ADDIS ABABA UNIVERSITYSCHOOL OF COMMERCE

ACCOUNTING & FINANCE PROGRAM UNIT

Assignment on Financial Accounting II
Submission date: June 03, 2022

1. On January 1, 2020, Roosevelt Company purchased 12% bonds having a maturity value
of $500,000 for a price$525,907.40 incurring transaction costs of Br12,000. The bonds
provide the bondholders with a 10% yield. They are dated January 1, 2020, and mature
January 1, 2025, with interest receivable December 31 of each year. Roosevelt’s business
model is to hold these bonds to collect contractual cash flows.
Required: Prepare the journal entry
i. At the date of bond purchase
ii. to record the interest received and the amortization for 2020& 2021.
iii. At the date of bond purchase if the bonds are held for trading.

2. Presented below are two independent situations.

Situation 1: Hatcher Cosmetics acquired 10% of the 200,000 ordinary shares of Ramirez
Fashion at a total cost of $14 per share on March 18, 2015. On June 30, Ramirez declared
and paid a $75,000 cash dividend. On December 31, Ramirez reported net income of
$122,000 for the year. At December 31, the market price of Ramirez Fashion was $15 per
share. The investment is classified as held for trading.
Situation 2: Holmes, Inc. obtained significant influence over Nadal Corporation by
buying 25% of Nadal’s30,000 outstanding ordinary shares at a total cost of $9 per share
on January 1, 2015. On June 15, Nadal declared and paid a cash dividend of $36,000. On
December 31, Nadal reported a net income of $85,000 for the year.
Instructions
Prepare all necessary journal entries in 2015 for both situations.

3. Assume that on January 1, 2020, Stora Enso (FIN) signs a 12-year, non-cancelable lease
agreement to lease a storage building from Balesteros Storage Company. The following
information pertains to this lease agreement.
i. The agreement requires equal rental payments of €90,000 beginning on January 1,
2020.
ii. The fair value of the building on January 1, 2020, is €560,000.
iii. The building has an estimated economic life of 12 years, with an unguaranteed
residual value at current price of€10,000. Stora Enso depreciates similar buildings
on the straight-line method.
iv. The lease is non-renewable. At the termination of the lease, the building reverts to
the lessor.
Instructions
Prepare the journal entries on the lessee’s and lessor’s books to reflect the signing of the
lease agreement and to record the payments/collections and expense/income related to
this lease for the years 2020 and 2021. Assume the year-end is December 31.

4. The contract between Customer and Supplier requires Supplier to transport a specified
quantity of goods by using a specified type of rail car in accordance with a stated

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 timetable for a period of five years. The timetable and quantity of goods specified is
equivalent to Customer having the use of 10 rail cars for five years. Supplier provides the
rail cars, driver and engine as part of the contract. The contract states the nature and
quantity of the goods to be transported (and the type of rail car to be used to transport the
goods). Supplier has a large pool of similar cars that can be used to fulfil the
requirements of the contract. Similarly, Supplier can choose to use any one of a number
of engines to fulfil each of Customer’s requests, and one engine could be used to
transport not only Customer’s goods, but also the goods of other customers. The cars and
engines are stored at Supplier’s premises when not being used to transport goods.

Instructions
a. Is there an identified asset?
b. Has the customer the right to obtain substantially all of the economic benefits from the
use of rail cars?
c. Has the customer the right to direct the use of the rail cars?
d. Does the contract contain a lease?

5. Good luck Company manufactures and sells different machines and their spare parts. In
2017, it began two sales promotion techniques— assurance type warranties and
premiums—to attract customers. Machines are sold with a two-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past experience, is
2% of sales in the year of sale and 3% of sales in the second year after sales. The
premium is offered on the spare parts. Customers receive a coupon for each 10 birr spent
on spare parts. Customers may exchange 200 coupons and Br500 for a premium (tape
recorder). Good luck pays Br750 for each tape recorder and estimates that 70% of the
coupons given to customers will be redeemed.

Good luck’s total sales for 2017 were Br10,000,000 from machines and Br2,500,000 from
spare parts. Replacement of parts and labor for warranty work totaled Br180,000 during
2017. A total of 1,000 tape recorders to be used in the premium program were purchased
during the year and there were 75,000 coupons redeemed in 2017.
Instructions:
a. Prepare a journal entry for sales of machines and spare parts made in 2017.
b. Prepare a journal entry for the purchases of tape recorders (prize merchandises) made
in 2017.
c. Record the actual warranty costs incurred in the year 2017.
d. Calculate the actual premium expense incurred up on redemption of 75,000 coupons
in 2017.
e. Prepare a journal entry to record the actual redemption of coupons in 2017.
f. Compute the estimated product warranty costs to be incurred in 2018 for replacement
of parts and labor on 2017 sales of machines.
g. Prepare a year-end adjusting entry for ‘liability from product warranty’ on December
31, 2017.
h. Compute the liability from premium outstanding of December 31, 2017.

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 6. Polska Corporation, in preparation of its December 31, 2015,financial statements, is
attempting to determine the proper accounting treatment for each of the following
situations.
i. As a result of uninsured accidents during the year, personal injury suits for €350,000
and €60,000 have been filed against the company. It is the judgment of Polska’s legal
counsel that an unfavorable outcome is unlikely in the €60,000 case but that an
unfavorable verdict approximating €250,000 will probably result in the €350,000
case.
ii. Polska Corporation owns a subsidiary in a foreign country that has a book value of
€5,725,000 and an estimated fair value of €9,500,000. The foreign government has
communicated to Polska its intention to expropriate the assets and business of all
foreign investors. On the basis of settlements other firms have received from this
same country, it is virtually certain that Polska will receive 40% of the fair value of
its properties as final settlement.
iii. Polska’s chemical product division consisting of five plants is uninsurable because of
the special risk of injury to employees and losses due to fire and explosion. The year
2015 is considered one of the safest(luckiest) in the division’s history because no loss
due to injury or casualty was suffered. Having suffered an average of three casualties
a year during the rest of the past decade (ranging from €60,000 to€700,000),
management is certain that next year the company will probably not be so fortunate.
iv. Polska operates profitably from a factory it has leased. During 2015, Polska decides
to relocate these operations to a new factory. The lease of the old factory continues
for the next 5 years. The lease cannot be cancelled and the factory cannot be
subleased. Polska determines that the cost to settle the old lease is €950,000.
v. Litigation is being pursued for the recovery of €1,300,000 consulting fees on a failed
project. The directors believe it is more likely than not that their claim will be
successful.
Instructions
(a) Prepare the journal entries that should be recorded as of December 31, 2015, to
recognize each of the situations above.
(b) Indicate what should be reported relative to each situation in the financial
statements and accompanying notes. Explain why.
7. Venzuela Co. is building a new hockey arena at a cost of$2,500,000. It received a down
payment of $500,000 from local businesses to support the project and now needs to
borrow $2,000,000 to complete the project. It therefore decides to issue $2,000,000 of
10.5%, 10-yearbonds. These bonds were issued on January 1, 2015, and pay interest
annually on each January 1. The bonds yield 10%.
Instructions
a. Prepare the journal entry to record the issuance of the bonds on January 1, 2015.
b. Prepare journal entries on December 31, 2015 and January 1, 2016
c. Assume that on July 1, 2018, Venzuela Co. retires half of the bonds at a cost of
$1,065,000 plus accrued interest. Prepare the journal entry to record this retirement.

8. The expenditures and receipts below are related to land, land improvements, and
buildings acquired for use in a business enterprise. The receipts are enclosed in
parentheses.

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 (a) Money borrowed to pay building contractor (signed a note) Br(275,000)
(b) Payment for construction from note proceeds 275,000
(c) Cost of land fill and clearing 10,000
(d) Delinquent real estate taxes on property assumed by purchaser 7,000
(e) Premium on 6-month insurance policy during construction 6,000
(f) Refund of 1-month insurance premium because construction completed early (1,000)
(g) Architect’s fee on building 25,000
(h) Cost of real estate purchased as a plant site (land 200,000 & building 50,000) 250,000
(i) Commission fee paid to real estate agency 9,000
(j) Cost of razing and removing building 11,000
(k) Proceeds from residual value of demolished building (5,000)
(l) Interest paid during construction on money borrowed for construction 13,000
(m) Excavation costs for new building 3,000

Instructions
Identify each item by letter and list the items in columnar form, using the headings shown below.
All receipt amounts should be reported in parentheses. For any amounts entered in the Other
Accounts column, also indicate the account title.

Item Land Buildings Other Accounts

9. During the current year, Marshall Construction trades an old crane that has a book value
of €90,000 (original cost €140,000 less accumulated depreciation €50,000) for a new
crane from Brigham Manufacturing Co. The new crane cost Brigham €165,000 to
manufacture and is classified as inventory. The following information is also available.

Instructions
(a) Assuming that this exchange is considered to have commercial substance, prepare the
journal entries on the books of (1) Marshall Construction and (2) Brigham
Manufacturing.
(b) Assuming that this exchange lacks commercial substance for Marshall, prepare the
journal entries on the books of Marshall Construction.
(c) Assuming the same facts as those in (a) except that the fair value of the old crane is
€98,000 and the cash paid is €102,000, prepare the journal entries on the books of (1)
Marshall Construction and (2) Brigham Manufacturing.
10. Parnevik Group uses revaluation method for a class of equipment it uses in its golf club
refurbishing business. The equipment was purchased on January 2, 2015, for €500,000; it
has a 10-year useful life with no residual value. Parnevik has the following information
related to the equipment. (Assume that estimated useful life and residual value does not
change during the periods presented below.)
Date Fair Value

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 January 2, 2015 €500,000
December 31, 2015 468,000
December 31, 2016 380,000
December 31, 2017 355,000
Instructions:
(a) Prepare all entries related to the equipment for 2015.
(b) Determine the amounts to be reported by Parnevik at December 31, 2016 and 2017, as
Equipment, Revaluation Surplus, Depreciation Expense, and Impairment Loss.
(c) Prepare the entry for any revaluation adjustments at December 31, 2016 and 2017.
(d) Prepare the entries for the sale of the equipment by Parnevik on January 2, 2018, for
€330,000.
11. Montana Matt’s Golf Inc. was formed on July 1, 2014, when Matt Magilke purchased the Old
Master Golf Company. Old Master provides video golf instruction at kiosks in shopping
malls. Magilke plans to integrate the instructional business into his golf equipment and
accessory stores. Magilke paid £770,000 cash for Old Master. At the time, Old Master’s
statement of financial position reported assets of £650,000 and liabilities of £200,000 (thus
equity was £450,000). The fair value of Old Master’s assets is estimated to be £800,000.
Included in the assets is the Old Master trade name with a fair value of £10,000 and a
copyright on some instructional books with a fair value of £24,000. The trade name has a
remaining life of 5 years and can be renewed at nominal cost indefinitely. The copyright has a
remaining life of 40 years.

Instructions:
(c) Prepare the intangible assets section of Montana Matt’s Golf Inc. at December 31,
2014. How much amortization expense is included in Montana Matt’s income for
the year ended December 31, 2014? Show all supporting computations.
(d) Prepare the journal entry to record amortization expense for 2015. Prepare the
intangible assets section of Montana Matt’s Golf Inc. at December 31, 2015. (No
impairments are required to be recorded in 2015.)
(e) At the end of 2016, Magilke is evaluating the results of the instructional business.
Due to fierce competition from online and television (e.g., the Golf Channel), the
Old Master cash-generating unit has been losing money. Its book value is now
£500,000. The recoverable amount of the Old Master reporting unit is £420,000.
Magilke has collected the following information related to the company’s
intangible assets.
Intangible Asset Value-in-Use
Trade names £ 3,000
Copyrights 25,000
Prepare the journal entries required, if any, to record impairments on Montana Matt’s intangible
assets. (Assume that any amortization for 2016 has been recorded.) Show supporting computations.

12. On January 1, 2010 XYZ Company made a specific borrowing of Br 450,000, at 12% for the
construction of a special-purpose equipment to be used in operation. The construction of the
asset started on January 10, 2017 and completed and placed in service on December 31, 2017.
During the construction period the following expenditures have been made:
January 10 June 1 August 31 December 31

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 Br 150,000 Br 320,000 Br 400,000 Br 100,000

On January 10, 2017 after making the first expenditure, xyz invested the rest of the money from the
specific borrowing (Br 300,000) on four months short term investment and generated Br8,000
interest revenue which was received with the principal on May 31, before the second expenditure is
made.

On January 1, 2017 xyz also have the following debts outstanding:

Br800,000; 12%, 10 year bonds payable issued on January 1, 2012 on which interest is Paid each
year on December 31.
Br700,000; 9%, 5 years notes payable issued on January 1, 2016 on which interest is Payable
every year on December 31.

Required:
a. Record all the journal entries from January 1, 2017 to December 31, 2017 in the book of
XYZ Company.
b. What is the acquisition cost of the special- purpose equipment just on the date it is placed in
service (December 31, 2017).

13. TTD Breakfast cereal manufacturer offers a children’s hand puppet as a premium for every five
coupons presented by customers together with Br15. Coupons are included in each box of cereal
sold. Each box of cereal is sold by the company to distributors for Br40. The purchase price of
each hand puppet to the company is Br20. The results of the premium plan for the years 2016 and
2017 are as follows. (All purchases and sales are for cash.)
2016 2017
Hand puppets 50,000 80,000
Boxes of breakfast cereals sold 400,000 500,000
Coupons redeemed 200,000 350,000
2016 coupons expected to be redeemed in 2017 90,000
2017 coupons expected to be redeemed in 2018 120,000
Instructions
(a) Prepare the journal entries that should be made in 2016 and 2017 to record the transactions
related to sales of product and the premium plan of the TTD.

(b) Indicate the account names, amounts, and classifications of the items related to the premium
plan that would appear on the Statement of Financial Position and the income statement at the
end of 2016 and 2017.

14. Nafis Company sells products that carry a two-year warranty against defects (assurance type
warranty). Based on the industry experience, the estimated warranty cost related to amount of
sales are the following:
First year after sale -------------------- 3%
Second year after sale ------------------ 5%
Sales and actual warranty expenditures for the first three- year period were as follows:
Sales Actual warranty expenditures

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 Year 1 Br 350,000 Br 12,000
Year 2 250,000 20,000
Instructions:
1) Calculate the product warranty expense for year 1
2) Calculate the balance of Liability for product warranty at the end of year 2.

15. Presented below is information related to Luzon Company.

Cost Retail
Beginning inventory Br58,000 Br100,000
Purchases (net) 127,000 200,000
Net markups 27,000
Net markdowns 20,000
Employee discounts 10,000
Abnormal shortage 5,000 7,000
Normal shortage 5,000
Sales 194,000
Sales returns 8,000

Instructions
(a) Compute the ending inventory at retail.
(b) Compute a cost-to-retail percentage (round to two decimals) under
(1) retail average cost method.
(2) conventional retail method
(c) Compute ending inventory at LCNRV by using.
(1) retail average cost method.
(2) conventional retail method
(d) Compute cost of goods sold based on (c).
(e) Compute gross margin based on (c).