Intermediate Accounting II--(ACCT 311), Fall 2014 _Latest Solutions_Updated on 13 December 2014

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Please see instructions on the answer sheet provided before completing the exam.


Question 1 (3 points—30 minutes)


On January 1, 2014, A&O Corp. leases equipment to PVP Company under a six-year non-cancelable lease agreement. The fair value of the equipment is $700,000 and the cost of equipment to A&O is $600,000.  Economic life of the leased equipment  is ten years with no residual value and title to the equipment passes to PVP at the end of the lease.  Equal annual payments of 151,421 are due on December 31 each year.  The implicit interest rate is 8%.  Collectibility of the lease payments is reasonably predictable and there are no additional costs yet to be incurred by A&O Corp.   Assume that this is a sales type lease.  The present value factor for an ordinary annuity for 6 periods at 8% is 4.62288 and the present value factor for an annuity due for 6 periods at 8% is 4.99271.


For A&O Co. (lessor) answer the following questions.

a.        Show calculations for Lease Receivable on 1/1/2014 (round your answer).

b.       Prepare the journal entry to record the lease on 1/1/ 2014.

c.        Prepare a partial amortization table for the lease through 12/31/2016.

d.       Prepare the journal entry to record the receipt of lease payment on 12/31/2014.


Question 2 (3 points—30 minutes)

The following partial information is available for A&O Company for 2014 and 2015:

                                                                                                                                            2015                                2014           

            Cash                                                                                                                          $   292,000                       $  153,000

            Accounts receivable                                                                                                       149,000                           117,000

            Inventory                                                                                                                        150,000                           180,000

            Prepaid expenses                                                                                                             18,000                             27,000

            Plant assets                                                                                                                1,275,000                        1,050,000

            Accumulated depreciation                                                                                            (450,000)                        (375,000)

            Patent                                                                                                                            153,000                           174,000

                                                                                                                                              $1,587,000                      $1,326,000

            Accounts payable                                                                                                      $   153,000                      $   168,000

            Accrued liabilities                                                                                                            60,000                             42,000

            Mortgage payable                                                                                                             —                                 450,000

            Preferred stock                                                                                                              525,000                              —

            Additional paid-in capital—preferred                                                                           120,000                              —

            Common stock                                                                                                               600,000                           600,000

            Retained earnings                                                                                                         129,000                             66,000

                                                                                                                                              $1,587,000                      $1,326,000

·         The increase in Accumulated Depreciation account is due to the depreciation expense for the period. No plant assets were sold during the year. Patents were not purchased or sold during the year.

·         The Retained Earnings account has been charged for dividends of $148,000 and credited for the net income for the year.

·         Depreciation expense and patent amortization expense for 2015 are included in the $680k operating expense shown below.

        The income statement (partial information) for 2015 is as follows:

Sales revenue                                                               $1,980,000

Cost of sales                                                                   1,089,000

Gross profit                                                                        891,000

Operating expenses                                                           680,000

Net income                                                                   $   211,000

Indirect method: show calculations for cash flow from (a) Operating (b) Investing, and (c) Financing activities for  2015.



Question 3 (2 points—15 minutes)


During 2014, AM Construction Company changed from the completed-contract method to the percentage-of-completion method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three years appear below:

                                  Completed-Contract                  Percentage-of-Completion

2012                                  $   400,000                                    $   800,000

2013                                        600,000                                         900,000

2014                                        700,000                                      1,000,000

                                           $1,700,000                                   $2,700,000

Assume an income tax rate of 35% for all years.

a.        Show computations to determine the adjustment needed in 2014 to the beginning balance of retained earnings to account for the effect of this accounting change on prior periods.

b.       Prepare a journal entry needed in 2014 to adjust the accounting records for this change in accounting principle.


Question 4 (2 points—25 minutes)


The following information pertains to VAAP Co.’s defined benefit pension plan for the year 2014.

Projected benefit obligation at 1/1/2014


Fair value of pension plan assets 1/1/2014


Unrecognized prior service costs at 1/1/2014


Service cost for 2014


Amortization of prior service costs


Actual return on plan assets in 2014


Expected return on plan assets in 2014


Contributions to the plan in 2014


Benefits paid in 2014


Unexpected loss from change in projected benefit obligation due to change in actuarial predictions in 2014


Settlement rate used



a.        Show calculations to determine the pension expense for 2014.

b.       Show calculations to determine the ending balance of the projected benefit obligation at 12/31/2014.


Question 5 (4 points—20 minutes)


Select the best answer for each of the following and write the letter corresponding to your answer in the answer sheet provided.


1.       VAAP Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. The cause for action occurred during the accounting period covered by the financial statements. A loss and related liability should be reported in the financial statements if

a.     VAAP lawyers admit guilt.

b.     The court will decide the case within one year.

c.     The amount can be reasonably estimated, and an unfavorable outcome is reasonably possible.

d.     The amount can be reasonably estimated, and an unfavorable outcome is highly probable.

2.       A company is required to exclude a short term obligation from current liabilities if

a.     It intends to refinance the obligation on a long term basis

b.     It enters into a financing agreement that permits the enterprise to refinance the debt on a short-term basis.

c.     It demonstrates an ability to consummate the refinancing

d.     Both conditions in a and c are met.

3.       Under the effective-interest method of bond discount or premium amortization, which of the following statements is correct?

a.        As bond discount is amortized, the interest expense increases over time.

b.       As bond discount is amortized, the carrying value of bonds remains the same over time.

c.        As bond premium is amortized, the carrying value of bonds increases over time.

d.       All of the above statements are incorrect.

4.       A&O Corporation issued a 10% stock dividend of its common stock which had a par value of $10 and a fair value of $13 at the time of the stock dividend. At what amount should retained earnings be capitalized (debit to retained earnings) for the additional shares issued?

a.        There should be no capitalization of retained earnings.

b.       Par value

c.        Fair value on the declaration date

d.       Fair value on the date of distribution

5.       What effect does the issuance of a stock dividend have on each of the following?

                              Par Value per Share                 Retained Earnings

                a.                 No effect                                           No effect

                b.                 Increase                                             Increase

                c.                 Decrease                                           Decrease

                d.                 No effect                                           Decrease

6.       Which of the following would result in future deductible amounts?

a.        Fines resulting from a violation of law.

b.       Warranty expense reported in financial income before it is paid.

c.        Depreciation taken on the tax return in excess of the amounts reported in financial income.

d.       Interest received on a municipal obligation.

7.       Under the cost method, when a company sells its Treasury Stock either above or below its cost, which of the following statements is correct with respect to accounting for the sale?

a.     Sale of Treasury Stock above cost results in a debit to Paid in Capital from Treasury Stock.

b.     Sale of Treasury Stock above cost results in a debit to Retained earnings.

c.     Sale of Treasury Stock above cost results in a credit to Paid in Capital from Treasury Stock.

d.     Sale of Treasury Stock below cost results in a credit to Paid in Capital from Treasury Stock.

8.       A lessor with a sales-type lease involving unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?

a.     Lease receivable plus the present value of the unguaranteed residual value.

b.     The sales price of the asset, less the present value of the unguaranteed residual value.

c.     The sales price of the asset, plus the present value of the unguaranteed residual value.

d.     The sales revenue would be equal to the sales price of the asset.

9.       A company changes the useful life of a building from 15 years and no salvage value to 25 years and no salvage value. The company would account for the effect of this change

a.     By recasting previously issued financial statements.

b.     In the period of change and future periods if the change affects both.

c.     As a change in estimate effected by a change in accounting principle.

d.     As a change in accounting principle.

10.    A&O Corporation sold equipment for $85,000.  The cost of the equipment was $100,000 and the book value was $82,000.  Under the indirect method, to determine net cash flow from operations, A&O would

a.     Subtract from net income a $3,000 gain from sale of equipment

b.     Add back to net income a $15,000 loss from sale of equipment

c.     Add back to net income a $3,000 loss from sale of equipment

d.     Subtract from net income a $15,000 gain from sale of equipment.



Question 6 (6 points—40 minutes)


Show computations for each of the following, and clearly show your final answer using the answer sheet provided. 

1.       PVP Company sells products for $500,000 (on credit) that include an assurance-type warranty for the first 90 days. The cost of the products is $250.000. PVP also offers  a service type warranty for extended coverage for 2 years beyond the expiration of the assurance-type warranty for $10,000. The estimated cost of the assurance-warranty is $20,000. Prepare (a) a journal entry to record sale and related warranties AND (b) a journal entry to record the cost of goods sold.


2.       During 2013, PVP Co. introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following sale and 3% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2013 and 2014 are as follows:

                                                                                                           Actual Warranty

                                                            Sales                                         Expenditures

2013                                                  $   500,000                                 $20,000

2014                                                    1,500,000                                   50,000

                                                           $2,000,000                                 $70,000

Show computation for an estimated warranty liability on (a) 12/31/2013 and (b) on 12/31/2014.


3.       VAP Company's balance sheet shows:

·         Common stock, $20 par                                                         $4,000,000

·         Paid-in capital in excess of par                                                1,000,000

·         Retained earnings                                                                         800,000

Prepare journal entries to record the following transactions using the cost method.

(a)           Bought 10,000 treasury shares of its own common stock at $30 a share.

(b)           Sold 2,000 treasury shares at $31 a share.

(c)           Sold 1,000 shares of treasury stock at $27 a share.


4.       At December 31, 2014, VAAP Corp. had 55,000 shares of common stock.  The company has a 7% ten-year bond sold in 2012 for $1,000,000 and convertible into 35,000 shares of common stock. Net income for 2014 was $302,500 and the tax rate is 35%. Show computations for VAAP’s (a) basic and (b) diluted earnings per share in 2014.


5.        On January 1, 2013, PVP Co. purchased a machine for $880,000 and depreciated it by the straight-line method using an estimated useful life of ten years with a salvage value $80,000. On January 1, 2015, PVP determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $70,000. An accounting change was made in 2015 to reflect these additional data. Show calculations to determine the depreciation expense for this machine in 2015.


6.       A&E Co. reported $250,000 income in its 2014 income statement before provision for income taxes.  To compute the provision for federal income taxes the following 2014 information is provided.

Estimated product warranty expenses deducted in financial income before payment


Income from tax exempt municipal bonds


Depreciation deducted for income tax purposes in excess of depreciation reported for financial statement purposes


Enacted corporate income tax rate


Show computations to determine the amount of (a) current income tax liability (income taxes payable), and (b) deferred tax asset and/or deferred tax liability as applicable on 12/31/2014.


7.       PVP Corp leased a truck on 1/1/2014.  The lease requires PVP Corp to make 5 annual payments of $20,000 beginning on 1/1/2014.  At the end of the lease PVP Corp guarantees the residual value of the truck will total $6,000.  The lease qualifies as a capital lease. The interest rate implicit in the lease is 10%.  Present value factors at 10% are as follows:

·         For an annuity due with 5 payments, 4.16986

·         For an ordinary annuity with 5 payments, 3.79079

·         Present value of $1 for 5 periods, 0.62092


Show calculations to determine the amount for PVP Corp’s recorded liability immediately after the first payment.

8.       A&O Inc. leased a machine from PVP Co.  The lease qualifies as a capital lease and requires 10 annual payments of $25,000 beginning immediately.  The lessor’s implicit rate is 12% and the lessee is aware of this rate.  The lessee’s incremental borrowing rate is 14%.  The lease has a bargain purchase option of $10,000 at the end of the tenth year.

·         The present value of an annuity due of one at 12% for 10 years is 6.328; and at 14% for 10 years is 5.946.

·         The present value of an ordinary annuity at 12% for 10 years is 5.650.

·         The present value of one at 12% for 10 years is 0.322; and at 14% for 10 years is 0.270.

Show calculations to determine the amount A&O should record as a lease liability at the beginning of the lease term.









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    Intermediate Accounting II--(ACCT 311), Fall 2014 _Latest Solutions_Updated on 13 December 2014

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