Chapter 17.

Investments

BE17.1 (LO 1) On January 1, 2022, Garfield AG made an investment in €80,000 of the 9%, 5-year bonds of Chester Corporation for €74,086, which
provides an 11% return. Garfield plans to hold these bonds to collect contractual cash flows. Prepare Garfield’s journal entries for (a) the purchase of
the investment, and (b) the receipt of annual interest on December 31 and discount amortization.

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E17.1 (LO 1, 2) (Investment Classifications) For the following investments, identify whether they are:

1. Debt investments—held-for-collection. 3. Debt investments—trading. 5. Non-trading equity investments.

2. Debt investments—held-for-collection 4. Trading equity investments.

Each case is independent of the other.

a. A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases, which is expected next month, it
will be sold.

b. 10% of the outstanding shares of Farm-Co are purchased. The company is planning on eventually getting a total of 30% of its outstanding shares.

c. 10-year bonds were purchased this year. The bonds mature at the first of next year, and the company plans to sell the bonds if interest rates fall.

d. Bonds that will mature in 5 years are purchased. The company has a strategy to hold them to collect interest payments and principal of the bonds at
maturity.

e. A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project planned 10 years from now.

f. Ordinary shares in a distributor are purchased to meet a regulatory requirement for doing business in the distributor’s region. The investment will be
held indefinitely.

E17.6 (LO 1) (HFCS Debt Securities Entries and Financial Statement Presentation) At December 31, 2022, the held-forcollection and selling debt
portfolio for Steffi Graf SA is as follows.

On January 20, 2023, Steffi Graf SA sold security A for €15,100. The sale proceeds are net of brokerage fees.

Instructions

a. Prepare the adjusting entry at December 31, 2022, to report the portfolio at fair value.

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b. Show the statement of financial position presentation of the investment-related accounts at December 31, 2022. (Ignore notes presentation.)

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c. Prepare the journal entry for the 2023 sale of security A.

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E17.10 (LO 2) (Entries for Equity Investments) The following information is available for Kinney plc at December 31, 2022, regarding its investments.

Instructions

a. Prepare the adjusting entry (if any) for 2022, assuming the investments are classified as trading.

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b. Prepare the adjusting entry (if any) for 2022, assuming the investments are classified as non-trading.

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c. Discuss how the amounts reported in the financial statements are affected by the entries in (a) and (b).

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 Chapter 21. Leases

BE21.4 (LO 2) Waterworld Company leased equipment from Costner Company, beginning on December 31, 2021. The lease term is 4 years and requires
equal rental payments of $41,933 at the beginning of each year of the lease, starting on the commencement date (December 31, 2021). The equipment has
a fair value at the commencement date of the lease of $150,000, an estimated useful life of 4 years, and no estimated residual value. The appropriate interest
rate is 8%. Prepare Waterworld’s 2021 and 2022 journal entries, assuming Waterworld depreciates similar equipment it owns on a straight-line basis.

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BE21.6 (LO 2) Debbink plc leased machinery from Young Ltd. on January 1, 2022. The lease term was for 8 years, with equal annual rental payments of
£5,300 at the beginning of each year. In addition, the lease provides an option to purchase the machinery at the end of the lease term for £2,000, which
Debbink is reasonably certain it will exercise, as it believes the fair value of the machinery will be at least £6,000. The machinery has a useful life of 10
years and a fair value of £36,000. The implicit rate of the lease is not known to Debbink. Debbink’s incremental borrowing rate is 8%. Prepare Debbink’s
2022 journal entries.

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E21.1 (LO 2) (Lessee Entries, No Residual Value) DU Journeys enters into an agreement with Traveler plc to lease a car on December 31, 2021. The
following information relates to this agreement.

1. The term of the non-cancelable lease is 3 years with no renewal or bargain purchase option. The remaining economic life of the car is 3 years, and it
isbexpected to have no residual value at the end of the lease term.

2. The fair value of the car was £15,000 at commencement of the lease.

3. Annual payments are made on December 31 at the end of each year of the lease, beginning December 31, 2022. The first payment is £5,552.82, with
each payment increasing by a constant rate of 5% from the previous payment (i.e., the second payment will be £5,830.46, and the third and final payment
will be £6,121.98).

4. DU Journeys’ incremental borrowing rate is 8%. The rate implicit in the lease is unknown.

5. DU Journeys uses straight-line depreciation for all similar cars.

Instructions

a. Prepare DU Journeys’ journal entries for 2021, 2022, and 2023.

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b. Assume that, instead of a constant rate of increase, the annual lease payments will increase according to a price index. At its current level, the price
index stipulates that the first rental payment should be £5,820. What would be the impact on the journal entries made by DU Journeys at commencement
of the lease, as well as for subsequent years?

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P21.14 (LO 2, 3, 4) (Lessor Operating Lease) Lewis Machinery Works entered into a lease agreement on January 1, 2022, to provide Garcia SA with a
piece of machinery. The terms of the lease agreement were as follows.

1. The lease is to be for 3 years with rental payments of R$10,521 to be made at the beginning of each year.

2. The machinery has a fair value of R$55,000, a book value of R$40,000, and an economic life of 8 years.

3. At the end of the lease term, both parties expect the machinery to have a residual value of R$30,000, none of which is guaranteed.

4. The lease does not transfer ownership at the end of the lease term, and does not have a bargain purchase option, and the asset is not of a specialized
nature.

5. Garcia knows that the implicit rate is 6%.

6. Collectibility of the payments is probable.

Instructions

a. Evaluate the criteria for classification of the lease, and describe the nature of the lease.

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b. Prepare the amortization schedule Garcia will use over the lease term.

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c. Prepare the 2022 journal entries for Garcia.

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d. Prepare the 2022 journal entries for Lewis.

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e. Suppose the lease were only for 1 year instead of 3 years, with just one lease payment at the beginning of the lease term. Prepare any journal entries
Garcia would need, assuming it elects to use the short-term lease option.

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 Chapter 23. Statement of Cash Flow

E23.2 (LO 1, 2) (Statement Presentation of Transactions-Indirect Method) Each of the following items must be considered in preparing a statement of cash
flows (indirect method) for Granderson SA for the year ended December 31, 2022.

a. Plant assets that had cost €25,000 6 years before and were being depreciated on a straight-line basis over 10 years with no estimated residual value were sold at the beginning
of the year for €5,300.

b. During the year, 10,000 ordinary shares with a stated value of €10 a share were issued for €33 a share.

c. Uncollectible accounts receivable in the amount of €27,000 were written off against Allowance for Doubtful Accounts.

d. The company sustained a net loss for the year of €50,000. Depreciation amounted to €22,000, andma gain of €9,000 was realized on the sale of land for €39,000 cash.

e. A 3-month certificate of deposit was purchased for €100,000. The company uses a cash and cash- equivalent basis for its cash flow statement.

f. Patent amortization for the year was €20,000.

g. The company exchanged ordinary shares for a 70% interest in Plumlee Co. for €900,000.

h. During the year, treasury shares costing €47,000 were purchased.

i. The company recognized an unrealized holding gain on a debt investment not held for collection.

Instructions: State where each item is to be shown in the statement of cash flows, if at all. Prepare the indirect cash flows statements.

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E23.3 (LO 2) (Preparation of Operating Activities Section—Indirect Method, Periodic Inventory) The income statement of Rodriquez SA is shown
below.

Additional information:

1. Accounts receivable decreased R$310,000 during the year.

2. Prepaid expenses increased R$170,000 during the year.

3. Accounts payable to suppliers of merchandise decreased R$275,000 during the year.

4. Accrued expenses payable decreased R$120,000 during the year.

5. Administrative expenses include depreciation expense of R$60,000.

Instructions: Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2022, for Rodriquez SA, using the
indirect method.

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 Chapter 19. Income tax

BE19.1 (LO 1) In 2022, Amirante Corporation had pretax financial income of $168,000 and taxable income of $120,000. The difference is due to the use
of different depreciation methods for tax and accounting purposes. The effective tax rate is 40%. Compute the amount to be reported as income taxes
payable at December 31, 2022. Prepare journal entries and T account.

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BE19.2 (LO 1) Oxford SA began operations in 2022 and reported pretax financial income of €225,000 for the year. Oxford’s tax depreciation exceeded
its book depreciation by €40,000. Oxford’s tax rate for 2022 and years thereafter is 30%. In its December 31, 2022, statement of financial position, what
amount of deferred tax liability should be reported? Prepare journal entries and T account.

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BE19.5 (LO 1) At December 31, 2022, Suffolk plc had an estimated warranty liability of £105,000 for accounting purposes and £0 for tax purposes. (The
warranty costs are not deductible until paid.) The effective tax rate is 40%. Compute the amount Suffolk should report as a deferred tax asset at December
31, 2022, assuming sufficient taxable income in future years. Prepare journal entries and T account.

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BE19.9 (LO 1) Shetland Inc. had pretax financial income of $154,000 in 2022 in its first year of operations. Included in the computation of that amount
is insurance expense of $4,000, which is not deductible for tax purposes. In addition, depreciation for tax purposes exceeds accounting depreciation by
$10,000. Prepare Shetland’s journal entry to record 2022 taxes, assuming a tax rate of 45%. Prepare T account.

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E19.1 (LO 1, 2) (One Temporary Difference, Future Taxable Amounts, One Rate, No Beginning Deferred Taxes) Starfleet Corporation has one
temporary difference at the end of 2021 that will reverse and cause taxable amounts of $55,000 in 2022, $60,000 in 2023, and $75,000 in 2024. Starfleet’s
pretax financial income for 2021 is $400,000, and the tax rate is 30% for all years. There are no other deferred taxes at the beginning of 2021.

Instructions

a. Compute taxable income and income taxes payable for 2021.

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b. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2021.

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c. Prepare the income tax expense section of the income statement for 2021, beginning with the line “Income before income taxes.

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