1.

On January 1, 2018, Ellison Company purchased 12% bonds, having a maturity value of
€800,000, for €860,652. The bonds provide the bondholders with a 10% yield. They are
dated January 1, 2018, and mature January 1, 2023, with interest receivable December 31
of each year. Ellison’s business model is to hold these bonds to collect contractual cash
flows.

Instructions
(a) Prepare the journal entry at the date of the bond purchase.
(b) Prepare a bond amortization schedule through 2019.
(c) Prepare the journal entry to record the interest received and the amortization for 2018.
(d) Prepare any entries necessary at December 31, 2018, using the fair value option,
assuming the fair value of the bonds is €860,000.
(e) Prepare any entries necessary at December 31, 2019, using the fair value option,
assuming the fair value of the bonds is €840,000.

2. On January 1, 2019, Kirmer Corp. purchased €450,000 of 6% bonds, interest payable on

January 1 and July 1, for €428,800 (a 7% effective interest rate). The bonds mature on
January 1, 2025. Record amortization and interest revenue on the appropriate dates by the
effective-interest method (round to the nearest dollar). (Assume bonds are non-trading.)

Instructions
(a) Prepare the entry for January 1, 2019.
(b) The bonds are sold on October 1, 2019 for €427,000 plus accrued interest. Prepare all
entries required to properly record the sale.

3. On January 1, 2019, West Co. purchased €160,000 of 6% bonds for €168,300 (a 5%

effective interest rate) as a non-trading investment. Interest is paid on July 1 and January 1
and the bonds mature on January 1, 2024.

Instructions
(a) Prepare the journal entry on January 1, 2019.
(b) The bonds are sold on November 1, 2019 at 105 plus accrued interest. Record
amortization and interest revenue on the appropriate dates by the effective-interest method
(round to the nearest dollar). Prepare all entries required to properly record the sale.
4. Presented below is information related to equipment owned by Marley Company at
December 31, 2018.
Cost €7,000,000
Accumulated depreciation to date 1,500,000
Value-in-use 5,000,000
Fair value less cost of disposal 4,400,000

Assume that Marley will continue to use this asset in the future. As of December 31, 2018, the
equipment has a remaining useful of 4 years.
Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December
31, 2018.
(b) Prepare the journal entry to record depreciation expense for 2019.
(c) The recoverable amount of the equipment at December 31, 2019, is €5,250,000.
Prepare the journal entry (if any) necessary to record this increase.

5.

Eubank Company, as lessee, enters into a lease agreement on July 1, 2018, for equipment. The
following data are relevant to the lease agreement:
1. The term of the noncancelable lease is 4 years. Payments of €978,446 are due on July 1 of
each year.
2. The fair value of the equipment on July 1, 2018 is €3,500,000. The equipment has an
economic life of 6 years with no salvage value.
3. Eubank depreciates similar machinery it owns on the sum-of-the-years’-digits basis.
4. The lessee pays all executory costs.
5. Eubank’s incremental borrowing rate is 10% per year. The lessee is aware that the lessor
used an implicit rate of 8% in computing the lease payments (present value factor for 4
periods at 8%, 3.57710; at 10%, 3.48685).

Instructions
(a) Indicate the type of lease Eubank Company has entered into and what accounting
treatment is applicable.
(b) Prepare the journal entries on Eubank’s books that relate to the lease agreement for the
following dates: (Round all amounts to the nearest dollar. Include a partial amortization
schedule.)
1. July 1, 2018.
 2. December 31, 2018.
3. July 1, 2019.
4. December 31, 2019.

6. Hayes Corp. is a manufacturer of truck trailers. On January 1, 2018, Hayes Corp. leases ten
trailers to Lester Company under a six-year noncancelable lease agreement. The following
information about the lease and the trailers is provided:

1. Equal annual payments that are due on January 1 each year provide Hayes Corp. with an
8% return on net investment (present value factor for 6 periods at 8% is 4.99271).

2. Titles to the trailers pass to Lester at the end of the lease.

3. The fair value of each trailer is €60,000. The cost of each trailer to Hayes Corp. is €54,000.
Each trailer has an expected useful life of nine years.

4. Collectibility of the lease payments is probable.

(a) What type of lease is this for the lessor? Discuss.
(b) Calculate the annual lease payment. (Round to nearest dollar.)
(c) Prepare a lease amortization schedule for Hayes Corp. for the first three years.
(d) Prepare the journal entries for the lessor for 2018 to record the lease agreement, the
receipt of the lease rentals, and the recognition of revenue (assume the use of a perpetual
inventory method and round all amounts to the nearest dollar).

7. The Appliance Store is an experienced home appliance dealer. Appliance Store also offers a
number of services together with the home appliances that it sells. Assume that Appliance
Store sells dishwashers on a standalone basis. Appliance Store also sells installation
services and maintenance services for dishwashers. However, Appliance Store does not
offer installation or maintenance services to customers who buy dishwashers from other
vendors. Pricing for dishwashers is as follows.

Dishwasher only €1,140

Dishwasher with Installation service 1,260

Dishwasher with maintenance services 1,380

 Dishwasher with installation and maintenance services 1,450

In each instance in which maintenance services are provided, the maintenance service is
separately priced within the arrangement at €240. Additionally, the incremental amount charged
by Appliance Store for installation approximates the amount charged by independent third
parties. Dishwashers are sold subject to a general right of return. If a customer purchases a
dishwasher with installation and/or maintenance services, in the event Appliance Store does not
complete the service satisfactorily, the customer is only entitled to a refund of the portion of the
fee that exceeds €1,140.
Instructions
(a) Assume that a customer purchases a dishwasher with both installation and maintenance
services for €1,450. Based on its experience, Appliance Store believes that it is probable
that the installation of the equipment will be performed satisfactorily to the customer.
Assume that the maintenance services are priced separately. Identify the separate
performance obligations related to the Appliance Store revenue arrangement.
(b) Indicate the amount of revenue that should be allocated to the dishwasher the installation,
and to the maintenance contract.
(c) Prepare the necessary journal entry for the Appliance Store.

8. On December 31, 2018, Dieker Company sells equipment to Tabor Inc. for $125,000. Dieker
includes a 1-year assurance warranty service with the sale of all its equipment. The
customer receives and pays for the equipment on December 31, 2018. Dieker estimates the
prices to be $122,000 for the equipment and $3,000 for the cost of the warranty.

Instructions
(a) Prepare the journal entry to record this transaction on December 31, 2018.
(b) Repeat the requirements for (a), assuming that in addition to the assurance warranty,
Dieker sold an extended warranty (service type warranty) for an additional 2 years (2020–
2021) for $2,000.
9. On July 2, 2018, Lake Company sold to Sue Black merchandise having a sales price of
€9,000 (cost €5,400) with terms of 2/10. n/30. f.o.b. shipping point. Lake estimates that
merchandise with a sales value of €900 will be returned. An invoice totaling €120, terms
n/30, was received by Black on July 6 from Pacific Delivery Service for the freight cost. Upon
receipt of the goods, on July 3, Black notified Lake that €350 of merchandise contained
flaws. The same day, Lake issued a credit memo covering the defective merchandise and
asked that it be returned at Lake’s expense. Lake estimates the returned items to have a fair
value of €140. The freight on the returned merchandise was €20 paid by Lake on July 7. On
July 12, the company received a check for the balance due from Black.

Instructions
(a) Prepare journal entries for Lake Company to record all the events noted above assuming
sales and receivables are entered at gross selling price.
(b) Prepare the journal entry assuming that Sue Black did not remit payment until August 5.