1. Accrual accounting requires estimation of future results. For example, a reserve for bad credit is

the current estimated amount of receivables which will ultimately prove uncollectible.

What is needed:

Identify and explain three reasons why accounting information might deviate from economic reality.

Cite examples of transactions that might give rise to each reason.

2. Cybernetics Inc. issue $ 60 million in 5% bonds, with a term of three years with coupons paid on each

end of year. Effective interest rates at the beginning of Years 1, 2 and 3 are 8%, 5%, and 2%.

What is needed:

a. Determine what will be raised by Cybernetics from the issue of bonds.

b. Assume Cybernetics decides to explain bonds using the amortized cost method.

Determine interest and amortization of bonds for each of the three years.