Question 10

In accordance with professional pronouncements :-

Segments having more than 10 % of revenue as compared to total revenue ,Segments having more than
10% of Profits/(Loss) of combined profit/(loss) , Segments having more than 10% of identifiable assets as
compared to total identifiable assets are reportable and those segments are required to be disclosed.

A B C D TOTAL

REVENUE 8000 450000 54000 32000 5,44,000

% AGE OF TOTAL
REVEUNES 1.47 82.72 9.92 5.89

REPORTABLE

OPERATING
PROFIT (LOSS) 1,20,500 (6,000) 4650 1,25,150

% AGE OF TOTAL 96.28 4.80 3.71

REPORTABLE

IDENTIFIABLE
ASSETS 52,000 3,65,000 47,000 34,000 4,98,000

% AGE OF TOTAL 10.44 73.29 9.44 6.827

REPORTABLE

Segments A and B ARE REPORTABLE. Segments A and B have to be disclosed in accordance with
professional pronouncements.

Question 9
Issue of a large amount of capital stock
((TCO A) Adam's Adorable Creations Company provided the following financial
information for its installment sales for the current year.
Financial Data:

Installment sales for current year $2,500,000

Cost of goods sold on installment basis $2,000,000
Repossessed merchandise: Estimated
value $32,000
Repossessed merchandise: Unpaid
balances $45,000
Payments by customers $1,600,000
Required:
a. Prepare journal entries for the end of the year based on the information above.
b. Prepare the entry to record the gross profit realized in the current year.
Solution:

Required: a) Prepare journal entries for the end of the year based on the
information above.

Particulars Debit Credit

Installment Accounts receivable $2,500,000

Installement Sales 2,500,000

Cost of good Sold 2,000,000

Inventory 2,000,000

(To record installment sale)

 Repossessed merchandise 32,000

Deferred Gross Profit 9,000

Loss on repossession (difference) 4,000

Installment Accounts receivable 45,000

Cash 1,600,000

Installment Accounts receivable 1,600,000

(To record cash collection from installment

sale)

b) Prepare the entry to record the gross profit realized in the

current year.

Installement Sales 2,500,000

Cost of good Sold 2,000,000

Deferred Gross Profit 500,000

Deferred Gross Profit (1,600,000 x 20%) 320,000

Realized Gross Profit 320,000

Gross profit Margin = ($2,500,000 -

$2,000,000)/($2,500,000) 20%

Deferred Gross Profit ($45,000 x 20%) 9,000

(TCO B) The Accent Corporation shows the following information.

On January 1, 2015, Accent purchased a donut machine for $700,000.
a. Pretax financial income is $2,300,000 in 2015 and $2,400,000 in 2016
b. Taxable income is expected in future years with an expected tax rate of 35%.
c. The company recognized an extraordinary gain of $150,000 in 2016 (which is fully
taxable).
d. Tax-exempt municipal bonds yielded interest of $150,000 in 2016.
e. Straight-line basis for 7 years for financial reporting (See Appendix 11A.)
f. Half-year convention basis depreciation for 4 years for tax purposes.
Required:
a. Compute taxable income and income taxes payable for 2016.
b. Prepare the journal entries for income tax expense, income taxes payable, and
deferred taxes for 2016.
c. Prepare the deferred income taxes presentation for December 31, 2016 balance sheet
Solution:
The value of book depreciation and tax depreciation is calculated with the use of following table:

Book Depreciation (700,000/7) Tax Depreciation Difference

2015 100,000 87,500 (700,000/4*1/2) 12,500

2016 100,000 175,000 (700,000*4/12) (75,000)

2017 100,000 175,000 (700,000*4/12) (75,000)

2018 100,000 175,000 (700,000*4/12) (75,000)

2019 100,000 87,500 (700,000*4/12*1/2) 12,500

2020 100,000 0 100,000

2021 100,000 0 100,000

Total 700,000 700,000 0

_______

Part A)

The taxable income and income taxes payable for 2013 is calculated as follows:

Pretax Financial Income for 2016 2,400,000

Less Non-Taxable Interest 150,000

 Excess Depreciation (175,000 - 100,000) 75,000

Taxable Income for 2016 $2,175,000

Income Taxes Payable for 2013 (2,175,000*35%) $761,250

______

Part B)

The journal entry is given as follows:

Income Tax Expense (761,250 + 21,875 + 4,375] $787,500

Income Tax Payable $761,250

Deferred Tax Liability [(75,000-12,500)*35%] $21,875

Deferred Tax Asset (12,500*35%) $4,375

______

Part C)

The balance sheet presentation is given as below:

Long Term Liabilities

Deferred Tax Liability $21,875

(TCO D) Absolute Leasing, Inc. agrees to lease equipment to Allen, Inc. on January 1,

2015. They agree on the following terms:

a. The normal selling price of the equipment is $350,000 and the cost of the asset to

Absolute Leasing Inc. was $275,000.

b. At the end of the lease, the equipment will revert to Absolute Leasing, Inc. and have an

unguaranteed residual value of $25,000. Their implicit interest rate is 10%.

c. The lease is noncancelable with no renewal option. The lease term is 10 years (the

same as the estimated economic life).

d. Absolute Leasing, Inc. incurred costs of $5,000 in negotiating and closing the lease.

There are no uncertainties regarding additional costs yet to be incurred and the
collectability of the lease payments is reasonably predictable.

e. The lease begins on January 1, 2015 and payments will be in equal annual

installments.

f. Allen will pay all maintenance, insurance, and tax costs directly and annual payments

of $55,000 on January 1 of each year.

Required:

a. Determine what type of lease this would be for the lessee and calculate the initial

obligation.

b. Prepare Allen, Inc.'s amortization schedule for the lease terms.

c. Prepare all the journal entries for Allen, Inc. for 2015. Assume a calendar year fiscal

year.

Solution:

SOLUTION:

a) It is the finance lease and initial obligation is to pay $55,000.

b) Present Value of Minimum Lease Payment

Year MLP Discounted Rate Present Va

$
0 to 9 $55,000.00 6.759 371,745.
$
371,745.

Amortization schedule

Financ
Year Liability MLP Charge

$ $
0 371,745.00 55,000.00 $
$ $ $
1 316,745.00 55,000.00 31,674.5
$ $ $
2 293,419.50 55,000.00 29,341.9
 $ $ $
3 267,761.45 55,000.00 26,776.1
$ $ $
4 239,537.60 55,000.00 23,953.7
$ $ $
5 208,491.35 55,000.00 20,849.1
$ $ $
6 174,340.49 55,000.00 17,434.0
$ $ $
7 136,774.54 55,000.00 13,677.4
$ $ $
8 95,451.99 55,000.00 9,545.2
$ $ $
9 49,997.19 55,000.00 4,999.7
$
10 (3.09)

c)
Journal Entries in the books of Allen Inc. for the year 2012

Particulars Debit Credit

$
Assets under finance lease 371,745.00
$
Absolute Leasing Inc. 371,745.00
(To record the asset taken on finance
lease.)

$
Absolute Leasing Inc. 55,000.00
$
Cash 55,000.00
(To record the annual payment made.)

$
Lease Rental 23,325.50
$
Finance Charge 31,674.50
$
Absolute Leasing Inc. 55,000.00
(To record the lease rental & finance
charge outstanding at year end.)
(TCO F) Drexon Corp., which follows U.S. GAAP, uses the direct method to report its

cash flows. The CFO is assessing the impact on cash flows of 12 events during the

fiscal year. Specify which category each event falls under (under the direct method) and

note whether it increases cash, decreases cash, or has no impact on cash:

# Event

1 Accrued liabilities increase from $245,000 to $250,000

2 Accounts payable decreases from $400,000 to $385,000

3 Dividends of $6,500 are received from a stock classified as

available for sale

4 40,000 new shares of stock are issued near the close of the

fiscal year

5 Accounts receivable decreases from $620,000 to $610,000

6 A gain of $8,200 is booked on the sale of an asset

7 An interest payment of $85,000 is made on a new debt issuance

8 Drexon purchases a trading security which it classifies as

non¬current

9 Dividends of $12,000 are paid on Drexon company stock

10 Depreciation and amortization expense totaling $50,000 is

booked

11 Drexon purchases 60% of a subsidiary company

12 Capital expenditures of $35,000 are made for equipment used in

day to day operations

Solution:

Impact on
# Event Acivities cash flow
 Accrued liabilities increase from
1 $245,000 to $250,000. Operating Increases

Accounts payable decreases from

2 $400,000 to $385,000. Operating Decreases

Dividends of $6,500 are received

from a stock classified as
3 available for sale. Operating Increases

40,000 new shares of stock are

issued near the close of the fiscal
4 year. Financing Increases

Accounts receivable decreases

5 from $620,000 to $610,000. Operating Increases

A gain of $8,200 is booked on the No impact (whole proceed

6 sale of an asset. on cash amount is requred)

An interest payment of $85,000 is

7 made on a new debt issuance. Financing Decreases

Drexon purchases a trading

security which it classifies as No impact
8 non¬current. on cash

Dividends of $12,000 are paid on

9 Drexon company stock. Financing Decreases

Depreciation and amortization

expense totaling $50,000 is No impact
10 booked. on cash

Drexon purchases 60% of a No impact

11 subsidiary company. on cash

Capital expenditures of $35,000

are made for equipment used in
12 day to day operations. Investing Decreases

(TCO G) The following information pertains to Allbright, Inc.

Cash $42,000

Accounts receivable $208,000

Inventory $95,000
Plant assets (net) $340,000

Total assets $685,000

Accounts payable $78,000

Accrued taxes and expenses payable $26,000

Long-term debt $80,000

Common stock ($10 par) $174,000

Paid-in capital in excess of par $45,000

Retained earnings $282,000

Total equities $685,000

Net sales (all on credit) $850,000

Cost of goods sold $697,000

General & Admin Expenses $78,000

Net income $75,000

Required:

Compute the following: (It is not necessary to use averages for any balance sheet figures

involved.)

a. Current ratio

b. Inventory turnover

c. Receivables turnover

d. Book value per share

e. Earnings per share

f. Debt to total assets

g. Profit margin on sales

h. Return on common stock equity

solution:
(a) Current ratio = Current asset / Current liabilities
= (cash + Accounts receivable + Inventory) / (Accounts payable + Accrued taxes)

= $(42,000 + 208,000 + 95,000) / $(78,000 + 26,000)

= $345,000 / $104,000

= 3.32

(b) Inventory turnover = Cost of goods sold / Inventory = $697,000 / $95,000 = 7.34

(c) Receivables turnover = Credit sales / Accounts receivable = $850,000 / $208,000 = 4.09

(d) Book value per share = Common equity / Number of shares

= (Common stock + Paid-in capital in excess + Retained earnings) / Number of shares

= $(174,000 + 45,000 + 282,000) / ($174,000 / $10) = $501,000 / 17,400 = $28.79

(e) Earnings per share = Net income / Number of shares = $75,000 / 17,400 = $4.31

(f) Debt-to-assets = Long term debt / Total assets = $80,000 / $685,000 = 0.1168 = 11.68%

(g) Profit margin ratio = Net income / Sales = $75,000 / $850,000 = 0.0882 = 8.82%

(h) Return on common equity = Net income / Total equity = $75,000 / $501,000** = 0.1497 = 14.97%

**See part (d)

(TCO E) Discuss the three approaches for reporting changes in accounting principles. Include

additional points about how these approaches may be impacted by the adoption of new IFRS

standards.

Solution:

Report changes
a.
currently.
In this approach, companies report the cumulative effect of the change in the current
year’s income statement as an irregular item. The cumulative effect is the difference in
prior years’ income between the newly adopted and prior accounting method. Under
this approach, the effect of the change on prior years’ income appears only in the
current-year income statement. The company does not change prior-year financial
statements.

b. Report changes retrospectively. (FASB requires this approach)

Retrospective application refers to the application of a different accounting principle to
recast previously issued financial statements—as if the new principle had always been
used. In other words, the company “goes back” and adjusts prior years’ statements on a
 basis consistent with the newly adopted principle. The company shows any cumulative
effect of the change as an adjustment to beginning retained earnings of the earliest year
presented.
Advocates of this position argue that retrospective application ensures comparability.
Think for a moment what happens if this approach is not used: The year previous to the
change will be on the old method; the year of the change will report the entire
cumulative adjustment; and the following year will present financial statements on the
new basis without the cumulative effect of the change. Such lack of consistency fails to
provide meaningful earnings-trend data and other financial relationships necessary to
evaluate the business.

c. Report changes prospectively.

Report changes prospectively (in the future). In this approach, previously reported
results remain. As a result, companies do not adjust opening balances to reflect the
change in principle. Advocates of this position argue that once management presents
financial statements based on acceptable accounting principles, they are final;
management cannot change prior periods by adopting a new principle. According to
this line of reasoning, the current-period cumulative adjustment is not appropriate,
because that approach includes amounts that have little or no relationship to the current
year’s income or economic events.
(TCO D) Animal, Inc. leased equipment from Zoo Enterprises under a 5-year lease
requiring equal annual payments of $48,000, with the first payment due at lease
inception. The lease does not transfer ownership, nor is there a bargain purchase
option. The equipment has a 5-year useful life and no salvage value. Animal, Inc.’s
incremental borrowing rate is 10% and the rate implicit in the lease (which is known by
Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what
is the amount of interest expense recorded by Animal, Inc. in the first year of the asset’s
life?
PV Annuity PV Ordinary
Due Annuity
8%, 5 periods 4.31213 3.99271

10%, 5
4.16986 3.79079
periods
Solution:

Value = ($48,000 * 4.31213)

$
Value 206,982.24

Interest = ($206,982.24 - $48,000) * 8%

 $
Interest 12,718.58