Chapter 1.

PPE
BE10.2 (LO 2) Zhang Ltd. is constructing a building. Construction began on February 1 and was completed on December 31.
Expenditures were HK$1,800,000 on March 1, HK$1,200,000 on June 1, and HK$3,000,000 on December 31. Compute
Zhang’s average carrying amount for borrowing cost capitalization purposes.
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BE10.3 (LO 2) Zhang Ltd. (see BE10.2) had outstanding all year a 10%, 5-year HK$4,000,000 note payable and an 11%, 4-
year HK$3,500,000 note payable. Compute the capitalization rate used for borrowing cost capitalization purposes.
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BE10.4 (LO 2) Using the information from BE10.2 and BE10.3, determine the amount of borrowing cost that Zhang Ltd.
would capitalize.
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BE10.15 (LO 5) Ottawa Corporation owns machinery that cost $20,000 when purchased on July 1, 2019. Depreciation has
been recorded at a rate of $2,400 per year, resulting in a balance in accumulated depreciation of $8,400 at December 31, 2022.
The machinery is sold on September 1, 2023, for $10,500. Prepare journal entries to (a) update depreciation for 2023 and (b)
record the sale.
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E10.25 (LO 4) (Analysis of Subsequent Expenditures) Plant assets often require expenditures subsequent to acquisition. It is
important that they be accounted for properly. Any errors will affect both the statements of financial position and income
statements for a number of years.
Instructions
For each of the following items, indicate whether the expenditure should be capitalized (C) or expensed (E) in the period
incurred.

a. Improvement.

b. Replacement of a minor broken part on a machine.

c. Expenditure that increases the useful life of an existing asset.

d. Expenditure that increases the efficiency and effectiveness of a productive asset but does not increase its residual
value.
e. Expenditure that increases the efficiency and effectiveness of a productive asset and increases the asset’s residual
value.
f. Ordinary repairs.

g. Improvement to a machine that increased its fair value and its production capacity by 30% without extending
the machine’s useful life.
i. Expenditure that increases the quality of the output of the productive asset.

Chapter 2. Depreciation, Impairments, and Depletion

E11.3 (LO 1, 2) (Depreciation Computations—SYD, DDB—Partial Periods) Cosby AG purchased a new plant asset on April
1, 2022, at a cost of €774,000. It was estimated to have a service life of 20 years and a residual value of €60,000. Cosby’s
accounting period is the calendar year.
Instructions
a. Compute the depreciation for this asset for 2022 and 2023 using the sum-of-theyears’-digits method.
b. Compute the depreciation for this asset for 2022 and 2023 using the doubledeclining-balance method.
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E11.27 (LO 5) (Revaluation Accounting) Falcetto Company acquired equipment on
January 1, 2021, for €12,000. Falcetto elects to value this class of equipment using revaluation accounting. This equipment is
being depreciated on a straight-line basis over its 6-year useful life. There is no residual value at the end of the 6-year period.
The appraised value of the equipment approximates the carrying amount at December 31, 2021 and 2023. On December 31,
2022, the fair value of the equipment is determined tobe €7,000.
Instructions
a. Prepare the journal entries for 2021 related to the equipment.
b. Prepare the journal entries for 2022 related to the equipment.
c. Determine the amount of depreciation expense that Falcetto will record on the equipment in 2023.
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Chapter 3. Intangible Asset

BE12.1 (LO 2) Celine Dion Corporation purchases a patent from Salmon Company on January 1, 2022, for $54,000. The patent has a remaining legal
life of 16 years. Celine Dion feels the patent will be useful for 10 years. Prepare Celine Dion’s journal entries to record the purchase of the patent and
2022 amortization.

BE12.2 (LO 2) Use the information provided in BE12.1. Assume that at January 1, 2024, the carrying amount of the patent on Celine Dion’s books is
$43,200. In January, Celine Dion spends $24,000 successfully defending a patent suit. Celine Dion still feels the patent will be useful until the end of
2031. Prepare the journal entries to record the $24,000 expenditure and 2024 amortization.

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E12.1 (LO 1, 2) (Classification Issues—Intangibles) The following is a list of items that could

be included in the intangible assets section of the statement of financial position.

1. Investment in an affiliate company. 12. Cost of testing in search for product alternatives.

2. Timberland. 13. Goodwill acquired in the purchase of a business.

3. Cost of engineering activity required to advance the design of a 14. Cost of developing a patent (before achieving economic viability).

product to the manufacturing stage. 15. Cost of purchasing a patent from an inventor.

4. Lease prepayment (6 months’ rent paid in advance). 16. Legal costs incurred in securing a patent.

5. Cost of equipment obtained. 17. Unrecovered costs of a successful legal suit to protect the patent.

6. Cost of searching for applications of new research findings. 18. Cost of conceptual formulation of possible product alternatives.

7. Costs incurred in the formation of a company. 19. Cost of purchasing a copyright.

8. Operating losses incurred in the start-up of a business. 20. Development costs incurred after achieving economic viability.

9. Training costs incurred in start-up of new operation. 21. Long-term receivables.

10. Purchase cost of a franchise. 22. Cost of developing a trademark.

11. Goodwill generated internally. 23. Cost of purchasing a trademark.

Instructions

a. Indicate which items on the list above would generally be reported as intangible assets in the statement of financial position.

b. Indicate how, if at all, the items not reportable as intangible assets would be reported in the financial statements.
E12.17 (LO 5) (Accounting for R&D Costs) Martinez Company incurred the following costs during 2022 in connection with its research and development
activities

Instructions: Compute the amount to be reported as research and development expense by Martinez on its income statement for 2022. Assume equipment
is purchased at the beginning of the year and economic viability has not been achieved.

Chapter 4. Current Liabilities, Provisions, and Contingencies

E13.5 (LO 1) (Debt Classifications)

Presented below are four different situations related to Mckee plc debt obligations. Mckee’s next financial reporting date is December 31, 2021. The
financial statements are authorized for issuance on March 1, 2022.

Instructions

Indicate how each of these debt obligations is reported on Mckee’s statement of financial position on December 31, 2021.

1. Mckee has a debt obligation maturing on December 31, 2024. The debt is callable on demand by the lender at any time.

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2. Mckee also has a long-term obligation due on December 1, 2023. On November 10, 2021, it breaches a covenant on its debt obligation and the loan
becomes due on demand. An agreement is reached to provide a waiver of the breach on December 8, 2021.

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3. Mckee has a long-term obligation of £400,000, which is maturing over 4 years in the amount of £100,000 per year. The obligation is dated November
1, 2021, and the first maturity date is November 1, 2022.

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4. Mckee has a short-term obligation due February 15, 2022. Its lender agrees to extend the maturity date of this loan to February 15, 2024. The agreement
for extension is signed on January 15, 2022.

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E13.12 (LO 2) (Warranties) Soundgarden Ltd. sold 200 color laser copiers on July 10, 2022, for £4,000 apiece, together with a 1-year warranty.
Maintenance on each copier during the warranty period is estimated to be £330.

Instructions

Prepare entries to record the sale of the copiers, the related warranty costs, and any accrual on December 31, 2022. Actual warranty expenditures (inventory)
in 2022 were £17,000.

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E13.15 (LO 2) (Restructuring Issues) EADS Ltd. is involved in a restructuring related to its energy division. The company controller and CFO are
considering the following costs to accrue as part of the restructuring. The costs are as follows (amounts in thousands).

Instructions

Indicate whether each of these costs should be included in the restructuring provision in the financial statements

1. The company has a long-term lease on one of the facilities related to the division. It is estimated that it will have to pay a penalty cost of ¥400,000 to
break the lease. The company estimates that the present value related to payments on the lease contract is ¥650,000.
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2. The company’s allocation of overhead costs to other divisions will increase by ¥1,500,000 as a result of restructuring these facilities.

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3. Due to the restructuring, some employees will be shifted to some of the other divisions. The cost of retraining these individuals is estimated to be
¥2,000,000.

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4. The company has hired an outplacement firm to help it in dealing with the number of

terminations related to the restructuring. It is estimated the cost for this outplacement firm will be ¥600,000.

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5. It is estimated that employee termination costs will be ¥3,000,000.

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6. The company believes that it will cost ¥320,000 to move useable assets from the energy division to other divisions in the company.

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E13.17 (LO 2, 3) (Provisions and Contingencies) Presented below are three independent situations.

1. During 2022, Maverick ASA became involved in a tax dispute with the government. Maverick’s attorneys have indicated that they believe it is probable
that Maverick will lose this dispute. They also believe that Maverick will have to pay the government between €800,000 and €1,400,000. After the 2022
financial statements were issued, the case was settled with the government for €1,200,000. What amount, if any, should be reported as a liability for this
tax dispute as of December 31, 2022 ?

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2. On October 1, 2022, Holmgren Chemical was identified as a potentially responsible party by its Environmental Regulatory Agency. Holmgren’s
management, along with its counsel, have concluded that it is probable that Holmgren will be responsible for damages, and a reasonable estimate of these
damages is €6,000,000. Holmgren’s insurance policy of €9,000,000 has a deductible clause of €500,000. How should Holmgren Chemical report this
information in its financial statements at December 31, 2022 ?

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3. Shinobi Ltd. had a manufacturing plant in Darfur, Sudan, which was destroyed in the civil war. It is not certain who will compensate Shinobi for this
destruction, but Shinobi has been assured by governmental officials that it will receive a definite amount for this plant. The amount of the compensation
will be less than the fair value of the plant but more than its book value. How should the compensation be reported in the financial statements of Shinobi ?
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E13.22 (LO 4) (Financial Statement Impact of Liability Transactions) Presented below is a list of possible transactions.

Transaction Assets Liabilities Equity Net Income

1 Purchased inventory for
€80,000 on account (assume
perpetual system is used).

2 Issued an €80,000 note payable

in payment on account (see item
1 above).

3 Recorded accrued interest on

the note from item 2 above

4 Borrowed €100,000 from the

bank by signing a 6-month,
€112,000, zero-interest-bearing
note.
5 Recognized 4 months’ interest
expense on the note from item 4
above.

6 Recorded cash sales of €75,260,

which includes 10% VAT.

7 Recorded wage expense of

€35,000. The cash paid was
€25,000; the difference was due
to various amounts withheld.

8 Recorded employer’s payroll

taxes.

9 Accrued accumulated vacation

pay.

10 Recorded an environmental
liability and related asset.

11 Recorded bonuses due to

employees.

12 Recorded sales of product and

related warranties (assume both
assurance-type warranty and
service-type warranty).

13 Paid warranty costs that were

accrued in item 12 above
related to assurance-type
warranty.

14 Recorded a liability on a lawsuit

that the company will probably
lose.

15 Paid service-type warranty

costs under contracts from item
12.

16 Recognized warranty revenue

(see item 12).
 Chapter 5. Non - Current Liabilities
BE14.2 (LO 1) The Colson Company issued €300,000 of 10% bonds on January 1, 2022. The bonds are due January 1, 2027, with interest payable each
July 1 and January 1. The bonds are issued at face value. Prepare Colson’s journal entries for (a) the January issuance, (b) the July 1 interest payment, and
(c) the December 31 adjusting entry.

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BE14.3 (LO 1) Assume the bonds in BE14.2 were issued at 108.11 to yield 8%. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December31.

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BE14.4 (LO 1) Assume the bonds in BE14.2 were issued at 92.6393 to yield 12%. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December
31.

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E14.1 (LO 1) (Classification of Liabilities) Presented below are various account balances.

a. Bank loans payable of a winery, due March 10, 2025. (The product requires aging for 5 years before sale.)

b. Serial bonds payable, €1,000,000, of which €250,000 are due each July 31.

c. Amounts withheld from employees’ wages for income taxes.

d. Notes payable due January 15, 2024.

e. Credit balances in customers’ accounts arising from returns and allowances after collection in full of account.
f. Bonds payable of €2,000,000 maturing June 30, 2023.

g. Overdraft of €1,000 in a bank account. (No other balances are carried at this bank.)

h. Deposits made by customers who have ordered goods.

Instructions

Indicate whether each of the items above should be classified on December 31, 2022, as a current liability, a non-current liability, or under some other
classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification
of some of the items is doubtful, explain why in each case.

Chapter 6. Equity
BE15.3 (LO 1, 2, 4) Wilco SE has the following equity balances at December 31, 2022. Prepare Wilco’s December 31, 2022, equity section in the statement
of financial position.

BE15.6 (LO 1) Moonwalker Corporation issued 2,000 shares of its $10 par value ordinary shares for $60,000. Moonwalker also incurred $1,500 of costs
associated with issuing the shares. Prepare Moonwalker’s journal entry to record the issuance of the company’s shares.

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BE15.7 (LO 2) Sprinkle SE has outstanding 10,000 shares of €10 par value ordinary shares. On July 1, 2022, Sprinkle reacquired 100 shares at €87 per
share. On September 1, Sprinkle reissued 60 shares at €90 per share. On November 1, Sprinkle reissued 40 shares at €83 per share. Prepare Sprinkle’s
journal entries to record these transactions using the cost method.

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BE15.11 (LO 3) Silva SpA owns shares of Costa S.A. classified as a trading equity investment. At December 31, 2022, the trading equity investment was
carried in Silva’s accounting records at its cost of R$875,000, which equals its fair value. On September 21, 2023, when the fair value of the investment
was R$1,200,000, Silva declared a property dividend whereby the Costa securities are to be distributed on October 23, 2023, to shareholders of record on
October 8, 2023. Prepare all journal entries necessary on those three dates.

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E15.5 (LO 1) (Lump-Sum Sales of Ordinary and Preference Shares) Hartman SE issues 500 shares of €10 par value ordinary shares and 100 shares of
€100 par value preference shares for a lump sum of €100,000.

Instructions

a. Prepare the journal entry for the issuance when the fair value of the ordinary shares is €168 each and fair value of the preference shares is €210 each.
(Round to the nearest euro.)

b. Prepare the journal entry for the issuance when only the fair value of the ordinary shares (€170 per share) is known.

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E15.11 (LO 3) (Effect of Equity Items on the Statement of Financial Position) The following are selected transactions that may affect equity.

1. Recorded accrued interest earned on a note receivable. 6. Paid the cash dividend declared in item 3 above.

2. Declared and distributed a share split. 7. Recorded accrued interest expense on a note payable.

3. Declared a cash dividend. 8. Declared a share dividend.

4. Recorded a retained earnings restriction. 9. Distributed the share dividend declared in item 8.

5. Recorded the expiration of insurance coverage that was previously

recorded as prepaid insurance.

Instructions

In the following table, indicate the effect each of the nine transactions has on the financial statement elements listed. Use the following code:

I = Increase D = Decrease NE = No effect

 Chapter 7. Dilutive securities & EPS
BE16.3 (LO 1) Pechstein Corporation issued 2,000 shares of $10 par value ordinary shares upon conversion of 1,000 shares of $50 par value preference
shares. The preference shares were originally issued at $60 per share. The ordinary shares are trading at $26 per share at the time of conversion. Record
the conversion of the convertible preference shares.
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BE16.4 (LO 2) Eisler Corporation issued 2,000 $1,000 bonds at 101. Each bond was issued with one detachable share warrant. At issuance, the net present
value of the bonds without the warrants was $1,970,000. Prepare the journal entry to record the issuance of the bonds and the share warrants.

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BE16.6 (LO 3) On January 1, 2022, Barwood Ltd. granted 5,000 options to executives. Each option entitles the holder to purchase one share of Barwood’s
£5 par value ordinary shares at £50 per share at any time during the next 5 years. The market price of the shares is £65 per share on the date of grant. The
fair value of the options at the grant date is £150,000. The period of benefit is 2 years. Prepare Barwood’s journal entries for January 1, 2022, and December
31, 2022 and 2023.

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E16.1 (LO 1) (Issuance and Repurchase of Convertible Bonds) Angela AG issues 2,000 convertible bonds at January 1, 2022. The bonds have a 3-year
life and are issued at par with a face value of €1,000 per bond, giving total proceeds of €2,000,000. Interest is payable annually at 6%. Each bond is
convertible into 250 ordinary shares (par value of €1). When the bonds are issued, the market rate of interest for similar debt without the conversion option
is 8%.

Instructions

a. Compute the liability and equity component of the convertible bond on January 1,2022.

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b. Prepare the journal entry to record the issuance of the convertible bond on January 1,2022.

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c. Prepare the journal entry to record the repurchase of the convertible bond for cash at January 1, 2025, its maturity date

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E16.4 (LO 1) (Issuance, Conversion, Repurchase of Convertible Bonds) On January 1, 2022, Lin plc issued a convertible bond with a par value of £50,000
in the market for £60,000. The bonds are convertible into 6,000 ordinary shares of £1 per share par value. The bond has a 5-year life and has a stated
interest rate of 10% payable annually. The market interest rate for a similar non-convertible bond at January 1, 2022, is 8%. The liability component of the
bond is computed to be £53,993. The following bond amortization schedule is provided for this bond.

Instructions

a. Prepare the journal entry to record the issuance of the convertible bond on January 1, 2022.

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b. Prepare the journal entry to record the payment of interest on December 31, 2023.

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c. Assume that the bonds were converted on December 31, 2024. The fair value of the liability component of the bond is determined to be £54,000 on
December 31, 2024. Prepare the journal entry to record the conversion on December 31, 2024. Assume that the accrual of interest related to 2024 has been
recorded.

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d. Assume that the convertible bonds were repurchased on December 31, 2024, for £55,500 instead of being converted. As indicated, the liability component
of the bond is determined to be £54,000 on December 31, 2024. Assume that the accrual of interest related to 2024 has been recorded.

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e. Assume that the bonds matured on December 31, 2026, and Lin repurchased the bonds. Prepare the entry or entries to record this transaction.

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E16.6 (LO 1) (Conversion of Bonds) Gabel Company has bonds payable outstanding with a carrying value of $406,000. When issued, Gabel recorded
$3,500 of conversion equity. Each of the 400 $1,000 bonds is convertible into 20 ordinary shares with par value of $50 per share. All bonds are converted
into ordinary shares.

Instructions: Assuming that the book value method was used, what entry would be made?

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E16.26 (LO 1, 5) (EPS with Convertible Bonds and Preference Shares) On January 1, 2022, Lund SA issued 10-year, €3,000,000 face value, 6% bonds, at
par. Each €1,000 bond is convertible into 15 ordinary shares of Lund. Lund’s net income in 2023 was €240,000, and its tax rate was 40%. Interest expense
on the liability component in 2023 was €210,000. The company had 100,000 ordinary shares outstanding throughout 2022. None of the bonds were
converted in 2022.

Instructions

a. Compute diluted earnings per share for 2022.

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b. Compute diluted earnings per share for 2022, assuming the same facts as above, except that €1,000,000 of 6% convertible preference shares were issued
instead of the bonds. Each €100 preference share is convertible into 5 ordinary shares of Lund.

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E16.16 (LO 4) (Weighted-Average Ordinary Shares) Portillo SA uses a calendar year for financial reporting. The company is authorized to issue 9,000,000
R$10 par ordinary shares. At no time has Portillo issued any potentially dilutive securities. Listed below is a summary of Portillo’s ordinary share activities.

Instructions

a. Compute the weighted-average ordinary shares used in computing earnings per ordinary share for 2022 on the 2023 comparative income statement.

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b. Compute the weighted-average ordinary shares used in computing earnings per ordinary share for 2023 on the 2023 comparative income statement.

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c. Compute the weighted-average ordinary shares to be used in computing earnings per ordinary share for 2023 on the 2024 comparative income statement.

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d. Compute the weighted-average ordinary shares to be used in computing earnings per ordinary share for 2024 on the 2024 comparative income statement.

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