intermediate accounting 2 exam 1 review

Landis Company purchased $ 3000000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2021, with interest payable on July 1 and January 1. The bonds sold for $ 3124740 at an effective interest rate of 7%. Using the effective-interest method, Landis Company decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2021 and December 31, 2021 by the amortized premiums of $ 10620 and $ 10980, respectively. At April 1, 2022, Landis Company sold the Ritter bonds for $ 3090000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2022 was $ 3097440. Assuming Landis Company has a portfolio of Available-for-Sale Debt Securities, what should Landis Company report as a gain or loss on the bonds?

$ -7440. $ 3097440 - $ 3090000 = $ -7440.

Tracy Company owns 4000 of the 10000 outstanding shares of Penn Corporation common stock. During 2021, Penn earns $ 450000 and pays cash dividends of $ 150000. If the beginning balance in the investment account was $ 900000, the balance at December 31, 2021 should be

$ 1,020,000.

Brown Corporation earns $ 720000 and pays cash dividends of $ 240000 during 2021. Dexter Corporation owns 3000 of the 10000 outstanding shares of Brown. What amount should Dexter show in the investment account at December 31, 2021 if the beginning of the year balance in the account was $ 960000?

$ 1104000.

Myers Company acquired a 60% interest in Gannon Corporation on December 31, 2020 for $ 1775000. During 2021, Gannon had net income of $ 1000000 and paid cash dividends of $ 250000. At December 31, 2021, the balance in the investment account should be

$ 2,225,000. $ 1775000 + ($ 1000000 × 0.60) - ($ 250000 × 0.60) = $ 2225000.

A company issues $ 15000000, 7.8%, 20-year bonds to yield 8% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $ 14703108. Using effective-interest amortization, how much interest expense will be recognized in 2020?

$1,176,373 ($14703108 × 0.04) + 14706232 × 0.04) = $1176373.

Pontchartrain Company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. The company uses effective-interest amortization. Interest expense reported on the 2017 income statement will total

$1,568,498. Interest expense for the first 6 month period from January 1 - June 30 is (Carrying amount of bonds, $19,604,145 X 8% X 6/12) = $784,166. The new carrying value for the bonds is [Carrying amount of bonds (original), $19,604,145 + (Interest expense, $784,166 - $780,000 or ($20,000,000 x 7.8% x 6/12), Cash Interest Paid)] = $19,608,311. Interest expense for the second six months is ($19,608,311 X .8% X 6/12) = $784,332. Total interest expense for 2017 is (January 1 - June 30 Interest, $784,166 + July 1 - December 31 Interest, $784,332) = $1,568,498.

Eckert Company issues $10,000,000, 6%, 5-year bonds dated July 1, 2017 on July 1, 2017. The bonds pay interest semiannually on December 31 and June 30. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

$10,437,618 Periods = 5 years x 2 = 10 and Interest Rate = 5% / 2 = 2.5%. Present value of the principal, (Face value of bonds, $10,000,000 X Present value of a single sum for 10 periods at 2.5% interest,.78120) + ($10,000,000 x 6% x 6/12 or $300,000 Semiannual Cash Payments for Interest X Present value of an annuity for 10 periods at 2.5% interest, 8.75206) = $10,437,618

During 2017, Grambling Company purchased 10,000 shares of Southern Corp. common stock for $215,000 as a passive interest investment. The fair value of these shares was $289,000 at December 31, 2017. During 2018, Grambling sold all of the Southern stock for $226,000. Grambling Company should report a realized gain on the sale of stock in 2018 of

$11,000. The difference between the selling price ($226,000) and the cost ($215,000) of securities is the amount of the realized gain (loss) on sale, $11,000.

On June 30, 2017, Prouty Co. had outstanding 9%, $5,000,000 face amount, 10-year bonds that pay interest semi-annually on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2017 was $200,000. On June 30, 2017, Prouty acquired all of these bonds at 101 and retired them. What amount of gain or loss would Prouty record on this early extinguishment of debt?

$250,000 loss The loss on extinguishment is: Retirement amount, ($5,000,000 X 1.01) - Carrying amount of bonds, $4,800,000 = $250,000.

On January 1, 2021, Huff Co. sold $ 5000000 of its 10% bonds for $ 4426480 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Huff report as interest expense for the six months ended June 30, 2021?

$265,589 $ 4426480 × 0.06 = $ 265589.

On January 1, 2017, Kimbrough Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Kimbrough uses the effective-interest method of amortizing bond discount. At December 31, 2017, Kimbrough should report unamortized bond discount of

$285,500 The discount on bonds payable is recorded at (Face Value of Bonds, $5,000,000 - Cash Proceeds from Bonds or Carrying Amount, $4,695,000) = $305,000 at issuance. The amortization of discount in 2017 is [Cash Interest Payment, $5,000,000 x 9% or $450,000 - (Carrying Amount or Face Value for Bonds, $4,695,000 X 10%)] =$19,500 leaving a balance of: Discount at Issuance, $305,000 - Amortization of Discount, $19,500 = $285,500.

Carr Corporation retires its $ 500000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $ 518725. The entry to record the redemption will include a

debit of $ 18725 to Premium on Bonds Payable.

On October 1, 2020 Macklin Corporation issued 5%, 10-year bonds with a face value of $ 6000000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. Bond interest expense reported on the December 31, 2020 income statement of Macklin Corporation would be

$69,000 [($6000000 × 0.05) × 3/12] - [($240000 ÷ 10) × 3/12] = $69000.

On its December 31, 2020 balance sheet, Emig Corp. reported bonds payable of $6000000. The bonds had been issued at par. On January 2, 2021, Emig retired $3000000 of the outstanding bonds at par plus a call premium of $70000. What amount should Emig report in its 2021 income statement as loss on extinguishment of debt (ignore taxes)?

$70000 ($3000000 + $70000) - ($6000000) × 1/2) = $70000.

Craig borrowed $700000 on October 1, 2020 and is required to pay $720000 on March 1, 2021. What amount is the note payable recorded at on October 1, 2020 and how much interest is recognized from October 1 to December 31, 2020?

$720000 and $12000.

At December 31, 2020 the following balances existed on the books of Rentro Corporation: Bonds Payable$ 7000000 Discount on Bonds Payable 980000 Interest Payable 168000 If the bonds are retired on January 1, 2021, at 102, what will Rentro report as a loss on redemption?

1,120,000 ($7000000 × 1.02) - ($7000000 - $980000) = $1120000.

Blanco Company purchased 200 of the 1000 outstanding shares of Darby Company's common stock for $ 600000 on January 2, 2021. During 2021, Darby Company declared dividends of $ 100000 and reported earnings for the year of $ 400000.If Blanco Company uses the equity method of accounting for its investment in Darby Company, its Equity Investments ( Darby) account at December 31, 2021 should be

660,000 $ 600000 + ($ 400000 × 0.20) - ($ 100000 × 0.20) = $ 660000

Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?

Amount of loss is reasonably estimable and occurrence of event is probable.

Which of the following is the proper way to report some gain contingencies?

As a disclosure only

Bargain Surplus made cash sales during the month of October of $ 375000. The sales are subject to a 6% sales tax that was also collected. Which of the following would be included in the summary journal entry to reflect the sale transactions?

Credit Sales Taxes Payable for $ 22500.

On August 1, 2021, Dambro Company acquired 1200, $ 1000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2018, and mature on April 30, 2027, with interest paid each October 31 and April 30. The bonds will be added to Dambro's available-for-sale portfolio. The preferred entry to record the purchase of the bonds on August 1, 2021 is

Debt Investments 1164000 Interest Revenue 27000 Cash 1191000

Which of the following best describes the accounting for assurance-type warranty costs?

Expensed based on estimate in year of sale

At December 31, 2021, Atlanta Company has an equity portfolio valued at $ 160000. Its cost was $ 132000. If the Securities Fair Value Adjustment has a debit balance of $ 8000, which of the following journal entries is required at December 31, 2021?

Fair Value Adjustment 20000 Unrealized Holding Gain or Loss-Income 20000 ($ 160000 - $ 132000) - $ 8000 = $ 20000 unrealized gain.

Which of the following situations may give rise to unearned revenue?

Selling magazine subscriptions.

Which of the following taxes does not represent a common employee payroll deduction?

State unemployment taxes.

When is a contingent liability recorded?

When the future events are probable to occur and the amount can be reasonably estimated.

On January 1, 2017, Trinity Company loaned $901,560 to Litton Industries in exchange for a 3 year, zero-interest-bearing note with a face amount, $1,200,000. The prevailing rate of interest for a loan of this type is 10%. The adjusting journal entry made by Litton at December 31, 2017 with regard to the note will include

a credit to Discount on Notes Payable for $90,156. (901,560 x 10%)

On January 1, Gasperson Inc. issued $100,000,000, 7% bonds at 102. The journal entry to record the issuance of the bonds will include

a credit to Premium on Bonds Payable for $2,000,000.

Lyric Company issued a 90-day zero-interest-bearing note with a face amount of $3,000. The present value of the note is $2,855. The journal entry to record the issuance of the note will include

a debit to Cash for $2,855.

Watt Company purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes

a debit to Debt Investments at $315,000.

Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses that are included as other comprehensive income and as a separate component of stockholders' equity are

available-for-sale debt securities.

Stock dividends distributable should be classified on the

balance sheet as an item of stockholders' equity.

On October 1, 2020 Bartley Corporation issued 5%, 10-year bonds with a face value of $ 8000000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. The entry to record the issuance of the bonds would include a

credit of $ 320000 to Premium on Bonds Payable. ($8000000 × 1.04) - $8000000 = $320000 premium.

Among the short-term obligations of Larsen Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Dennison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Larsen Company as

current liabilities

An ownership interest of 15% in another company's voting stock should be accounted for using the:

fair value method.

Debt securities that are accounted for at amortized cost, not fair value, are

held to maturity

Contingent Liability

is the result of a loss contingency

Roxy Co., which has a taxable payroll of $ 800000, is subject to FUTA tax of 6.2% that includes a state contribution rate of 5.4%. However, because of stable employment experience, the company's state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Roxy Co.?

$ 22400 [( 0.062 - 0.054) + 0.02] × $ 800000 = $ 22400.

On July 1, 2021, Spear Co. issued 4000 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2021 and mature on April 1, 2031. Interest is payable semiannually on April 1 and October 1. What amount did Spear receive from the bond issuance?

$ 4060000

On January 3, 2020, Moss Company acquires $ 500000 of Adam Company's 10-year, 10% bonds at a price of $ 532090 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Company uses the effective-interest method, what is the amount of interest revenue that would be recognized in 2021 related to these bonds?

$ 47698 ($ 532090 × 0.090) - ($ 500000 × 0.10) = $ -2112 - 2020 Amortization($ 532090 - $ 2112) × 0.090 = $ 47698 - 2021 Interest Revenue.

On January 1, 2020, Ellison Co. issued eight-year bonds with a face value of $ 6000000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: The issue price of the bonds is

$ 5301360. $ 3204000 + $ 2097360 = $ 5301360.

Blanco Company purchased 200 of the 1000 outstanding shares of Darby Company's common stock for $ 600000 on January 2, 2021. During 2021, Darby Company declared dividends of $ 100000 and reported earnings for the year of $ 400000.If Blanco Company used the fair value method of accounting for its investment in Darby Company, its Equity Investments ( Darby) account on December 31, 2021 should be

$ 600000. $ 600000, acquisition cost.

Landis Company purchased $ 3000000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2021, with interest payable on July 1 and January 1. The bonds sold for $ 3124740 at an effective interest rate of 7%. Using the effective-interest method, Landis Company decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2021 and December 31, 2021 by the amortized premiums of $ 10620 and $ 10980, respectively. At December 31, 2021, the fair value of the Ritter, Inc. bonds was $ 3180000. What should Landis Company report as other comprehensive income and as a separate component of stockholders' equity?

$ 76860. $3180000 - ($3124740 - $10620 - $10980) = $76860.

On October 1, 2020 Bartley Corporation issued 5%, 10-year bonds with a face value of $ 8000000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. Bond interest expense reported on the December 31, 2020 income statement of Bartley Corporation would be

$ 92000. [($8000000 × 0.05) × 3/12] - [($320000 ÷ 10) × 3/12] = $92000.

Parton owes $ 3 million that is due on February 28. The company borrows $ 2400000 on February 25 (5-year note) and uses the proceeds to pay down the $ 3 million note and uses other cash to pay the balance. How much of the $ 3 million note is classified as long-term in the December 31 financial statements?

$0

Jump Corporation has $3000000 of short-term debt it expects to retire with proceeds from the sale of 85000 shares of common stock. There is no contractual agreement to retire the debt with the stock sale proceeds. If the stock is sold for $25 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities?

$0, No contractual agreement to retire the debt with stock proceeds.

Venible Newspapers sold 6000 of annual subscriptions at $150 each on June 1. How much unearned revenue will exist as of December 31?

$375000.

Ferrone Company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Ferrone uses effective-interest amortization. What amount of interest expense will Ferrone record for the June 30, 2017 payment?

$392,083

On January 1, 2021, Solis Co. issued its 10% bonds in the face amount of $ 8000000, which mature on January 1, 2031. The bonds were issued for $ 9073584 to yield 8%, resulting in bond premium of $ 1073584. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2021, Solis's adjusted unamortized bond premium should be (Round intermediate calculations to 0 decimal places, e.g. 9,020,890.)

$999,471 $1073584 - [($8000000 × 0.10) - ($9073584 × 0.08)] = $999471.

Tracy Company owns 4000 of the 10000 outstanding shares of Penn Corporation common stock. During 2021, Penn earns $ 450000 and pays cash dividends of $ 150000.Tracy should report investment revenue for 2021 of

180,000 $ 450000 × 0.40 = $ 180000.

On January 1, 2017, Ellison Co. issued eight-year bonds with a face value of $ 6000000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:

2,097,360

On October 1, 2020 Macklin Corporation issued 5%, 10-year bonds with a face value of $ 6000000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis.The entry to record the issuance of the bonds would include a credit of

2,400,000 premium ($ 6000000 × 1.04) - $ 6000000 = $ 240000 premium.

Everhart Company issues $25000000, 6%, 5-year bonds dated January 1, 2020 on January 1, 2020. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

2,609,045 ($ 25000000 × 0.78120) + ($ 750000 × 8.75206) = $ 26094045.

Fox Co. issued $100000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.One step in calculating the issue price of the bonds is to multiply the face value by the table value for

20 periods and 4% from the present value of 1 table

Brown Corporation earns $ 720000 and pays cash dividends of $ 240000 during 2021. Dexter Corporation owns 3000 of the 10000 outstanding shares of Brown. How much investment income should Dexter report in 2021?

216,000 $ 720000 × 0.30 = $ 216000.

On January 1, 2020, Ellison Co. issued eight-year bonds with a face value of $ 6000000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:

3,204,000 $ 6000000 × 0.534 = $ 3204000.

On January 3, 2020, Moss Company acquires $ 500000 of Adam Company's 10-year, 10% bonds at a price of $ 532090 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Company uses the straight-line method, what is the amount of premium amortization that would be recognized in 2022 related to these bonds?

3,209 ($532090 - $500000) ÷ 10 = $3209.

On its December 31, 2020 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2021 in the composition of Calhoun's portfolio of debt investments held as available-for-sale debt securities. The following information pertains to that portfolio: What amount of unrealized loss on these debt securities should be included in Calhoun's stockholders' equity section of the balance sheet at December 31, 2021?

30,000

Slack Inc. borrowed $ 400000 on April 1. The note requires interest at 12% and principal to be paid in one year. How much interest is recognized for the period from April 1 to December 31?

36,000

On its December 31, 2020 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2021 in the composition of Calhoun's portfolio of debt investments held as available-for-sale debt securities. The following information pertains to that portfolio: The amount of unrealized loss to appear as a component of comprehensive income for the year ending December 31, 2021 is

40,000 $10,000 + ($405000 - $375000) = $40000

Downing Company issues $ 5000000, 6%, 5-year bonds dated January 1, 2020 on January 1, 2020. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

5,218,809 ($5000000 × 0.78120) + ($150000 × 8.75206) = $5218809

Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?

Fair Value Method Equity Method No Effect Decrease

Sandy Shoes Foot Inc. is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be $800000. What is the required journal entry as a result of this litigation?

No journal entry is required.

Which of the following is an example of a contingent liability?

Obligations related to product warranties.

On its December 31, 2020, balance sheet, Trump Company reported its investment in equity securities, which had cost $ 600000, at fair value of $ 560000. At December 31, 2021, the fair value of the securities was $ 585000. What should Trump report on its 2021 income statement as a result of the increase in fair value of the investments in 2021?

Unrealized gain of $ 25000. $ 585000 - $ 560000 = $ 25000 unrealized gain.

On its December 31, 2017, balance sheet, Estes Co. reported its investment in trading securities, which had cost $500,000, at fair value of $475,000. At December 31, 2018, the fair value of the securities was $492,500. What should Estes report on its 2018 income statement as a result of the increase in fair value of the investments in 2018?

Unrealized gain of $17,500.

Unrealized holding gains or losses which are recognized in income are from debt securities classified as

trading

When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be

increased by accrued interest from May 1 to June 1.

Fox Co. issued $ 100000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.One step in calculating the issue price of the bonds is to

none of these answers is correct.

Liabilities are

obligations arising from past transactions and payable in assets or services in the future.