can receive stock
dividends in some states.
The two methods of accounting for treasury stock are the cost method
and the par value method. The cost method records the acquisition of
treasury shares at the cost of the repurchased shares. The par value
method records the acquisition at the par value of the repurchased
shares. The cost method is the most popular method used in practice and
will be used in this exercise.

Requirement a. Prepare the journal entries required to record each of the
following events.
Kendra acquired 17,000 shares of common stock to be held in the
treasury at a cost of $18 per share.
When a firm repurchases shares, it debits the treasury stock account for
the cost of the repurchased shares. The repurchase of shares does not
change the common stock account or the additional paid-in capital
account. The repurchased shares are still considered issued, but they are
no longer outstanding. Determine the cost of the repurchased shares and
record the entry now. (Record debits first, then credits. Exclude
E15-19
In 2015, Telcam Inc. discovered an error in its 2012 financial
statements. The firm recorded $8,700,000 of depreciation expense on its
equipment instead of recording $11,700,000. Telcam has a constant tax
rate of 45% and reports three years of comparative income statements
and two years of comparative balance sheets with its financial reports.
Assume Telcam uses the same depreciation method for tax and financial
reporting. Retained earnings and accumulated depreciation as of
December 31, 2014, were $12,145,000 and $4,850,000, respectively.
Occasionally, companies uncover errors in their financial statements. If
the company discovers the error before releasing the financial
statements, the correction is straightforward: The company makes the
correction prior to release of the financial statements. However, if a

company finds an error after releasing the financial statements, it must
determine if corrections to past years' financial statements are necessary.
In our exercise, a prior-period adjustment is necessary. In order to make
a prior-period adjustment a company follows these steps:
P15-4
Skyline, Inc. reported the following shareholders' equity section as of the
beginning of the current year:
During the current year, Skyline engaged in the following transactions
affecting the stockholders' equity section of its current balance sheet.
Requirement a. Prepare all journal entries required to record the
transactions.
1. Issued 350,000 shares of its $1 par value common stock at $27 per
share. The underwriter charged a 4% fee for issuing the shares. The
stock issue costs are not capitalized.
When issuing stock for cash, firms allocate the total proceeds between
the par or stated value and the additional paid-in capital (that is, the
amount paid in excess of par or stated value). If the shares have no par
or stated value, firms record the total proceeds in the common stock
account.
BE 16-6

On January 1, Brodie Company acquired 30% of the outstanding voting
shares of Gravais Corporation at a cost of $1,792,800 by acquiring
24,900 of the total 83,000 outstanding shares at a cost of $72 per share.
During the year, Gravais reported $880,000 in net income and declared
and paid $6.00 per share dividends. At acquisition, Gravais's
market value equaled the book value of its net assets. Prepare the journal
entries required to record the above events assuming that Brodie uses the
equity method to account for its investment in Gravais.
When an investor has significant influence over the investee, but does
not have control, companies use the equity method of accounting for the
investment. Significant influence is the power to participate in the
financial and operating decisions of the company but not control those
policies. An investor is generally presumed to have significant influence
at 20% or more ownership, unless it can be clearly demonstrated that
this is not the case. Under the equity method, the investor recognizes the
increases and decreases in the economic resources of the investee. The
investor initially reports the investment account at cost and thereafter
reports any events that affect the book value of the investee's
stockholder's
E16-5
Poehling Capital Partners, Ltd. acquired the following equity
investments at the beginning of year 1 to be held in a trading portfolio.

Debt securities are investments in the notes or bonds payable issued by
another company. A bond, or promissory note, is a form of borrowing by
which a company raises capital today in exchange for a contractual
obligation to pay bondholders (the lenders) back in the future.
Corporations invest in bonds in order to receive periodic interest
payments and a final payment of the face value. Firms usually issue
bonds with a face value (also referred to as par value) indicating the
amount that the issuer will pay the bondholder at maturity. Bonds also
typically have a stated interest rate, which determines the amount of
interest that bondholders will receive as cash, and a specified maturity
date. Bonds can be purchased at their par value, at a discount (a price
below par), or at a premium (a
price above par). In all cases, bonds are priced such that their yield will
be the same as the market rate of interest, which is also called the
effective interest rate, for a similar amount of risk. Yield is the actual
return that the investors will receive.
Equity securities are an investment in the common or preferred shares of
another company. The investor may receive returns in the form of
dividends, which are distributions (often cash) that the investee pays to
the investor. In addition, the investor could eventually sell the
investment for an amount greater than its purchase price and earn a gain
on disposal.
Accounting for debt and certain equity securities depends on
management's reason for purchasing the securities. For all debt securities
and equity securities over which a company does not exert significant
influence, management classifies the securities into one of three
portfolio categories at acquisition

P16-5
J&H Potato Chip Company, a U.S. GAAP reporter, provides you with
the following information regarding its investments in equity securities
during the current year.
P16-6
Boots Borden Company has the following securities in its available-for-
sale portfolio on December 31 of year 1. All securities are purchased
during year 1:
Debt securities are investments in the notes or bonds payable issued by
another company. A bond, or promissory note, is a form of borrowing by
which a company raises capital today in exchange for a contractual
obligation to pay bondholders (the lenders) back in the future.
Corporations invest in bonds in order to receive periodic interest
payments and a final payment of the face value. Firms usually issue
bonds with a face value (also referred to as par value) indicating the
amount that the issuer will pay the bondholder at maturity. Bonds also
typically have a stated interest rate, which determines the amount of
interest that bondholders

*********************************
ACC 306 Week 2 Quiz (2 Set)
WEEK 2 QUIZ
QUESTION 1
ITG Corporation issued 410,000 shares of $6 par value stock. The book
value of ITG's common stockholders' equity is equal to $123 million.
ITG implements a two-for-one stock split. What is the total number of
shares outstanding after the stock split? What is the par value per share
after the split? What is the book value of equity after the split?
QUESTION 2
On February 16, Vicky Home Goods, Incorporated (VHG) acquires
6,000 shares of its own shares at a cost of $39 per share. On April 29,
VHG sells 2,400 of the 6,000 shares of its treasury stock for $49 per
share. On June 4, VHG sells the remaining 3,600 shares of treasury
stock for $14 per share.
What are the necessary journal entries to record these transactions?
entries.)

On February 16,
Vicky Home Goods, Incorporated (VHG) acquires 6,000 shares of its
own shares at a cost of $39
per share.
QUESTION 3
On January 1, 2012, Dover Company issued 1,800 shares of 4%, $90 par
value, preferred stock for $201,000.
The board of directors declared dividends on December 30, 2012. Dover
paid the dividends on January 30, 2013.
What journal entries are necessary to record these transactions?
Prepare all the necessary journal entries to record the transactions.
entries.)
First, prepare the journal entry to record the issuance of the preferred
stock.
QUESTION 4

Merlin Enterprises sold the following equity investment on September
30, year 2:
What is the amount of the realized gain or loss on Merlin's year 2
income statement, assuming that the investment in Beard Inc. is
classified as a trading security?
QUESTION 5
Marmol Corporation purchased an equity investment in Inder Zu, Ltd.
on December 15 for $105,000 and sold it the following June 22 for
$124,000. Inder Zu, Ltd's equity is not actively traded and it does not
have a readily determinable fair value. What are journal entries required
to record these transactions?
Prepare the journal entry to record the purchase at cost as on December
15 of the current year. Do not record the entry for sale of investment.
We will do that in the next step. (Record debits first, then credits.
Exclude explanations from any journal entries. If no entry is required
select "No Entry Required" on the first line of the journal entry table and
leave all remaining cells in the table blank.)
QUESTION 6

Boone Corporation's outstanding capital stock at December 15 consisted
of the following:
30,000 shares of 5% cumulative preferred stock, par value $10 per share,
fully participating as to dividends. No dividends were in arrears.
200,000 shares of common stock, par value $1 per share.
On December 15, Boone declared dividends of $100,000. What was the
amount of dividends payable to Boone's common stockholders?
QUESTION 7
On January 1, 2016, the Precor Corporation purchased $440,000 par
value 6% bonds that mature on December 31,
2019. The market rate of interest was 4% when Precor purchased the
bonds. Coley receives interest on the bonds semiannually each June 30
and December 31.
QUESTION 8
On May 2 of the current year, Mystic Associates acquired an equity
investment in a start-up company, Wember Enterprises, for $230,000.
Mystic elected to report its investment in Wember using the fair value
option. Due to
Wember Enterprises' tremendous growth opportunities and the efforts it
put into development activities, the fair value of Mystic's investment at
the end of the year increased to $500,000.

Prepare the journal entry to record the investment using the fair value
option.
Begin by recording the journal entry for acquisition of the investment in
Wember Enterprises as on May
2. Do not record the entry for fair value adjustment. We will do that in
the next step. (Record debits first, then credits. Exclude explanations
from any journal entries.)
QUESTION 9
Deutsch Imports has three securities in its available-for-sale investment
portfolio. Information about these securities is as follows:
QUESTION 10
At its date of incorporation, The McCarty Company issued 100,000
shares of its $10 par common stock at $11 per share. During the current
year, The McCarty Company acquired 30,000 shares of its common
stock at a price of $16 per share and accounted for them by the cost
method. Subsequently, these shares were reissued at a price of $12 per
share. There have been no other issuances or acquisitions of its own
common stock. What effect does the reissuance of the stock have on the
following accounts?

2ND ATTEMPT
QUESTION 1
On January 1, 2016, the Platnum Corporation purchased $500,000 par
value 6% bonds that mature on December 31, 2019.
The market rate of interest was 4% when Platnum purchased the bonds.
Coley receives interest on the bonds semiannually each June 30 and
December 31.
QUESTION 2
Eunice, Inc. declared a cash dividend of $4,000 on June 1, 2014.
It sets the record date as June 17, 2014, the ex-dividend date as June 15,
2014, and the payment date as July 7, 2014.
What journal entries are necessary to record this dividend?
The timeline related to the cash dividend declaration and payment is
presented below.
Date of Declaration6-1-2014Legal liability IncurredEx-dividend Date6-
15-2014If buy stock on thisdate or later, will notreceive the
dividendDate of Record6-17-2014Ownership determinedat the close of
businessPayment Date7-7-2014Liability paid
What journal entries are necessary to record this dividend? (Record
debits first, then credits. Exclude explanations from any journal entries.

If no entry is required, select "No Entry Required" on the first line of the
journal entry table and leave all remaining cells in the table blank.)
June 1, 2014:
Date of declaration of the cash dividend.
QUESTION 3
Cleves Rainbow Company provides the following information regarding
its most recent balance sheet.
Cleves Rainbow acquired 22,000 shares of common stock in the open
market at a price of $19 per share and retired the shares. What is the
journal entry to record this transaction? (Record debits first, then credits.
Exclude explanations from any journal entries.)
QUESTION 5
incorrect, MC16-2 (similar to)
The following data pertains to Tyne Co.'s investments in marketable
equity securities:

What amount should Tyne report as net unrealized loss on available-for-
sale marketable equity securities at December 31, year 2, in accumulated
other comprehensive income on the balance sheet?
QUESTION 6
Grand Company holds a debt investment at amortized cost of $140,000.
At December 31, 2014, the fair value of the investment (the current
market price) is $87,000 and the present value of the future cash flows
from the debt investment is
$92,300. Grand did not intend to sell the investment, but it now deems it
more likely than not that it will have to sell it before the market recovers.
Does an impairment exist? If so, is it other than temporary? What
amount of loss, if any, will
Grand report in net income if the loss is other than temporary? What
amount of loss will Grand report in other comprehensive income?
Prepare the journal entry for the impairment loss, if needed.
Does an impairment exist? If so, is it other than temporary? (If
impairment does not exist, leave the second column blank.)
QUESTION 8

Kerns Corporation purchased an equity investment in Zentric Zu, Ltd.
on December 15 for $106,000 and sold it the following June 22 for
$148,000. Zentric Zu, Ltd's equity is not actively traded and it does not
have a readily determinable fair value. What are journal entries required
to record these transactions?
Prepare the journal entry to record the purchase at cost as on December
15 of the current year. Do not record the entry for sale of investment.
We will do that in the next step. (Record debits first, then credits.
Exclude explanations from any journal entries. If no entry is required
select "No Entry Required" on the first line of the journal entry table and
leave all remaining cells in the table blank.)
QUESTION 9
ITG Corporation issued 330,000 shares of $6 par value stock. The book
value of ITG's common stockholders' equity is equal to $99 million. ITG
implements a two-for-one stock split. What is the total number of shares
outstanding after the stock split? What is the par value per share after the
split? What is the book value of equity after the split?
QUESTION 10

$370,000, 10% note from Fonda Products on January 1, 2015, and lends
money to Fonda. TR will receive periodic, equal payments every six
months, beginning June 30. The loan matures in three years (on
December 31, 2017) and the interest rate equals the market rate of 10%.
TR is a calendar-year firm and prepares financial statements annually.
Prepare the amortization table and the journal entries for the first year.
*********************************
ACC 306 Week 2 Quiz
Question 1: The method used to pay interest depends on whether the
bonds are:
Question 2: Bond X and bond Y are both issued by the same company.
Each of the bonds has a maturity value of $100,000 and each matures in
10 years. Bond X pays 8% interest while bond Y pays 9% interest. The
current market rate of interest is 8%. Which of the following is correct?
Question 3: Which of the following statements characterizes a
leveraged lease?
Question 4: If the lessee and lessor use different interest rates to account
for a capital lease, then:

Question 5: Of the four criteria for a capital lease, which two are not
applied if the lease begins during the final quarter of the asset's useful
life?
Question 6: Griggs Co. failed to amortize the premium on an
outstanding five-year bond issue. What is the resulting effect on interest
expense and the bond carrying value, respectively?
Question 7: When the interest payment dates are March 1 and
September 1, and the notes are issued on July 1, the amount of interest
expense to be accrued at December 31 of the year of issue would:
Question 8: When bonds are retired prior to their maturity date:
Question 9: Which of the following statements characterizes an
operating lease?
Question 10: The four criteria provided in FASB Statement No. 13 for
distinguishing a capital lease from an operating lease do not include:
*********************************
E 17-19, P 16-7, P 17-16

ACC 306 Week 3 Assignment E 16-24, E 16-25, E 17-10, E 17-19, P
16-7, P 17-16
*********************************
ACC 306 Week 3 Ethics Case 17-6 401(k) plan
contributions
Ethics Case 17–6 - VXI International - 401(k) plan contributions ● LO1
You are in your third year as internal auditor with VXI International,
manufacturer of parts and supplies for jet air- craft. VXI began a defined
contribution pension plan three years ago. The plan is a so-called 401(k)
plan (named after the Tax Code section that specifies the conditions for
the favorable tax treatment of these plans) that permits voluntary
contributions by employees. Employees’ contributions are matched with
one dollar of employer contribution for every two dollars of employee
contribution. Approximately $500,000 of contributions is deducted from
employee paychecks each month for investment in one of three
employer-sponsored mutual funds.
While performing some preliminary audit tests, you happen to notice
that employee contributions to these plans usually do not show up on
mutual fund statements for up to two months following the end of pay
periods from which the deductions are drawn. On further investigation,
you discover that when the plan was first begun, contributions were

invested within one week of receipt of the funds. When you question the
firm’s investment manager about the apparent change in the timing of
investments, you are told, “Last year Mr. Maxwell (the CFO) directed
me to initially deposit the contributions in the corporate investment
account. At the close of each quarter, we add the employer matching
contribution and deposit the combined amount in specific employee
mutual funds.”
Required:
1. What is Mr. Maxwell’s apparent motivation for the change in the
way contributions are handled?
2. Do you perceive an ethical dilemma?
*********************************
ACC 306 Week 3 Homework (BE 17-17, BE 17-22, E17-
17, E17-21, P17-1, P17-6, BE18-5, BE18-6, E18-4, E18-
10, P18-2, P18-6)
BE 17-17
BE 17-22

E17-17
E17-21
P17-1
P17-6
BE18-5
BE18-6
E18-4
E18-10
P18-2
P18-6

BE 17-17
Bigger Shoes Company recorded book income of $105,000 in 2014. It
does not have any permanent differences and the only temporary
difference relates to a $50,000 installment sale that it recorded for book
purposes. Bigger Shoes anticipates collecting the installment sales
equally over the following two years. The current enacted tax rate is
40%.
The substantively enacted tax rates for the following three years are
42%, 45%, and 45%, respectively. What deferred tax amount should
Bigger Shoes record for this temporary difference under U.S. GAAP?
BE 17-22
Butler Toy Company uses an acceptable tax method that provided a
$26,000 tax deduction for the current year. GAAP and taxable income
before considering this tax deduction are equal to $270,000 (i.e., there
are no book-tax differences). Butler is subject to a 35% income tax rate.
Tax authorities have challenged this type of tax deduction in the past and
Butler is now concerned about the realizability of this tax deduction in
the future. However, management believes that it is more likely than not
that the firm will sustain the tax benefits upon examination by tax
authorities. Butler provides the following analysis regarding the
probabilities of sustaining the tax deduction:
]

E17-17
Freeman Imported Provisions, Inc. reported pretax accounting income
equal to its taxable income, as presented below:
All tax changes are enacted into law as of the beginning of the year. All
tax rate changes are not known until the year of change.
Freeman elects the carryback/ carryforward option for all net operating
losses. For the losses noted above, management concluded that it is more
likely than not that the benefits of the net operating losses will be fully
realizable in the future.
Requirement a. Prepare the journal entries necessary to record the tax
provisions for years 4 through 8.
Begin by preparing the entry, if needed, to record the portion of the year
4 NOL carried back.
Under the U.S. tax law, companies with NOLs can elect to carryback or
carryforward the tax loss. The carryback allows a company to offset the
current tax loss against prior years' taxable income and claim a refund
for taxes previously paid on the amount offset. The carryforward permits
a company to offset the current tax loss against future taxable income,
thereby reducing future taxable income and lowering the amount of tax
due in the year of the offset.
E17-21

Corker Enterprises provided the following information regarding book-
tax differences for its first year of operations:
Installment sales are a normal part of Corker's operations and so any
deferred taxes related to them would be classified as current. The
depreciation expense is related to a building costing $1,500,000. Income
before including any of the book-tax differences above is $890,000.
The firm expects to fully realize all deferred tax assets, so no allowance
account is needed. Corker is subject to a 34%
income tax rate. Assume the sales relating to the warranty liability
occurred at year end.
Computing income tax expense and income taxes payable is
straightforward when book income and taxable income
are identical. When book and taxable income are the same, the basis, or
carrying values, of assets and liabilities, as well as the income of the
entity, are the same for book and tax reporting. That is, the amount a
company records as income tax expense will equal the income taxes
payable to the government. In this problem, Corker Enterprises has
several transactions for which the book and tax treatment differs.
P17-1
Ruthersford Manufacturing uses long-term installment contracts to
market its building products.

Ruthersford uses the accrual basis for financial reporting and the cash
basis for tax purposes. The company also sells several products without
offering installment contracts. We present the results of operations for
the last five years.
Requirements
a. Determine the balance of the deferred tax account at the end of each
of the five years.
b. Prepare the journal entries to record the tax for the five years
presented above. Show the effective tax rate for each year.
c. How should Ruthersford Manufacturing classify the deferred tax
account on the balance sheet?
Computing income tax expense and income taxes payable is
straightforward when book income and taxable income
are identical. When book and taxable income are the same, the basis, or
carrying values, of assets and liabilities, as well as the income of the
entity, are the same for book and tax reporting. That is, the amount a
company records as income tax expense will equal the income taxes
payable to the government. When there are differences between book
and taxable income, the accounting for these items become more
complex. These differences fall into two categories: permanent
differences and temporary differences. We will discuss temporary
differences in this exercise.
Temporary differences occur when the book treatment and the tax
treatment for a given transaction are different in a given year, but will be
the same over the life of the firm. Specifically, the tax basis of an asset
or liability differs from the book basis of that asset or liability, resulting
in taxable or deductible amounts in future years. Temporary differences

occur due to events that have been recognized in the financial statements
and will result in taxable or deductible amounts in future years or events
that are taxable or deductible before they will be recognized in the
financial statements.
P17-6
Michael, Inc. provides DJ services for corporate parties. Michael
reported a net operating loss of $700,000 on its 2016
tax return. During the three preceding years, Michael had taxable
income and paid taxes at various tax rates, as noted below:
BE18-5
Sting Iron Works signed a lease on January 1 with Jets Bank for an iron-
stamping machine. The lease has a 10-year term with no purchase option
or transfer of ownership. Under the terms of the contract, Sting must pay
$3,800 at the beginning of each year. Jets Bank's implicit rate is 9%. The
iron-stamping machine has an economic life of 40 years and a fair value
of $43,000. If Sting borrowed at Jets Bank, the loan would have carried

an interest rate of 11%. The lessee knows the implicit rate. The present
value of the payments due under the lease is $26,582, and the lease
agreement is classified as an operating lease.
Prepare the journal entries for the lessor and the lessee at the inception
of the lease.
A lease is a contract that gives the lessee the right to use an asset, legally
owned by the lessor, for a specified period of time in return for periodic
payments or rentals made by the lessee. The owner of the asset is called
the lessor. The party acquiring the use of the asset is the lessee. The
lease contract only conveys the right to use the asset—it typically does
not result in ownership of the asset. This property right has economic
value to the lessee and, in substance, represents the purchase of an asset
with a corresponding obligation. Determining how to account for a lease
depends on the company's evaluation of whether the risks and rewards
of ownership have been transferred from the lessor to the lessee.
A capital lease is a lease that results in the lessee reporting the asset and
the liability on the balance sheet and reporting the related interest and
depreciation as expenses on the income statement. If the lease agreement
does not transfer substantially all of the risks and rewards of ownership
to the lessee, the lease is accounted for as a simple operating
lease.
BE18-6
Karras Manufacturing Company leased a piece of machinery for use in
its operations from Signage Leasing on January 1.

The 14-year, non-cancellable lease requires lease payments of $3,500
due at the beginning of each year. The machinery is estimated to have a
14-year life, is depreciated on the straight-line method, and will have no
residual value at the end of the lease term. The present value of the
minimum lease payments using 11.2% and the asset's fair value on the
date the lease is signed are both equal to $26,889. Signage paid fair
value to acquire the equipment. The lessor's implicit rate of 11.2% is
known to Karras. Signage has no material uncertainties as to future costs
to be incurred and collectability is reasonably assured.
Prepare Karras Manufacturing's journal entries at the inception of the
lease and at the end of the first year.
A lease is a contract that gives the lessee the right to use an asset, legally
owned by the lessor, for a specified period of time in return for periodic
payments or rentals made by the lessee. The owner of the asset is called
the lessor. The party acquiring the use of the asset is the lessee. The
lease contract only conveys the right to use the asset—it typically does
not result in ownership of the asset. This property right has economic
value to the lessee and, in substance, represents the purchase of an asset
with a corresponding obligation. Determining how to account for a lease
Classification of lease agreement as an operating or a capital lease.
A capital lease is a lease that results in the lessee reporting the asset and
the liability on the balance sheet and reporting the related interest and
depreciation as expenses on the income statement. If the lease agreement
does not transfer substantially all of the risks and rewards of ownership
to the lessee, the lease is accounted for as a simple operating
lease.

Under an operating lease, the lessee reports rent expense on the income
statement and does not recognize an asset or liability on the balance
sheet.
Lessees classify leases that meet any one of the four following criteria as
a capital lease. Otherwise, the lease is an operating lease.
E18-4
On January 1, 2016, Adden Leasing Company (Upper AALC) acquired
a fleet of cars to be leased to Reuben River Company. Upper AALC
paid $272,270 to acquire the vehicles, which is also the fair value of the
fleet. The lease terms are listed below:
E18-10
Deporte Jewelers Incorporated signed a lease agreement on July 1, 2018,
to lease diamond-polishing equipment from Overton Industries. The
following information is relevant to the lease agreement.The term of the
non-cancellable lease is seven years with no renewal option. Payments
of $44,400 are due on July 1 each year (at the beginning of each period).
P18-2
On January 1, 2016, the ADL Company leases a fleet of delivery
vehicles from Nolt Motors, Inc.

Under the terms of the lease, ADL must pay $60,000 on January 1 of
each year, beginning on January 1, 2016, over a
four-year term. The delivery vehicles have a useful life of six years and
ADL depreciates similar vehicles owned using the straight-line method.
ADL's incremental borrowing rate is 6% and the 5% implicit rate in the
lease is known to the lessee. The vehicles cost Nolt Motors $200,000
and have a fair value of $223,395. Nolt has no uncertainties as to future
costs and collection. The lease terms do not contain a transfer of
ownership and there is no bargain purchase option. There is also no
residual value specified in the contract. Assume that there are no
executory costs related to the lease agreement. A lease is a contract that
gives the lessee the right to use an asset, legally owned by the lessor, for
a specified period of time in return for periodic payments or rentals
made by the lessee. The owner of the asset is called the lessor. The party
acquiring the use of the asset is the lessee. The lease contract only
conveys the right to use the asset—it typically does not result in
ownership of the asset. This property right has economic value to the
lessee and, in substance, represents the purchase of an asset with a
corresponding obligation. Determining how to account for a lease
P18-6
On January 1, 2016, McClellan Finance Company agreed to lease a
piece of machinery to Hagen Construction Products, Inc. McClellan paid
$1,623,269 to acquire the machine from the manufacturer and carries it
at this amount in its financial statements. The fair value (current selling

price) of the machine is $1,623,269. The relevant lease terms are listed
below.
*********************************
ACC 306 Week 3 Integrating Case 16-5 accounting
changes and error correction
Integrating Case 16–5 - Williams-Santana, Inc. - Tax effects of
accounting changes and error correction; six situations ● LO1 LO2 LO8
Williams-Santana, Inc. is a manufacturer of high-tech industrial parts
that was started in 1997 by two talented engineers with little business
training. In 2011, the company was acquired by one of its major
customers. As part of an internal audit, the following facts were
discovered. The audit occurred during 2011 before any adjusting entries
or closing entries were prepared. The income tax rate is 40% for all
years.
a. A five-year casualty insurance policy was purchased at the
beginning of 2009 for $35,000. The full amount was debited to
insurance expense at the time.

b. On December 31, 2010, merchandise inventory was overstated
by $25,000 due to a mistake in the physical inventory count using the
periodic inventory system.
c. The company changed inventory cost methods to FIFO from
LIFO at the end of 2011 for both financial statement and income tax
purposes. The change will cause a $960,000 increase in the beginning
inventory at January 1, 2010.
d. At the end of 2010, the company failed to accrue $15,500 of
sales commissions earned by employees during 2010. The expense was
recorded when the commissions were paid in early 2011.
e. At the beginning of 2009, the company purchased a machine at a
cost of $720,000. Its useful life was estimated to be 10 years with no
salvage value. The machine has been depreciated by the double
declining- balance method. Its carrying amount on December 31, 2010,
was $460,800. On January 1, 2011, the company changed to the straight-
line method.
*********************************
ACC 306 Week 3 Quiz New
QUESTION 1

On January 1, 2015, Dillon Manufacturing leased another piece of
machinery for use in its North American operations from Evans Bank.
The nine-year, non-cancellable lease requires annual lease payments of
$16,000, beginning January 1,
2015, and at each December 31 thereafter through 2022.
The lease agreement does not transfer ownership of the machinery, nor
does it contain a bargain purchase option. The machinery has a fair value
of $99,630 and an estimated life of 10 years. Dillon depreciates its
leased equipment using the straight-line method with no residual value.
Evans Bank's implicit rate of 11% is known to Dillon.
Before completing the requirements, identify the present value of the
lease payments. (Use the present value and future value tables, the
formula method, a financial calculator, or a spreadsheet for your
calculation. If using present and future value tables or the formula
method, use factor amounts rounded to five decimal places, X.XXXXX.
Round your final answer to the nearest whole dollar.)
The present value (PV) of the payments due under the lease is $ 98,338 .
Analyze the four criteria to determine whether the lease is an operating
or capital lease. Begin by identifying any of the capital lease criteria that
Dillon meets. (Select any and all that apply.)

1.The lease transfers ownership of the property to the lessee at the end
of the lease term.
2.The lease contains a bargain purchase option.
3.The lease term is greater than or equal to 75% of the estimated
economic life of the property.
Your answer is correct.
4.The present value of the minimum lease payments is greater than or
equal to 90% of the fair market value of the property at the inception of
the lease.
Your answer is correct.
This is a(n)
lease for the lessee (Dillon) because
of the capital criteria is(are) met. Provide the journal entries for Dillon
for 2015. (Record debits first, then credits. Exclude explanations from
any journal entries. Round amounts to the nearest whole dollar. If no
entry is required select "No Entry Required" on the first line of the
journal entry table and leave all remaining cells in the table blank.)
Begin by preparing the entry for Dillon at the inception of the lease on
January 1, 2015.
Exclude the first annual lease payment from this entry. We will record
that payment in the next step.

Account January 1, 2015
Leased Machinery 98,338
Obligations under Capital Lease 98,338
Prepare the entry for the first annual lease payment made on January 1,
2015.
Account January 1, 2015
Cash 16,000

Record Dillon's entry for the depreciation expense on the leased
machinery on December 31, 2015.
Account December 31, 2015
Depreciation Expense—Leased Machinery 10,926
Accumulated Depreciation—Leased Machinery 10,926
Prepare the entry to record the second annual lease payment on
December 31, 2015.
Account December 31, 2015

Interest Expense 9,057
Cash 16,000
QUESTION 2
Efland Optics, a U.S. GAAP reporter, began business in 2015 and billed,
but did not yet collect, $560,000 in revenue. In addition to its 2015 sales
revenue, Efland Optics received $44,000 of municipal bond interest
revenue. Efland Optics did not incur any expenses during the year. The
company is subject to a 30% income tax rate. What journal entries are
required to record the revenues and the related income tax for the year?
Begin by preparing the journal entry to record the sales revenue for the
year 2015.
Do not record the entry for the interest revenue. We will do that in the
next step. (Record debits first, then credits. Exclude explanations from
any journal entries.)
QUESTION 3
QUESTION 4

The present value of $82,095 (rounded) will appear at the bottom of the
box after the "=" sign or after you click "ok" in the cell you entered your
formula.
QUESTION 5
Smith Inc. reported a loss in 2014 of $530,000. The company reported
taxable income of $118,000 in 2012 and $231,000 in 2013. It has no
permanent or temporary differences and its tax rate is 25%. What is the
necessary journal entry for 2014? Smith reported taxable income of
$259,000 in 2015.
What is the necessary journal entry for 2015?
What is the necessary journal entry for 2014?
QUESTION 6
Carli Enterprises experienced an NOL of $573,000 in 2013. The
company reported taxable income of $431,000 in 2011 and $325,000 in
2012. The tax rate for all years is 40%. Carli elects to carryback the
NOL. What is the necessary journal entry to record the NOL carryback
in the year of the loss? Prepare a partial income statement for the year of
the loss.

What is the necessary journal entry to record the NOL carryback in the
year of the loss?
QUESTION 7
Two independent situations are described below. Each involves future
deductible amounts and/or future taxable amounts produced by
temporary differences:
QUESTION 8
Which of the following statements regarding lease accounting is/are
correct?
I. A capital (finance) lease is a form of off-balance sheet financing that
transfers substantially all of the benefits and risks of ownership of
property to the lessee.
II. It is possible for a lessee to account for a lease as an operating lease
while the lessor accounts for the lease as a capital (finance) lease.
III. When calculating the present value of the minimum lease payments,
the lesser of the implicit rate (if known) and the lessee's incremental
borrowing rate should be used.
QUESTION 9
Yawyag Company uses straight-line depreciation for financial
accounting and accelerated depreciation for tax accounting. There is no

salvage value used for either book or tax purposes. The company
purchased equipment for $114,000 and depreciated it over four years for
book purposes ($114,000/4 years = $28,500 per year). For tax purposes,
the asset depreciates for three years: $49,000 the first year and $32,500
in each of the following two years. Thus, the total depreciation under
both systems is $114,000. Determine the book carrying value and the tax
basis of the asset over its four-year useful life.
Determine the book carrying value and the tax basis of the asset over its
four-year useful life.
First calculate the book carrying value of the asset over its four-year
useful life. (Enter a "0" for any zero amounts.)
QUESTION 10
Begin by identifying any of the capital lease criteria that Tanner meets.
(Select any and all that apply.)
1.
The lease transfers ownership of the property to the lessee at the end of
the lease term.

2.
The lease contains a bargain purchase option.
3.
The lease term is greater than or equal to 75% of the estimated economic
life of the property.
This is the correct answer.
4.
The present value of the minimum lease payments is greater than or
equal to 90% of the fair market value of the property at the inception of
the lease.
This is a(n)
lease for the lessee
(TannerTanner)
because
of the capital criteria is(are) met.
More
Less

*********************************
ACC 306 Week 3 Quiz
Question 1: If a company's deferred tax asset is not reduced by a
valuation allowance, the company believes it is more likely than not
that:
Question 2: Which of the following statements typifies defined
contribution plans?
Question 3: The annual pension expense for what type of pension
plan(s) is recorded by a journal entry that includes a debit to pension
expense and a credit to the pension asset or pension liability?
Question 4: Which of the following causes a temporary difference
between taxable and pretax accounting income?
Question 5: The result of interperiod tax allocation is that:
Question 6: Pension gains related to plan assets occur when:
Question 7: Under SFAS 87, delayed recognition of gains and losses in
earnings achieves:
Question 8: Consider the following:

I present value of vested benefits at present pay levels
II present value of nonvested benefits at present pay levels
III present value of additional benefits related to projected pay increases
Which of the above constitutes the vested benefit obligation?
Question 9: Of the following temporary differences, which one
ordinarily creates a deferred tax asset?
Question 10: A gain from changing an estimate regarding the
obligation for pensions and other postretirement benefit plans will:
*********************************
E 19-5, E 19-9, E 19-24, P 18-5
ACC 306 Week 4 Assignment E 18-18, E 18-24, E 19-2, E 19-5, E 19-9,
E 19-24, P 18-5
*********************************
ACC 306 Week 4 Communication Case 18-10

Communication Case 18–10 Should the present two-category distinction
between liabilities and equity be retained? Group interaction. ● LO1
The current conceptual distinction between liabilities and equity defines
liabilities independently of assets and equity, with equity defined as a
residual amount. The present proliferation of financial instruments that
combine features of both debt and equity and the difficulty of drawing a
distinction have led many to conclude that the present two-category
distinction between liabilities and equity should be eliminated. Two
opposing viewpoints are:
View 1: The distinction should be maintained.
View 2: The distinction should be eliminated and financial instruments
should instead be reported in accordance with the priority of their claims
to enterprise assets.
One type of security that often is mentioned in the debate is convertible
bonds. Although stock in many ways, such a security also obligates the
issuer to transfer assets at a specified price and redemption date. Thus it
also has features of debt. In considering this question, focus on
conceptual issues regarding the practicable and theoretically appropriate
treatment, unconstrained by GAAP.
Required:
1. Which view do you favor? Develop a list of arguments in support
of your view prior to the class session for which the case is assigned.
*********************************

ACC 306 Week 4 Ethics Case 19-7 International Network
Solutions
Ethics Case 19–7 International Network Solutions ● LO6
International Network Solutions provides products and services related
to remote access networking. The company has grown rapidly during its
first 10 years of operations. As its segment of the industry has begun to
mature, though, the fast growth of previous years has begun to slow. In
fact, this year revenues and profits are roughly the same as last year.
One morning, nine weeks before the close of the fiscal year, Rob
Mashburn, CFO, and Jessica Lane, controller, were sharing coffee and
ideas in Lane’s office.
Lane: About the Board meeting Thursday. You may be right.
This may be the time to suggest a share buyback program.
Mashburn: To begin this year, you mean?
Lane: Right! I know Barber will be lobbying to use the funds
for our European expansion. She’s probably right about the best use of
our funds, but we can always issue more notes next year. Right now, we
need a quick fix for our EPS numbers.
Mashburn: Our shareholders are accustomed to increases every year.

Required:
1. How will a buyback of shares provide a “quick fix” for EPS?
2. Is the proposal ethical? 3. Who would be affected if the proposal
is implemented?
*********************************
ACC 306 Week 4 Homework (BE 19-3, BE 19-11, BE
19-5, E19-6, P19-2, P19-5, BE20-5, BE20-9, E20-9, E
20-11, P20-1, P20-3)
BE 19-3
BE 19-11
BE 19-5
E19-6
P19-2
P19-5
BE20-5
BE20-9

E20-9
E 20-11
P20-1
P20-3
BE 19-3
O-Boy Jeans, Inc. awarded 2,900 options to acquire 2,900 shares of its
common stock. The options have a fair value of $34 each and cannot be
exercised until employees complete a two-year service period. The
market price and the exercise price were both equal to $23 per share on
the date of the grant. The entry on the date of the grant debited Deferred
Compensation and credited Additional Paid-in Capital – Stock Options
for $98,600. Prepare the journal entry required at the end of the first year
after the options are granted. To account for the issuance of an equity-
classified award , a company first records the fair value of the award,
adjusted for the forfeiture rate , with a debit to deferred compensation (a
contra-equity account) and a credit to additional paid-in capital - stock
options. Because both of these accounts are equity accounts, there is no
net impact on the balance sheet. Rather, this treatment allows for the
disclosure of stock option plans. The company then expenses the
adjusted fair value of the award on a straight-line basis over the vesting
period .
When recording the expense, the company also removes the associated
deferred compensation. Each year's expense is justified by the fact that
the allocation is designed to match compensation expense against
increased employee productivity over the vesting period.

BE 19-11
Oliver Company issued 120,000 shares of $3 par value, restricted stock
to its top five key employees on January 1, 2015.
The market value of Oliver's shares is $46 per share on the date of issue.
The restricted shares require a vesting period of
five years. Prepare the journal entries for the first year.
Under a restricted stock plan, a company awards actual shares in the
name of a specific employee, resulting in an allocation of restricted
shares to the designated employee. Restricted stock plans are therefore
not stock options. The restrictions attached to the awarded shares often
include the following provisions:
BE 19-5
Walgreen Company started a share appreciation plan on January 1,
2015, when it granted 208,000 rights to its executives. The pre-
established price is $49 per share, which is the market value of the
shares at January 1, 2015.
The vesting period is two years. The plan expires on January 1, 2017.
Madison's closing market price for the years ended
December 31, 2015, and 2016 are as follows:
Employees exercise all SARs on January 1, 2017, when the market price
is $66. What is the compensation expense in 2015 and in 2016?
Prepare all journal entries to record the SAR plan.

E19-6
Conway Company issued 54,500 shares of $3 par value, restricted stock
to each of its five key executives on January 1, 2015. Each executive
receives 10,900 shares. Conway's shares have a market value of $31 per
share on the date of issue. The restricted shares require a vesting period
of four years. Conway's year-end is December 31.
Requirements
a. Prepare the journal entries required for 2015 through 2018.
b. Independent of a., prepare all the journal entries for 2015 through
2018 assuming that three of the executives leave the company at January
1, 2017.
Under a restricted stock plan, a company awards actual shares in the
name of a specific employee, resulting in an allocation of restricted
shares to the designated employee. Restricted stock plans are therefore
not stock options. The restrictions attached to the awarded shares often
include the following provisions:
P19-2
Question Help

On January 1 of the current year, Jessie Upper J Fashions granted
300,000 stock options to its division managers. The options are equity-
classified awards. The plan permits the division managers to acquire the
shares at an exercise price of $13 per share. Each option permits the
purchase of one share of the company's $2 par value common stock. The
options vest in two years and they expire if they are unexercised at the
end of five years. On the grant date, the fair value of the options,
estimated by an accepted option-pricing model, is equal to $46 each.
P19-5
The Ronnie Joy
Restaurants, Inc., provided the following information related to its
defined-benefit plan for the current year:
There are two main types of pension arrangements: defined-contribution
and defined-benefit .
This problem will illustrate the accounting for a defined-benefit plan.
Three primary accounts are involved in accounting for defined-benefit
plans: pension plan assets, pension plan obligations, and pension
expense. Companies utilize an account for pension plan assets because
the sponsor company invests funds into the pension plan. A defined-
benefit pension plan results in a projected benefit obligation liability.
Companies report the difference between the pension plan asset account
and the projected benefit obligation (PBO) on the balance sheet as either
a net pension asset or a net pension liability. This amount is called the
funded status of the plan. If the plan assets exceed the PBO, the plan is

overfunded; if the plan assets are less than the PBO, the plan is
underfunded.
BE20-5
ryan Excavation Consultants began the current year with 33,600
common shares outstanding. It issued additional shares of 18,000 and
20,400 on February 1 and September 1, respectively. The company also
purchased 4,800 shares of treasury stock on November 1. The firm's
year end is December 31. Based on this information, determine the
weighted-average number of common shares outstanding for the year.
Basic earnings per share (EPS) is a measure of the earnings per share
available to common shareholders that does not consider the potentially
dilutive effects of convertible securities and employee options.
Basic EPS equals Start Fraction Net Income minus Preferred Dividend
Requirement Over Weighted minus Average Number of Common
Shares Outstanding End FractionBasic EPS = Net Income − Preferred
Dividend RequirementWeighted−Average Number of Common Shares
Outstanding
BE20-9
Patrick Pet Food Suppliers reported $6,700,000 net income for the
current year. The company indicated that it has $6,700,000, 6%
convertible debt issued at par and $600,000 par value, 5%
nonconvertible, cumulative preferred shares outstanding. The firm did
not declare dividends for the current year. It issued the bonds on May 31

and the preferred shares were outstanding for the entire year. Based on
this information, determine the numerator of the earnings per share
fraction for both basic earnings per share and diluted earnings per share.
Assume that all financial instruments described above are dilutive. The
tax rate is 35%.
E20-9
You are computing annual earnings per share and required disclosures
for Tolson Fencing based on company-provided information. Net
income is $4,600,000. The weighted-average number of shares is
2,760,000 shares. The year-end balance of outstanding shares is also
2,760,000 shares. There are options outstanding all year to acquire
2,145,000
shares of common stock at $18 per share. The average price of the
company's common stock is $39 per share. The firm has 97,000 shares
of $47 par value nonconvertible, noncumulative preferred stock
outstanding as of the beginning of the year. The dividend rate is $1.11
per share. The board of directors declared the annual dividend. The
company is subject to a 30% tax rate.
Requirement a. Based on this information, compute basic and diluted
earnings per share (EPS) for the current year.
We'll begin with the basic EPS computations.
E 20-11

Below we present Utica Incorporated's current-year partial income
statement. Utica is subject to a 40% income tax rate.
Requirement a. Based on the information provided, compute basic and
diluted earnings per share (EPS) for the current year. Include all
computations related to the application of antidilution sequencing, if
needed.
Basic earnings per share (EPS) is a measure of the earnings per share
available to common shareholders that does not consider the potentially
dilutive effects of convertible securities and employee options.
Basic EPS equals Start Fraction Net Income minus Preferred Dividend
Requirement Over Weighted minus Average Number of Common
Shares Outstanding End Fraction Basic EPS = Net Income − Preferred
Dividend Requirement Weighted−Average Number of Common Shares
Outstanding
P20-1
Panda Paws, Ltd. began the current year with 280,000 common shares
outstanding and issued an additional 150,000
shares on August 1. The firm has $7,500,000, 4% convertible bonds
outstanding at the beginning of the year (i.e., $300,000 coupon interest
per year), which are convertible into 180,000 shares of common stock.
The firm issued the bonds at their par value and converted them on
March 1. Panda Paws also has $930,000 par value, 2% convertible,
noncumulative preferred stock outstanding. The preferred shares can
convert into 10,000 shares of common stock and were outstanding for a

full year. The firm declared dividends for the current year. There were
no actual conversions of the preferred stock during the year. Panda is
subject to a 40% effective tax rate, and net income is $2,600,000.
Assume that all convertible securities are dilutive
P20-3
Dizroyal reported income from continuing operations of $ 1,200,000
reported income from continuing operations of $1,200,000 and a
$550,000 loss from discontinued operations, net of tax. The company is
subject to a 40% tax rate. Dizroyal has $1,000,000, 6% convertible debt
outstanding as of the beginning of the year. The debt was issued at par.
Each $1,000 par value bond converts into 40 shares of the company's
common stock. The company's shareholders' equity section indicates
that the firm also holds $90,000 par value, 2%
convertible preferred shares outstanding for the current year. The board
of directors declared the annual dividend. The preferred shares can
convert into 40,000 shares of common stock. There were no actual
exercises or conversions during the year.
Requirement a. Compute basic and diluted earnings per share (EPS) for
both income from continuing operations and net income. Show all
computations.
*********************************
ACC 306 Week 4 Quiz New

QUESTION 1
On January 1, Year 1, Sweeney Company granted an employee options
to purchase 100 shares of Sweeney's common stock at $40 per share.
The options became exercisable on December 31, Year 1, after the
employee had completed one year of service, and were exercised on that
date. Market prices of the stock and fair values of the options were as
follows:
QUESTION 2
January 1, Year 1 that give him rights to purchase shares of the company
for $40 per share on December 31, Year 2. At the time the options were
granted, the fair value of the options totaled $20,000. At December 31,
Year 1 the company's stock sold for $45 per share and at December 31,
Year 2 the selling price of the stock was $55 per share. In its Year 2
financial statements, Gregory's on Ormond would recognize
compensation expense relative to the options of:
QUESTION 3
The Burken Co. has one class of common stock outstanding and no other
securities that are potentially convertible into common stock. During
year 10, 100,000 shares of common stock were outstanding. In year 11,
two distributions of additional common shares occurred: On April 1,

20,000 shares of treasury stock were sold, and on July 1, a 2-for-1 stock
split was issued. Net income was $410,000 in year 11 and $350,000 in
year 10. What amounts should Burken report as earnings per share in its
year 11 and year 10 comparative income statements?
QUESTION 4
LORLOR Bookstores amends its defined-benefit pension plan, resulting
in prior service costs of $42,000. The company will amortize the prior
service costs on a straight-line basis over three years. What is the journal
entry
QUESTION 5
Grina Group reported net income of $9,700,000 for the current year.
There are 5,300,000 common shares outstanding for the entire year and
the average market price per common share for the year is $54. In
addition, Grina has 1,822,500 options outstanding all year. The exercise
price is now $80 per share.
Compute basic and diluted EPS for Grina Group. Each option can be
used to purchase one share of common stock
QUESTION 6

Herkimer Enterprises, Inc. granted employee stock options on January 2,
2015, to acquire 62,000 shares of $1.70 par value common stock with an
exercise price of $5.80 per share. The market price on January 2, 2015,
was also $5.80
per share, so there is no intrinsic value on the date of the grant.
Employees must complete a two-year service (vesting) period in order to
exercise the options. The options will expire after a five-year period
(total option period). The estimated fair value of the options using the
Black-Scholes option-pricing model is $8.70 per share for a total of
$539,400
(62,000 shares × $8.70 per share). The company estimates that there will
not be any forfeiture of the options. The options are equity-classified
awards. Determine the amount and allocation of the stock-based
compensation expense for the years 2015 and 2016, preparing the
necessary journal entries.
Determine the amount and allocation of the stock-based compensation
expense for the years 2015 and 2016.
(Enter a "0"for any zero amounts.)
QUESTION 7
Sandberg Crafters reported $180,000 in interest expense for convertible
bonds issued several years ago. The company is subject to a 40%
effective tax rate. There were no actual conversions during the year.
What adjustment is needed to the company's diluted EPS numerator?
(Abbreviations Used: EPS = Earning per share.)

QUESTION 8
Katus Motor Company initiated a share-appreciation rights plan on
January 1, 2015, by granting 41,000 rights to its key executives. Under
the terms of the plan, Katus's executives will receive a cash payment
equal to the difference between the pre-established price of $21 per
share and the market price of the company's common stock on the date
of exercise.However, there is a three-year vesting period, and the SARs
cannot be exercised before January 1, 2018. The plan also expires on
January 1, 2019. The closing market prices of Katus common stock for
the years ended December 31, 2015,
through 2017 are presented in the following table.
Date Closing Market Price
December 31, 2015 $33
December 31, 2016 37
December 31, 2017 27
The SARs are all exercised on January 1, 2018, when the market price is
$27.
Prepare the journal entries necessary to record the SAR plan.
QUESTION 8
DCV Company has 29,000 common shares outstanding with no
preferred shares in its capital structure. DCV has outstanding in-the-
money options that will result in 19,000 incremental shares. The current
income statement indicates the following:

Loss from continuing operations $(1,131,000)
Income from discontinued operations (net of tax) 957,000
QUESTION 10
Hutchins Company had 200,000 shares of common stock, 50,000 shares
of convertible preferred stock, and $2,000,000 of 10% convertible bonds
outstanding during the current year. The preferred stock was convertible
into 40,000 shares of common stock.
During the current year, Hutchins paid dividends of $1.00 per share on
the common stock and $2.00 per share on the preferred stock. Each
$1,000 bond was convertible into 50 shares of common stock. The net
income for the year was $1,000,000 and the income tax rate was 30%.
Diluted earnings per share for the current year was (rounded to the
nearest penny):
QUESTION 1
QWE Company has 22,000 common shares outstanding with no
preferred shares in its capital structure. QWE has outstanding in-the-
money options that will result in 19,000 incremental shares. The current
income statement indicates the following:
QUESTION 2

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