ACC 306 Week 2

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ACC 306 Week 2

1.Determine which accounts are incorrect as a result of these errors at January 1, 2011, before any adjustments. Explain your answer. (Ignore income taxes.)

2.Prepare a journal entry to correct the error.

3.What other step(s) would be taken in connection with the error?

E 1418 - American Food Services, Inc. - Installment note; amortization schedule ? LO3

American Food Services, Inc., acquired a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2011. In payment for the $4 million machine, American Food Services issued a four-year installment note to be paid in four equal payments at the end of each year. The payments include interest at the rate of 10%.

Required:

1.Prepare the journal entry for American Food Services purchase of the machine on January 1, 2011.

2.Prepare an amortization schedule for the four-year term of the installment note.

3.Prepare the journal entry for the first installment payment on December 31, 2011.

4.Prepare the journal entry for the third installment payment on December 31, 2013.

E 1525 Concepts; terminology ? LO3 through LO9

Listed below are several terms and phrases associated with leases. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it.

P 1421 - Appling Enterprises - Report bonds at fair value; quarterly reporting ? LO6

Appling Enterprises issued 8% bonds with a face amount of $400,000 on January 1, 2011. The bonds sold for $331,364 and mature in 2030 (20 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually on June 30 and December 31. Appling determines interest expense at the effective rate. Appling elected the option to report these bonds at their fair value. The fair values of the bonds at the end of each quarter during 2011 as determined by their market values in the over-the-counter market were the following:

March 31 $ 350,000

June 30 340,000

September 30 335,000

December 31 342,000

Required:

  1. By how much will Applings earnings be increased or decreased by the bonds (ignoring taxes) in the March31 quarterly financial statements?

2.By how much will Applings earnings be increased or decreased by the bonds (ignoring taxes) in the June 30 quarterly financial statements?

3.By how much will Applings earnings be increased or decreased by the bonds (ignoring taxes) in the September 30 quarterly financial statements?

4.By how much will Applings earnings be increased or decreased by the bonds (ignoring taxes) in the December 31 annual financial statements?

P 153 Rand Medical - Direct financing and sales-type lease; lessee and lessor ? LO3 LO5 LO6

Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians Leasing purchased a lithotripter from Rand for $2,000,000 and leased it to Mid-South Urologists Group, Inc., on January 1, 2011.

Collectibility of the lease payments is reasonably assured, and there are no lessor costs yet to be incurred.

Required:

  1. How should this lease be classified by Mid-South Urologists Group and by Physicians Leasing?

2.Prepare appropriate entries for both Mid-South Urologists Group and Physicians Leasing from the inception of the lease through the second rental payment on April 1, 2011. Depreciation is recorded at the end of each fiscal year (December 31).

3.Assume Mid-South Urologists Group leased the lithotripter directly from the manufacturer, Rand Medical, which produced the machine at a cost of $1.7 million. Prepare appropriate entries for Rand Medical from the inception of the lease through the second lease payment on April 1, 2011.

Discussion Questions

Ethics Case 148 - 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 dont 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 wed 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, theyll all convert. We wont have to pay a cent. And, since no cash will be paid, we wont pay taxes either.

Required:

Do you perceive an ethical dilemma? What would be the impact of following up on Claudes plan? Who would benefit? Who would be injured?

Ethics Case 154 - American Movieplex - Leasehold improvements ? LO3

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 com- pany controller, Sarah Keene, was surprised by the suggestion of Larry Person, her new assistant.

Keene:Why 25 years? Weve 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 dont need expenses to be any higher than necessary.

Keene:But isnt 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 Movieplexs income?

2.Does revising the estimate pose an ethical dilemma?

  1. Who would be affected if Persons suggestion is followed?

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