Hawassa University

College of Business and Economics

Instructions:
❖ Form a group of 5 students and do the following questions.
❖ The assignment will be submitted on May 21, 2024
❖ Maximum mark Allotted: 20 Marks
❖ Assignment should be submitted via hard copy to the Instructor.
Questions
1) At December 31, 2014, Burr Corporation owes €500,000 on a note payable due February
15, 2015. (a) If Burr intends to refinance the obligation by issuing a long-term note on
February 14 and using the proceeds to pay off the note due February 15, how much (if any)
of the €500,000 should be reported as a current liability at December 31, 2014? (b) If Burr
pays off the note on February 15, 2015, and then borrows €1,000,000 on a long-term basis
on March 1, how much (if any) of the €500,000 should be reported as a current liability at
December 31, 2014, the end of the fiscal year?
2) Streep Factory provides a 2-year warranty with one of its products which was first sold in
2015 for ¥4,000,000. Streep estimates that ¥450,000 will be spent in the future to service
warranty claims related to the 2015 sales. In 2015, Streep spent ¥130,000 servicing
warranty claims. Prepare the journal entries to record the sale, warranty costs, and related
warranty expenditures in 2015.
3) Main Company sells 100 televisions on June 1, 2015, at a total price of €35,000 with a
warranty guarantee that the product was free of any defects. The assurance warranties
extend for a 2-year period and are estimated to cost €1,000. Main also sold extended
warranties for €800 related to the televisions covering 2 additional years beyond the
assurance warranty period. Prepare the journal entries that Main should make in 2015
related to the sale of the televisions and related warranties. Warranty costs incurred in 2015
were €150.
4) Eastwood Ranchers sells a herd of cattle to Rozo Meat Packers for €30,000 and the related
VAT. Rozo Meat Packers sells the beef to Wrangler Supermarkets for €40,000 and the

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 related VAT. Wrangler Supermarkets sells this beef to customers for €50,000 plus related
VAT.
Instructions
a) Assuming the VAT is 15% on all sales, prepare the journal entry to record the sale
by Rozo Meat Packers to Wrangler Supermarkets.
b) What is the net cash outlay that Eastwood Ranchers incurs related to the VAT?
5) Described below are certain transactions of Edwardson Corporation. The company uses
the periodic inventory system.
i. On February 2, the corporation purchased goods from Martin Company for €70,000
subject to cash discount terms of 2/10, n/30. Purchases and accounts payable are
recorded by the corporation at net amounts after cash discounts. The invoice was
paid on February 26.
ii. On April 1, the corporation bought a truck for €50,000, paying €4,000 in cash and
signing a one-year, 12% note for the balance of the purchase price.
iii. 3. On August 1, the board of directors declared a €300,000 cash dividend that was
payable on September 10 to shareholders of record on August 31.
6) On June 30, 2014, Macias Company issued R$5,000,000 face value of 13%, 20-year bonds
at R$5,376,150 to yield 12%. The bonds pay semiannual interest on June 30 and December
31.
Instructions: Prepare the journal entries to record the following transactions.
a) The issuance of the bonds on June 30, 2014.
b) The payment of interest and the amortization of the premium on December 31, 2014.
c) The payment of interest and the amortization of the premium on June 30, 2015.
d) The payment of interest and the amortization of the premium on December 31, 2015.
7) On January 2, 2012, Prebish Corporation issued $1,500,000 of 10% bonds to yield 11%
due December 31, 2021. Interest on the bonds is payable annually each December 31. The
bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2015, Prebish
called $1,000,000 face amount of the bonds and retired them.
Instructions
a) Determine the price of the Prebish bonds when issued on January 2, 2012.
b) Prepare an amortization schedule for 2012–2016 for the bonds.

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 c) Ignoring income taxes, compute the amount of loss, if any, to be recognized by Prebish
as a result of retiring the $1,000,000 of bonds in 2015 and prepare the journal entry to
record the retirement.
8) Chen Inc. acquired 20% of the outstanding ordinary shares of Cho Corp. on December 31,
2015. The purchase price was ¥125,000,000 for 50,000 shares. Cho Corp. declared and
paid an ¥80 per share cash dividend on June 30 and on December 31, 2016. Cho reported
net income of ¥73,000,000 for 2016. The fair value of Cho’s shares was ¥2,700 per share
at December 31, 2016.
Instructions
a) Prepare the journal entries for Chen Inc. for 2015 and 2016, assuming that Chen cannot
exercise significant influence over Cho. The investments should be classified as
trading.
b) Prepare the journal entries for Chen Inc. for 2015 and 2016, assuming that Chen can
exercise significant influence over Cho.
c) At what amount is the investment reported on the statement of financial position under
each of these methods at December 31, 2016? What is the total net income reported in
2016 under each of these methods?
9) Cairo Corporation has government bonds classified as held-for-collection at December 31,
2015. These bonds have a par value of $800,000, an amortized cost of $800,000, and a fair
value of $740,000. In evaluating the bonds, Cairo determines the bonds have a $60,000
permanent decline in value. That is, the company believes that impairment accounting is
now appropriate for these bonds.
Instructions
a) Prepare the journal entry to recognize the impairment.
b) What is the new cost basis of the bonds? Given that the maturity value of the bonds is
$800,000, should Cairo Corporation amortize the difference between the carrying
amount and the maturity value over the life of the bonds?
c) At December 31, 2016, the fair value of the municipal bonds is $760,000. Prepare the
entry (if any) to record this information.

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 10) Presented below is information taken from a bond investment amortization schedule with
related fair values provided. These bonds are managed to profit from changes in market
interest rates.
12/31/15 12/31/16 12/31/17
Amortized cost €491,150 €519,442 €550,000
Fair value 497,000 509,000 550,000
Instructions:
a) Indicate whether the bonds were purchased at a discount or at a premium.
b) Prepare the adjusting entry to record the bonds at fair value at December 31, 2015. The
Fair Value Adjustment account has a debit balance of €1,000 prior to adjustment.
c) Prepare the adjusting entry to record the bonds at fair value at December 31, 2016.
11) Brecker Company leases an automobile with a fair value of €10,906 from Emporia Motors,
Inc., on the following terms:
i. Non-cancelable term of 50 months.
ii. Rental of €250 per month (at end of each month). (The present value at 1% per
month is €9,800.)
iii. Estimated residual value after 50 months is €1,180. (The present value at 1% per
month is €715.) Brecker Company guarantees the residual value of €1,180.
iv. Estimated economic life of the automobile is 60 months.
v. Brecker Company’s incremental borrowing rate is 12% a year (1% a month). It is
impracticable to determine Emporia’s implicit rate.
Instructions:
a) What is the nature of this lease to Brecker Company?
b) What is the present value of the minimum lease payments?
c) Record the lease on Brecker Company’s books at the date of inception.
d) Record the first month’s depreciation on Brecker Company’s books (assume
straight-line).
e) Record the first month’s lease payment.
12) On January 1, 2015, Palmer Company leased equipment to Zumra Corporation. The
following information pertains to this lease.

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 i. The term of the non-cancelable lease is 6 years, with no renewal option. The
equipment reverts to the lessor at the termination of the lease.
ii. Equal rental payments are due on January 1 of each year, beginning in 2015.
iii. The fair value of the equipment on January 1, 2015, is $200,000, and its cost is
$150,000.
iv. The equipment has an economic life of 8 years, with an unguaranteed residual value
of $10,000. Zumra depreciates all of its equipment on a straight-line basis.
v. Palmer sets the annual rental to ensure an 11% rate of return. Zumra’s incremental
borrowing rate is 12%, and it is impracticable for Zumra to determine the implicit
rate.
Instructions (Both the lessor and the lessee’s accounting period ends on December 31.)
a) Discuss the nature of this lease to Palmer and Zumra.
b) Calculate the amount of the annual rental payment.
c) Prepare all the necessary journal entries for Zumra for 2015.
d) Prepare all the necessary journal entries for Palmer for 2015.
13) Demir Leasing Company signs an agreement on January 1, 2015, to lease equipment to
Azure Company. The following information relates to this agreement. 1
✓ The term of the non-cancelable lease is 5 years with no renewal option. The
equipment has an estimated economic life of 5 years.
✓ The fair value of the asset at January 1, 2015, is 90,000.
✓ The asset will revert to the lessor at the end of the lease term, at which time the
asset is expected to have a residual value of 7,000, none of which is guaranteed.
✓ Azure Company assumes direct responsibility for all executory costs, which
include the following annual amounts: (1) 900 to Frontier Insurance Company for
insurance and (2) 1,600 for property taxes.
✓ The agreement requires equal annual rental payments of 20,541.11 to the lessor,
beginning on January 1, 2015.
✓ The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10%
and is known to the lessee.
✓ Azure Company uses the straight-line depreciation method for all equipment. 8.
Azure uses reversing entries when appropriate.
Instructions: (Round all numbers to two decimal places.)
a) Prepare an amortization schedule that would be suitable for the lessee for the lease
term.

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 b) Prepare all of the journal entries for the lessee for 2015 and 2016 to record the lease
agreement, the lease payments, and all expenses related to this lease. Assume the
lessee’s annual accounting period ends on December 31

14) Cherokee Construction Company changed from the cost-recovery to the percentage-of-
completion method of accounting for long-term construction contracts during 2015. For
tax purposes, the company employs the cost-recovery method and will continue this
ap proach in the future. (Hint: Adjust all tax consequences through the Deferred Tax
Liability account.) The appropriate information related to this change is as follows.
________________________________Pretax Income from__________________
Percentage-of-Completion Cost-Recovery Difference
2014 $780,000 $610,000 $170,000
2015 700,000 480,000 220,000
Instructions:
a) Assuming that the tax rate is 35%, what is the amount of net income that would be
reported in 2015?
b) What entry(ies) is necessary to adjust the accounting records for the change in
accounting policy?

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