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ACC 356 EXAM 1 SPRING 2012 SOLUTIONS

I. Multiple Choice

1. C 2. D 3. B 4. A 5. B 6. C 7. A

8. D 9. A 10. D 11. C 12. B 13. B 14. A 15. C


II. Contingencies

Part A Warranty expense = $1,200,000 x (2% + 3%) = $ 60,000

Warranty liability = $60,000 - $18,000 = $ 42,000

Part B Although the loss is reasonably estimated, PCF is required to only disclose information about
the situation since the loss is only reasonably possible. An accrual is not required since the loss
is not probable.

Part C
1/1/12 Leasehold Improvements ($2,500,000 + $298,904) 2,798,904
Cash 2,500,000
Asset Retirement Obligation 298,904

12/31/12 Depreciation Expense ($2,798,904 / 5 years) 559,781
Accumulated Depreciation, Leasehold Improvements 559,781

Accretion Expense ($298,904 x 6%) 17,934
Asset Retirement Obligation 17,934

III. Current Liabilities

Part A Payroll Taxes Expense 2,268
FICA Taxes Payable ($20,000 x 7.65%) 1,530
FUTA Taxes Payable [($5,000 + $6,000 + $7,000) x 0.6%] 108
SUTA Taxes Payable [($5,000 + $6,000 + $7,000) x 3.5%] 630

Part B Wages Expense 180
Vacation Wages Payable (5 x 8 x 9 x $9.50) 3,420
Cash (5 x 8 x 9 x $10) 3,600


IV. Bonds

Part A PV principal = $2,000,000 x PVSS 4%,30 (.30832) = $ 616,640
PV interest = $100,000* x PVOA 4%,30 (17.29203) = 1,729,203
Issue price $ 2,345,843

* ($2,000,000 x 10% x 6/12)

Part B
3/1/12 Cash ($1,500,000 x 92.561%) 1,388,415
Discount on Bonds Payable 111,585
Bonds Payable 1,500,000

Unamortized Bond Issue Costs 150,000
Cash 150,000
IV. Bonds continued

12/31/12 Interest Expense ($41,777 x 4/6) 27,851
Discount on Bonds Payable ($4,277 x 4/6) 2,851
Interest Payable ($37,500 x 4/6) 25,000

Bond Issue Expense ($150,000 / 10 yrs x 10/12) 12,500
Unamortized Bond Issue Costs 12,500

Amortization schedule:
Date Cash Interest Paid
(5%, semi.)
Interest Expense
(6%, semi.)
Discount
Amortization
Bonds Payable
Carrying Value
3/1/12 (beg) $ 1,388,415
9/1/12 $ 37,500 $ 41,652 $ 4,152 1,392,567
3/1/13 37,500 41,777 4,277

Part C Reacquisition price ($5,000,000 x 1.03) $ 5,150,000
Net carrying value of bond:
Face value $ 5,000,000
Unamortized bond premium [$200,000 ($200,000 x 4/10)] 120,000
Unamortized bond issue costs [$50,000 ($50,000 x 4/10)] (30,000) 5,090,000
Loss $ 60,000


V. Troubled-Debt Restructuring

Part A Debtor

(1) CV $ 750,000
FCP:
Principal $ 600,000
Interest ($600,000 x 7% = $42,000 x 2) 84,000 684,000
CV > FCP Gain $ 66,000

(2)
1/1/12 Notes Payable 66,000
Gain on Debt Restructure 66,000

12/31/12 Notes Payable 42,000
Cash 42,000

Part B Creditor

(1) CV $ 750,000
PV of FCP:
Principal [$600,000 x PVSS 2,9% (.84168)] $ 505,008
Interest [$42,000 x PVOA 2,9% (1.75911)] 73,883 578,891
Loss $ 171,109