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intermediate accounting volume 2

Questions and Answers of Intermediate Accounting Volume 2

A manufacturer of household appliances has potential losses due to the discovery of a possible defect in one of its products. The occurrence of the loss is reasonably possible, and the costs can be
The Occupational Safety and Health Administration (OSHA) is in the process of conducting a workplace inspection at Kenny's Corp. to determine whether the company is in compliance with standards on
During the year, a driver for Commuters Inc. was involved in an accident. Commuters Inc. brought a suit against the negligent party for \(\$ 1\) million. The suit is pending on December 31, 2020.
In January 2021, an explosion occurred at Nilo Company's plant, causing damage to area properties. In March 2021, Nilo received notification of lawsuits filed against the company. Nilo's management
Compute the (1) current ratio and the (2) quick ratio for Nike, Inc. using the following excerpt from the balance sheet reported in a recent \(10-\mathrm{K}\) of Nike, Inc. At May 31 (in millions)
Cash sales for Zeviae Inc. in 2020 were \(\$ 9\) million. The majority of sales were subject to a sales tax rate of \(6 \%\). Zeviae records sales taxes payable at the point of sale.Requireda. Record
On September 1, 2020, Global Tech Inc. purchased merchandise for resale for \(\$ 8,000\) on credit terms \(2 / 15, \mathrm{n} / 60\) using the gross method and a perpetual inventory system. Global
Record the entries for the following transactions for Shoppers Inc. Shoppers uses a perpetual inventory system and records sales taxes payable at the point of sale.a. On January 1, 2020, Shoppers
Manchester Co. operates as a manufacturer of industrial equipment. On March 28, 2020, Manchester Co. required an advance payment of \(\$ 100,000\) from a customer on a special order of equipment. On
In 2020, Neighbor Co-Op Inc. sells 500 beverages in glass bottles and receives a \(\$ 1.00\) deposit for each returnable bottle sold. As of December 31, 2020, a total of 400 glass bottles were
Assume Ikeo Inc. sold \(\$ 100,000\) of gift cards during the last two weeks of December 2020. No gift cards were redeemed in 2020, while \(\$ 90,000\) of the gift cards were redeemed for store
Aloha Company has a personnel policy that allows each employee with at least one year's employment, 20 days vacation time and two holidays with regular pay. Unused days are carried over to the next
Utta Inc. allows each employee to earn 15 paid vacation days each year with full pay. Unused vacation time can be carried over to the next year. If not taken during the next year, unused vacation
Urban Fit Corporation paid salaries and wages of \(\$ 143,800\) to its employees for the month. Of this amount, \(\$ 3,800\) was paid to employees who had already exceeded wages of \(\$ 128,400\).
Bloy Company pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in the following biweekly period. Bloy accrues salaries expense only at its December 31 year-end. Data
Anne Taylor Company borrowed cash on August 1, 2020, and signed a \(\$ 33,300\) (face amount), one-year note payable, due on July 31, 2021. The accounting period of Anne Taylor ends December 31.
Consider the following three separate scenarios for a one-year, \(\$ 100,000\) note payable issued on September \(1,2020\). Use the straight-line method to amortize any discount on note
Masy's Department Store supported its operations through short-term note financing in 2020 described as follows:May 10 The Company entered into a new credit agreement with certain financial
The following table includes five separate short-term note payable scenarios.Required For each separate scenario, complete the last column in the table by calculating interest expense accrued at the
On December 31, 2020, Millers Grocery Inc. had a 10 -year, \(7 \%\) note payable balance of \(\$ 100,000\). The note payable was originally issued on June 30, 2011. The company will issue its
During 2020, Ward Company introduced a new product carrying a two-year warranty against defects, which is included in the selling price of the product. The estimated warranty costs are \(2 \%\) of
Assume the same information in Exercise 15-61, except that the warranty is for three years and has a separate purchase price. The company collected \(\$ 20,000\), and \(\$ 35,000\) for this extended
Macy Furniture sells a line of products that carry a three-year warranty against defects at no extra charge. Based on industry experience, the estimated warranty costs are as follows: first year
Koll's Company is preparing its annual financial statements at December 31, 2020. During 2020, a customer fell while riding on the escalator and has filed a lawsuit for \(\$ 150,000\) because of a
Stony Electronics, an electronics manufacturer, includes battery packs with its laptop computers that it sells. After a year of sales of the product, management learns that the battery packs have the
Atlanta Corp. is preparing its 2020 financial statements (December 31 year-end) and is considering the following events:a. Probable warranty costs on the company's products are estimated to be \(1
Boston Scientific Corporation is a worldwide developer, manufacturer and marketer of medical devices that are used in a broad range of interventional medical specialties. In a recent annual report on
On January 17, 2021, an explosion occurred at a Cord Company plant, causing extensive property damage to area buildings. Although no claims had yet been asserted against Cord by March 10, 2021, the
The following transactions relate to topics in this chapter.a. Purchased inventory on account, terms \(2 / n, n / 30\), accounted for using the perpetual method.b. Collected sales taxes on a customer
The following transactions relate to topics in this chapter.a. Coupons published in a newspaper that may be redeemed for merchandise or service.b. Sales taxes payable.c. Probable requirements to
Atlas Inc. issues short-term interest-bearing notes and uses the proceeds to purchase inventory. The company's profits for the year remain unchanged.Required Indicate how the use of the notes would
The balance sheets for Red Oak Inc. and Birch Co. reflect the following:Required Calculate the following ratios and comment on the results.a. Current ratiob. Quick ratio Red Oak Birch Current assets
List and briefly explain the primary characteristics of long-term debt securities. What are the primary distinctions between a debt security and an equity security?
Explain the difference between the stated rate and the market rate on a long-term debt security.
How is the issue price of a zero-interest-bearing note payable determined?
Briefly explain the effects on interest recognized when the stated and market rates of interest are different.
What are the primary characteristics of a bond? What distinguishes it from capital stock?
Distinguish between the face value and the issue price of a bond. When are they the same? When are they different? Explain.
Explain the impact on interest of a bond discount and bond premium to (a) the issuer and (b) the investor.
Assume that a \(\$ 1,000,8 \%\) (payable semiannually), 10 -year bond is sold at a market rate of \(6 \%\). Explain how to compute the price of this bond.
Explain why and how bond discount and bond premium affect (a) the balance sheet and (b) the income statement of the investor.
What is the primary conceptual difference between the straight-line and effective interest methods of amortizing bond discount and premium?
Under GAAP, when is it appropriate to use the (a) straight-line interest method and (b) effective interest method of amortization for bond discount or premium?
What are convertible bonds? What are the primary reasons for their use?
Define extinguishment of debt.
When may extinguishment of debt occur? List the various ways in which extinguishment of debt occurs.
Explain how an accounting gain or loss to the debtor may occur when a call privilege is exercised.
When the issuer purchases its own debt securities in the open market to extinguish the debt, two entries must usually be made. Explain.
What is meant by refunding?
Interest rates have increased since a company issued its bonds. Why would the company want to refund the bonds with another issue of bonds paying a higher rate?
A company retired a bond issue early, at a loss. Is the company in an economically worse position after the retirement?
Why is the accounting different for nonconvertible bonds with detachable stock purchase warrants and nonconvertible bonds with nondetachable stock purchase warrants?
Match each security listed below with its usual classification: (1) trading securities, (2) available-for-sale securities, (3) equity method securities, (4) held-to-maturity securities, or (5) equity
On January 1, 2020, Lazer Inc. purchased for cash, ten \(\$ 1,000,4 \%\) bonds of Star Corp. at par. The bond interest is paid annually on January 1 of each year, and the bond maturity date is
On January 1, 2020, Baker Corp. purchased \(\$ 20,000\) of Chocolate Inc. bonds. These bonds pay 5\% interest annually on December 31 and mature December 31, 2029. The investment is classified as a
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation to yield \(10 \%\). The bonds pay \(9 \%\) interest, payable on a semiannual basis each July 1 and
Repeat Exercise 14-43, assuming discounts and premiums are amortized using the straight-line interest method.Exercise 14-43On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation at a market rate of \(6 \%\). The bonds pay \(5 \%\) interest, payable on a semiannual basis each July
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation at a market rate of \(6 \%\). The bonds pay \(5 \%\) interest, payable on a semiannual basis each July
Repeat Exercise 14 -45 except now assume that the market rate is 4\% on July \(1,2020\).Exercise 14 -45On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation
At December 31, 2020, the investments in the portfolio of the trading securities of Kennedy Company included the following.Requireda. Record the entry for the receipt of quarterly interest from the
At December 31, 2020, the investments in the portfolio of the trading securities of Kennedy Company included the following.Requireda. Record the entry for the receipt of quarterly interest from the
On January 1, 2020, Jules Company purchased for cash, \(\$ 50,000\) bonds (ten \(\$ 5,000\) bonds) of Android Corporation at a market rate of \(6 \%\). The bonds pay \(6.5 \%\) interest, payable on a
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation to yield \(10 \%\). The bonds pay \(9 \%\) interest, payable on a semiannual basis each July 1 and
On July 1, 2020, West Company purchased for cash, eight \(\$ 10,000\) bonds of North Corporation to yield \(10 \%\). The bonds pay \(9 \%\) interest, payable on a semiannual basis each July 1 and
A portfolio of investments of available-for-sale securities held by Dow Inc. is as follows.The Fair Value Adjustment account had a \(\$ 0\) balance on January 1, 2020. No sales or purchases took
On December 31, 2020, Banff Company held an investment in Glacier Inc. bonds with an original cost of \(\$ 23,000\). The investment was classified as an available-for-sale security, had a fair value
On November 1, 2020, Drucker Co. acquired the following investments in equity securities measured at FV-NI.Kelly Corporation-500 shares of common stock (no-par) at \(\$ 60\) per share.Keefe
On November 1, 2020, Drucker Co. acquired the following investments in equity securities measured at FV-NI.Kelly Corporation- 500 shares of common stock (no-par) at \(\$ 60\) per share.Keefe
On September 1, 2020, Tech Company purchased 2,000 shares of common stock of Eagle Inc. for \(\$ 200,000\), while not obtaining significant influence over Eagle Inc. On November 1, 2020, Tech Company
At December 31, 2019, the portfolio of investments in equity securities measured at FV-NI held by Athletes Inc. is as follows. Investment Security Badger Common Stock (1,000 shares) Spartan Common
On June 1, 2020, Athletes Inc. sold 400 shares of Spartan stock for \(\$ 33\) per share and 100 shares of Wildcat stock for \(\$ 55\) per share. Athletes Inc. purchased 400 shares of Gopher common
At December 31, 2019, the portfolio of investments in equity securities measured at FV-NI held by Athletes Inc. is as follows. Investment Security Badger Common Stock (1,000 shares) Spartan Common
On June 1, 2020, Athletes Inc. sold 400 shares of Spartan stock for \(\$ 33\) per share and 100 shares of Wildcat stock for \(\$ 55\) per share. Athletes Inc. purchased 400 shares of Gopher common
Five separate scenarios of equity investment holdings, measured at FV-NI are as follows.Required For each of the five separate scenarios, record the adjustment to fair value required on December 31,
Corporation completed the following transactions, in the order given, relative to the portfolio of stocks held as equity investments measured at FV-NI.Year 2020 1. Purchased 150 shares of Starbux
On January 1, 2020, Allen Corporation purchased \(30 \%\) of the 30,000 outstanding common shares of Towne Corporation at \(\$ 17\) per share as a long-term investment. On the date of purchase, the
Assume that Fleetwood Inc. purchased 40\% of the voting stock of Mac Corporation on January 1, 2020, for \(\$ 100,000\), an amount equal to \(40 \%\) of Mac's book value. Assume that the fair value
On January 1, 2020, Allen Corporation purchased \(30 \%\) of the 30,000 outstanding common shares of Towne Corporation at \(\$ 15\) per share as a long-term investment. On the date of purchase, the
On January 1, 2020. Case Corporation purchased 3,000 of the 10,000 outstanding shares of common stock of Dow Corporation for \(\$ 28,000\) cash. At that date, Dow's balance sheet reflected the
On July 1, 2020, Allen Corporation purchased \(30 \%\) of the 30,000 outstanding common shares of Towne Corporation at \(\$ 17\) per share as a long-term investment. On the date of purchase, the book
Atlanta Inc. holds an HTM bond investment in Falcons Corporation. The carrying value of the investment is \(\$ 140,500\) on December 31, 2020. Atlanta Inc. determines the present value of the amounts
Eagle Software has an equity investment in Finch Enterprises accounted for under the equity method. The carrying value of the investment was \(\$ 45,000\) on December 31, 2020. At December 31, 2020,
Atlanta Inc. holds an AFS bond investment in Falcons Corporation. The amortized cost of the investment is \(\$ 140,500\) on December 31, 2020. Atlanta Inc. estimates the fair value of the bonds to be
On January 1, 2020, Josie Inc. purchased for cash ten, \(\$ 1,000,4 \%\) bonds of Star Corp. at par. The bond interest is paid annually on January 1 of each year, and the bonds mature on January 1,
On October 31, 2020, West Company purchased \(\$ 10,000\) of East Company bonds. West Company plans to hold the bonds for an indefinite period of time. West Company elects to account for the debt
Assume that Fireside Inc. purchased \(30 \%\) of the common stock of Theater Supplies Corporation on January 1, 2020 , for \(\$ 100,000\). Fireside Inc. elected to account for its investment using
Provide the definition of a current liability.
Explain how the measurement of a liability is related to its cause.
Why are most current liabilities recognized at maturity value at the beginning of their term?
Compute the present value of a \(\$ 10,000\), one-year note payable that specifies no interest, although \(10 \%\) would be a realistic rate. Is the present value less than, greater than, or equal to
In evaluating a balance sheet, some creditors say the liability section is one of the most important sections. What are some reasons justifying this position?
Some liabilities are reported at their maturity amount. In general, when should liabilities, prior to the maturity date, be reported at less than their maturity amount?
Explain why the amount of cash salaries paid to employees does not equal salaries expense for the employer.
Differentiate between secured and unsecured liabilities. Explain the reporting procedures for each.
What are examples of secured and unsecured liabilities?
Distinguish between the stated rate and the market rate on a debt.
Briefly define the following terms related to a note payable: present value of the note and maturity value of the note.
Distinguish between an interest-bearing note and a noninterest-bearing note.
Assume that \(\$ 4,000\) cash is borrowed on a \(\$ 4,000,10 \%\), one-year note payable that is interest-bearing and that another \(\$ 4,000\) cash is borrowed on a \(\$ 4,400\) one-year note that

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