Contents

CHAP 1.........................................................................................................................................................2
CHAP 2.........................................................................................................................................................3
CHAP 3.........................................................................................................................................................7
CHAP 4.......................................................................................................................................................10
CHAP 5.......................................................................................................................................................12
CHAP 6.......................................................................................................................................................13
CHAP 7.......................................................................................................................................................14
CHAP 8.......................................................................................................................................................16
CHAP 9.......................................................................................................................................................18
CHAP 10.....................................................................................................................................................21
CHAP 11.....................................................................................................................................................24

CHAP 1
1. Financial accounting measures, classifies, and summarizes in report form those
activities and that information which relate to the enterprise as a whole for use by

1
parties both internal and external to a business enterprise. Managerial accounting
also measures, classifies, and summarizes in report form enterprise activities, but
the communication is for the use of internal, managerial parties, and relates more
to subsystems of the entity. Managerial accounting is management decision
oriented and directed more toward product line, division, and profit center
reporting.
2. Financial statements generally refer to the four basic financial statements:
balance sheet, income statement, statement of cash flows, and statement of changes
in owners’ or stockholders’ equity. Financial reporting is a broader concept; it
includes the basic financial statements and any other means of communicating
financial and economic data to interested external parties. Examples of financial
reporting other than financial statements are annual reports, prospectuses, reports
filed with the government, news releases, management forecasts or plans, and
descriptions of an enterprise’s social or environmental impact.
8.The SEC has the power to prescribe, in whatever detail it desires, the accounting
practices and principles to be employed by the companies that fall within its
jurisdiction. Because the SEC receives audited financial statements from nearly all
companies that issue securities to the public or are listed on the stock exchanges, it
is greatly interested in the content, accuracy, and credibility of the statements. For
many years, the SEC relied on the AICPA to regulate the profession and develop
and enforce accounting principles. Lately, the SEC has assumed a more active role
in the development of accounting standards, especially in the area of disclosure
requirements. In December 1973, in ASR No. 150, the SEC said the FASB’s
statements would be presumed to carry substantial authoritative support and
anything contrary to them to lack such support. It thereby supports the
development of accounting principles in the private sector. LO: 2, Bloom: K,
Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None,
AICPA FC: Reporting, AICPA PC: Communication
9. The Committee on Accounting Procedure was a special committee of the
American Institute of CPAs that, between the years of 1939 and 1959, issued 51
Accounting Research Bulletins dealing with a wide variety of timely accounting
problems. These bulletins provided solutions to immediate problems and narrowed
the range of alternative practices. However, the Committee’s problem-byproblem
approach failed to provide a well-defined and well-structured body of accounting
theory that was so badly needed. The Committee on Accounting Procedure was
replaced in 1959 by the Accounting Principles Board
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12. The explanation should note that generally accepted accounting principles or
standards have “substantial authoritative support.” They consist of accounting
practices, procedures, concepts, and methods which are recognized by a large
majority of practicing accountants as well as other members of the business and
financial community. Bulletins issued by the Committee on Accounting Procedure,
opinions rendered by the Accounting Principles Board, and statements issued by
the Financial Accounting Standards Board constitute “substantial authoritative
support.”
14. The technical staff of the FASB conducts research on an identified accounting
topic and prepares a “preliminary view” that is released by the Board for public
reaction. The Board analyzes and evaluates the public response to the preliminary
view, deliberates on the issues, and issues an “exposure draft” for public comment.
The preliminary view merely presents all facts and alternatives related to a specific
topic or problem, whereas the exposure draft is a tentative “statement.” After
studying the public’s reaction to the exposure draft, the Board may reevaluate its
position, revise the draft, and vote on the issuance of a final statement.

CHAP 2
EXERCISE 2.1
(a) True.
(b) False – General-purpose financial reports help users who lack the ability to
demand all the financial information they need from an entity and, therefore, must
rely, at least partly, on the information in financial reports.
(c) False – Standard-setting that is based on personal conceptual frameworks will
lead to different conclusions about identical or similar issues. As a result, standards
will not be consistent with one another, and past decisions may not be indicative of
future ones.
(d) False – Information that is decision-useful to capital providers may also be
useful to users of financial reporting who are not capital providers.
(e) False – An implicit assumption is that all users need reasonable knowledge of
business and financial accounting matters to understand the information contained
in the financial statements.

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(f) True.
EXERCISE 2.2
(a) False – The fundamental qualitative characteristics that make accounting
information useful are relevance and faithful representation.
(b) False – Relevant information must also be material.
(c) False – Information that is relevant is characterized as having predictive or
confirmatory value.
(d) False – Comparability also refers to comparisons of a firm over time
(consistency).
(e) False – Verifiability is an enhancing characteristic which relates to both
relevance and faithful representation.
(f) True
EXERCISE 2.4
(a) (b) (c) Comparability. Confirmatory Value. Comparability (Consistency.)
(h) (i) (j) Materiality. Faithful representation. Relevance and Faithful
(d) (e) Neutrality. Verifiability.
(k) representation. Timeliness
(f) Relevance
(g) Comparability, Verifiability, Timeliness, and Understandability.
EXERCISE 2.5
(a) Gains, losses.
(b) Liabilities.
(c) Investments by owners, comprehensive income. (also, possible would be
revenues and gains).
(d) Distributions to owners. (Note to instructor: net effect is to reduce equity and
assets).
(e) Comprehensive income (also, possible would be revenues and gains).

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(f) Assets.
(g) Comprehensive income.
(h) Revenues, expenses.
(i) Equity.
(j) Revenues.
(k) Distributions to owners.
(l) Comprehensive income
EXERCISE 2.6
(a) 7. Expense recognition principle.
(b) 5. Measurement principle (historical cost.)
(c) 8. Full disclosure principle.
(d) 2. Going concern assumption.
(e) 1. Economic entity assumption. (f) 4. Periodicity assumption.
(g) 3. Monetary unit assumption.
EXERCISE 2.7
(a) Measurement principle (historical cost.). (b) Full disclosure principle.
(c) Expense recognition principle
(d) Measurement (fair value) principle.
(e) (f) Economic entity assumption. Full disclosure principle.
(g) Revenue recognition principle.
(h) Full disclosure principle
(i) Expense recognition and revenue recognition principles

(j) Economic entity assumption..

(k) Periodicity assumption.

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(l) Measurement principle, Expense recognition principle.
(m) Measurement principle (historical cost.)
(n) Expense recognition principle.

CHAP 3
EXERCISE 3.3

6
EXERCISES 3-4 & 3-5

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8
EXERCISES 3-11

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 CHAP 4
EXERCISE 4.2
Sales revenue................................................... .................. .................. ...................... $310,000
Cost of goods sold.............................. .................. .................. ..........................140,000
Gross profit.................................................... .................. .................................170,000
Selling and administrative expenses......... .................. ....................................... 50,000
(a) Income from operations 120,000
Other revenues and gains Gain on sale of plant assets....................................... 30,000
Other expenses and losses
Interest expense.................................................................................................... 6,000
Income from continuing operations ........................ .................. ..................... 144,000
Loss on discontinued operations ....................... ............................................... (12,000)
Net income........................................................... .................. ....................... $ 132,000
(b) Net income..................................................... ................................................. $132,000
Unrealized gain on available-for-sale debt investments ………………………………....
10,000
Comprehensive income.................................................................................... $142,000
(c) Net income........................................................................................................ $132,000
Dividends............................................................................................................ (5,000)
(d) Retained earnings ........................................................................................... $127,000
(a) Income from operations $120,000
(b) Net income $132,000
(c) Comprehensive income $142,000
(d) Retained earnings balance $127,000

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EXERCISE 4.5 , 4.8

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 CHAP 5
EXERCISE 5.3
1. (a) 2. (b) 3. (f) 4. (a) 5 (f) ) 6. (h) 7. (j) 8. (d) 9. (a) 10. (f)
11. (a) 12. (f) 13. (a) or (e) (preferably (a)) 14. (c) and (n15. (f) 16. (x) 17. (f) 18. (c) 19. (i)
EXERCISE 5.16
Shabbona Corporation Statement of Cash Flows For the Year Ended December 31, 2020 Cash
flows from operating activities
Net income......................................................................................................................
$125,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation expense ($69,000 - $42,000)....................................... $27,000
Increase in accounts receivable......................................................... (16,000)
Decrease in inventory .......................................................................... 9,000
Decrease in accounts payable............................................................ (13,000)
7,000
Net cash provided by operating activities .......................................................................
132,000
Cash flows from investing activities
Sale of land ($110,000 - $71,000)........................................................ 39,000
Purchase of equipment ($260,000 - $200,000).................................. (60,000)
Net cash used by investing activities ............................................................... (21,000)
Cash flows from financing activities
Payment of cash dividends ................................................................................ (60,000)
Net increase in cash........................................ .................... ............................... 51,000
Cash at beginning of year........................... .................... ................. ................. 22,000
Cash at end of year ...................... .................... .............................................. $ 73,000
Noncash investing and financing activities Issued common stock to retire $50,000 of
bonds outstanding

(b)
Current cash debt coverage = Net cash provided by operating activities/Average current
liabilities
= $132,000 ($34,000 + $47,000) / 2
= 3.26 to 1
Cash debt coverage = Net cash provided by operating activities /Average total liabilities

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= $132,000 ÷ $184,000 + $247,000/ 2
=.61 to 1
Free Cash Flow Analysis
Net cash provided by operating activities......................... $132,000
Less: Purchase of equipment ............................................... (60,000)
Dividends ............................................................................. (60,000)
Free cash flow ..................................................................... $ 12,000
Shabbona has excellent liquidity. Its financial flexibility is good. It might be noted that it
substantially reduced its long-term debt in 2020, which improved its financial flexibility

CHAP 6
EXERCISE 6.4
(a) Future value of an ordinary
annuity of $4,000 a period
for 20 periods at 8% $183,047.84 ($4,000 X 45.76196)
Factor (1 + .08) X 1.08
Future value of an annuity
due of $4,000 a period at 8% $197,692
(b) Present value of an ordinary annuity
of $2,500 for 30 periods at 5% $38,431.13 ($2,500 X 15.37245)
Factor (1 + .05) X 1.05
Present value of annuity due of
$2,500 for 30 periods at .05% $40,353 (Or see Table 6-5 which gives
$40,356.68)
(c) Future value of an ordinary
annuity of $2,000 a period for
15 periods at 10% $63,544.96 ($2,000 X 31.77248)
Factor (1 + 10) X 1.10
Future value of an annuity
due of $2,000 a period for 15
periods at 10% $69,899
(d) Present value of an ordinary
annuity of $1,000 for 6
periods at 9% $4,485.92 ($1,000 X 4.48592)
Factor (1 + .09) X 1.09
Present value of an annuity
date of $1,000 for 6 periods

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 at 9% $4,890 (Or see Table 6-5)
EXERCISE 6.7
(a) $100,000 X .55526 (PVF15, 4%) = $55,526
+ $5,000 X 11.11839 (PVF – OA 15, 4%) = 55,592
$111,118

(b) $100,000 X .48102 (PVF15, 5%) = $48,102

+ $5,000 X 10.37966 (PVF – OA 15, 5%) = 51,898
$100,000
(c) $100,000 X .41727 (PVF15, 6%) = $41,727
+ $5,000 X 9.71225 (PVF – OA 15, 6%) = 48,561
$90,288
EXERCISE 6.15
(a) FVF(n, 8%) = $1,999,000 ÷ $1,000,000 = 1.999
PVF(n, 8%) = $1,000,000 ÷ $1,999,000 = .50025
reading down the 8% column, 1.999 (Table 6-1) and .50025 (Table 6-2) corresponds to 9
periods
(b) By setting aside $300,000 now, Andrew can gradually build the fund to an amount to
establish the foundation.
PV = $300,000
 FV = $300,000 (FVF9, 8%) = $300,000 (1.999)
= $599,700—Thus, the amount needed from the annuity:
$1,999,000 – $599,700 = $1,399,300.
Payments = FV ÷ (FV–OA9, 8%) = $1,399,300 ÷ 12.48756 = $112,056.

CHAP 7
EXERCISE 7.1
(a) Cash includes the following:
1. Commercial savings account
— First National Bank of Yojimbo $ 600,000 ‘
1. Commercial checking account— First National Bank of Yojimbo 900,000
2. Money market fund—Volonte 5,000,000
5. Petty cash 1,000
11. Commercial Paper (cash equivalent) 2,100,000

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12. Currency and coin on hand 7,700
Cash reported on December 31, 2020, balance sheet $8,608,700
(b) Other items classified as follows:
3. Travel advances (reimbursed by employee)* should be reported as receivable—employee in
the amount of $180,000.
4. Cash restricted in the amount of $1,500,000 for the retirement of long-term debt should be
reported as a noncurrent asset identified as “Cash restricted for retirement of long-term debt.”
6. An IOU from Marianne Koch should be reported as an account receivable in the amount of
$190,000. 7. The bank overdraft of $110,000 should be reported as a current liability.**
8. Certificates of deposits of $500,000 each should be classified as temporary investments.
9. Postdated check of $125,000 should be reported as an accounts receivable.
10. The compensating balance of $500,000 requirement does not affect the balance in cash. A
note disclosure indicating the arrangement and the amounts involved should be described in the
notes.
*If not reimbursed, charge to prepaid expense.
**If cash is present in another account in the same bank on which the overdraft occurred,
offsetting is required.
EXERCISE 7.7
(a) Bad Debt Expense............................................ 3,000
Allowance for Doubtful Accounts............................................. 3,000
Step 1: .05 X $100,000 = $5,000 (desired credit balance in allowance account)
Step 2: $5,000 – $2,000 = $3,000 (required credit entry to bring allowance account to
$5,000 credit balance)
(b) Bad Debt Expense............................................ 6,500
Allowance for Doubtful Accounts............................................. 6,500
Step 1: .05 X $100,000 = $5,000 (desired credit balance in allowance account)
Step 2: $5,000 + $1,500 = $6,500 (required credit entry to bring allowance account to
$5,000 credit balance)

EXERCISE 7.11
Balance 1/1 ($700 – $155) $ 545 Over one year
4/12 (#2412) [($1,710 – $1,000 – $300*)] 410 Eight months and 19 days
11/18 (#5681) [($2,000 – $1,250)] 750 One month and 13 days

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 $1,705 *($790 – $490)
In as much as later invoices have been paid in full, all three of these amounts should be
investigated in order to determine why Hopkins Co. has not paid them. The amounts in the
beginning balance and #2412 should be of particular concern.

CHAP 8
EXERCISE 8.1

Items 1, 3, 5, 8, 11, 13, 14, 16, and 17 would be reported as inventory in the financial statements.

The following items would not be reported as inventory:

2. Cost of goods sold in the income statement.

4. Not reported in the financial statements.

6. Cost of goods sold in the income statement.

7. Cost of goods sold in the income statement.

9. Interest expense in the income statement.

10. Advertising expense in the income statement.

12. Office supplies in the current assets section of the balance sheet.

15. Not reported in the financial statements.

18. Short-term investments in the current asset section of the balance sheet.

EXERCISE 8.2

Inventory per physical count $441,000

Goods in transit to customer, f.o.b. destination + 38,000

Goods in transit from vendor, f.o.b. seller + 51,000

Inventory to be reported on balance sheet $530,000

The consigned goods of $61,000 are not owned by Jose Oliva and were properly excluded.

The goods in transit to a customer of $46,000, shipped f.o.b. shipping point, are properly excluded from
the inventory because the title to the goods passed when they left the seller (Oliva) and therefore a sale
and related cost of goods sold should be recorded in 2020.

The goods in transit from a vendor of $83,000, shipped f.o.b. destination, are properly excluded from
the inventory because the title to the goods does not pass to Oliva until the buyer (Oliva) receives them.

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EXERCISE 8.4

1. Raw Materials Inventory ................................ 8,100

Accounts Payable .................................................................. 8,100
2. Raw Materials Inventory .............................. 28,000
Accounts Payable ................................................................ 28,000
3. No adjustment necessary.
4. Accounts Payable ............................................... 7,500

Raw Materials Inventory ............................................................... 7,500

5. Raw Materials Inventory ................................ 19,800

Accounts Payable ........................................................................ 19,800

EXERCISE 8.13

(a)
(1) 2,100 units available for sale – 1,400 units sold = 700 units in the

ending inventory.

500 @ $4.58 = $2,290

200 @ 4.60 = 920

700 $3,210 Ending inventory at FIFO cost.

(2) 100 @ $4.10 = $ 410

600 @ 4.20 = 2,520

700 $2,930 Ending inventory at LIFO cost.

(3) $9,240 cost of goods available for sale ÷ 2,100 units available for sale = $4.40 weighted-
average unit cost.

700 units X $4.40 = $3,080 Ending inventory at weighted-average cost.

(b)

(1) LIFO will yield the lowest gross profit because this method will yield the highest cost of goods
sold figure in the situation presented. The company has experienced rising purchase prices for its
inventory acquisitions. In a period of rising prices, LIFO will yield the highest cost of goods sold
because the most recent purchase prices (which are the higher prices in this case) are used to price
cost of goods sold while the older (and lower) purchase prices are used to cost the ending inventory.
(2) LIFO will yield the lowest ending inventory because LIFO uses the oldest costs to price the ending
inventory units. The company has experienced rising purchase prices. The oldest costs in this case
are the lower costs.

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 EXERCISE 8.17

(a) FIFO Ending Inventory 12/31/2020

76 @ $10.89* = $ 827.64
24 @ $11.88** = 285.12
$1,112.76
*[$11.00 – .01 ($11.00)]
**[$12.00 – .01 ($12.00)]

(b) LIFO Cost of Goods Sold—2020

76 @ $10.89 = $ 827.64
84 @ $11.88 = 997.92
90 @ $14.85* = 1,336.50
15 @ $15.84** = 237.60
$3,399.66
*[$15.00 – .01 ($15.00)]
**[$16.00 – .01 ($16.00)]
(c) FIFO matches older costs with revenue. When prices are declining, as in this case, this results in
a higher amount for cost of goods sold. Therefore, it is recommended that FIFO be used by
Brady Sports to minimize taxable income.

CHAP 9
EXERCISE 9.2

Item Net Realizable Value Cost LCNRV

D $80* $75 $75

E 62 80 62

F 60 80 60

G 35 80 35

H 70 50 50

I 40 36 36

*Estimated selling price – Estimated selling costs and cost to complete = $120 – $30 – $10 = $80.

EXERCISE 9.4

December 31, 2020

(a) Cost of Goods Sold ($346,000 – $322,000) ............. 24,000

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 Allowance to Reduce Inventory to NRV ........................................ 24,000
December 31, 2021
Allowance to Reduce Inventory to NRV .................... 4,000
Cost of Goods Sold .......................................................................... 4,000
December 31, 2020
(b) Loss Due to Decline of Inventory to NRV ................ 24,000
Allowance to Reduce Inventory to NRV ........................................ 24,000
December 31, 2021 Allowance to Reduce
Inventory to NRV ................................................... 4,000*
Recovery of Inventory Loss ........................................................... 4,000

*Cost of inventory at 12/31/20 ..................................... $346,000

LCNRV at 12/31/20 ........................................................ (322,000)
Allowance amount needed to reduce inventory
to NRV (a) ....................................................................... $ 24,000
Cost of inventory at 12/31/21 ....................................... $410,000
LCNRV at 12/31/21 ....................................................... (390,000)
Allowance amount needed to reduce inventory
to NRV (b) ....................................................................... $ 20,000

Recovery of previously recognized loss = (a) – (b) = $24,000 – $20,000 = $4,000.

(c) Both methods of recording lower-of-cost-or-NRV adjustments have the same effect on net
income.

EXERCISE 9.6

Net realizable value $50 – $14 =$36

Cost $40

Lower-of-cost-or-NRV $36

$38 figure used – $36 correct value per unit = $2 per unit.

$2 X 1,000 units = $2,000.

If ending inventory is overstated, net income will be overstated.

If beginning inventory is overstated, net income will be understated.

Therefore, net income for 2020 was overstated by $2,000 and net income for 2021 was understated by
$2,000.

EXERCISE 9.12

(a) If the commitment is material in amount, there should be a footnote in the balance sheet stating the
nature and extent of the commitment. The footnote may also disclose the market price of the materials.

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The excess of market price over contracted price is a gain contingency which per GAAP cannot be
recognized in the accounts until it is realized.

(b) The drop in the market price of the commitment should be charged to operations in the current year
if it is material in amount. The following entry would be made:

Unrealized Holding Gain or Loss—Income (Purchase Commitments)........................ 10,800

Estimated Liability on Purchase

Commitments [36,000 X ($3.00 – $2.70)] ........................................................................................ 10,800

The entry is made because a loss in utility has occurred during the period in which the market decline
took place. The account credited in the above entry should be included among the current liabilities on
the balance sheet, with an appropriate footnote indicating the nature and extent of the commitment.
This liability indicates the minimum obligation on the commitment contract at the present time—the
amount that would have to be forfeited in case of breach of contract.

(c) Assuming the $10,800 market decline entry was made on December 31, 2020, as indicated in (b), the
entry when the materials are received in January 2020 would be:

Raw Materials ............................................................. 97,200

Estimated Liability on Purchase Commitments .......... 10,800
Accounts Payable .................................................................................. 108,000

This entry records the raw materials at the actual cost, eliminates the $10,800 liability set up at
December 31, 2020, and records the contractual liability for the purchase. This permits operations to be
charged this year with the $97,200, the other $10,800 of the cost having been charged to operations in
2020.

PROBLEM 9.3

(a) Cost-of-Goods-Sold Method December 31, 2021

Cost of Goods Sold ................................................................. 68,000
Allowance to Reduce Inventory to NRV ..................................................... 68,000
($780,000 – $712,000)
December 31, 2022
Cost of Goods Sold ................................................................... 7,000
Allowance to Reduce Inventory to NRV
[($905,000 – $830,000) – $68,000] ............................................................. 7,000
(b) Loss Method December 31, 2021 Loss
Due to Decline of Inventory to NRV ....................................... 68,000
Allowance to Reduce Inventory to NRV .................................................... 68,000
($780,000 – $712,000)
December 31, 2022 Loss Due to Decline of
Inventory to NRV ..................................................................... 7,000
Allowance to Reduce Inventory to NRV

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 [($905,000 – $830,000) – $68,000] ........................................................... 7,000

CHAP 10
EXERCISE 10.7
Avoidable Interest Weighted-Average Accumulated Expenditures X Interest Rate = Avoidable Interest

$2,000,000 .12 $240,000

1,600,000 .1042 166,720

$3,600,000 $406,720

Weighted-average interest rate computation Principal Interest

10% short-term loan $1,400,000 X .10 $140,000

11% long-term loan 1,000,000 X .11 110,000

$2,400,000 $250,000

Total Interest/ Total Principal = $250,000/$2,400,000 = 10.42%

(b)

Actual Interest Construction loan $2,000,000 X .12 = $240,000

Short-term loan $1,400,000 X .10 = 140,000

Long-term loan $1,000,000 X .11 = 110,000

Total $490,000

Because avoidable interest is lower than actual interest, use avoidable interest.

Cost $5,200,000

Interest capitalized 406,720

Total cost $5,606,720

Depreciation Expense = $5,606,720 – $300,000 = $176,891

EXERCISE 10.9
(a) Computation of Weighted-Average Accumulated Expenditures
Expenditures
Date Amount Capitalization Period Weighted-Average
Accumulated Expenditures
July 31 $200,000 3/12 $50,000
November 1 100,000 0 $50,000*

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 Avoidable interest
Weighted-Average Accumulated Expenditures X Interest Rate = Avoidable Interest
$50,000* .12 $6,000**
Actual Interest
$300,000 X .12 X 5/12 = $15,000
$30,000 X .08 = 2,400
$17,400***
Note to instructor: Interest revenue is not netted against actual interest.
Interest capitalized $ 6,000**
(b) (1) 7/31 Cash .................................................. 300,000
Note Payable.............................................................. 300,000
Machinery...................................................... 200,000
Trading Securities ................................................................... 100,000
Cash ................................................. 300,000
(2) 11/1 Machinery................................................................. 100,000
Cash ................................................ 100,000
(3) 12/31 Machinery................................................................... 6,000
Interest Expense ($17,400*** – $6,000**) ............. 11,400
Cash ($30,000 X .08).................................................. 2,400
Interest Payable ($300,000 X .12 X 5/12)................ 15,000

EXERCISE 10.11
(a) Equipment ........................................................... 10,000

Accounts Payable .............................................. 10,000

Accounts Payable ............................................... 10,000

Equipment ($10,000 X .02)..................................... 200
Cash..................................................................... 9,800

(b) Equipment (new) ................................................. 9,900*

Loss on Disposal of Equipment......................... 1,600**
Accumulated Depreciation—Equipment ........... 6,000
Accounts Payable ...................................... 9,500
Equipment (old).......................................... 8,000
*Cost ($9,500 + $400) $9,900
**Cost $8,000
Less: Accumulated depreciation*** 6,000
Book value of equipment (old) 2,000
Less: Fair value of equipment (old) 400

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 Loss on disposal of equipment $1,600
***Cost – Book Value = ($8,000 - $2,000)

Accounts Payable ............................................... 9,500

Cash............................................................................................... 9,500
(c) Equipment
($10,800 X .91743 PV of 1@ 9% for 1 year) .......................................... 9,908
Discount on Notes Payable ($10,800 – $9,908) …………………………………... 892
Notes Payable ...................................................................................... 10,800
Interest Expense ................................................. 892
Notes Payable ..................................................... 10,800
Discount on Note Payable......................................... 892
Cash...................................................................... 10,800

EXERCISE 10.12
a. Land...................................................................... 81,000
Contribution Revenue ........................................... 81,000
b. Land*..................................................................... 180,000
Buildings*............................................................... 630,000
Common Stock ($50 X 13,000)..................................... 650,000
Paid-in Capital in Excess of Par—
Common Stock**......................................................... 160,000

*Since the market value of the stock is not determinable, the market value of the property is
used as the basis for recording the asset and issuance of the stock.
**[($180,000 + $630,000) - $650,000]
c. Machinery............................................................. 40,100**
Materials ............................................................... 12,500
Direct Labor............................................................ 15,000
Factory Overhead .................................................. 12,600*
*Fixed overhead applied(.60 X $15,000) $ 9,000
Additional overhead 2,700
Factory supplies used 900
$12,600
**($12,500 + $15,000 + $12,600)

EXERCISE 10.13
1. Land ..................................................................... 350,000
Building................................................................ 1,050,000
Equipment ..................................................................... 700,000
Common Stock (12,500 X $100) .................................. 1,250,000

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 Paid-in Capital in Excess of Par—Common Stock
($2,100,000 – $1,250,000)........................ ……………………850,000

The cost of the property, plant and equipment is $2,100,000 ($12,500 X $168). This cost
is allocated based on appraisal values as follows:
Land $400,000/$2,400,000 X $2,100,000 = $350,000
Building $1,200,000/$2,400,000 X $2,100,000 = $1,050,000
Equipment $800,000/$2,400,000 X $2,100,000 = $700,000
2. Buildings ($105,000 plus $161,000) ................... 266,000
Equipment ........................................................... 135,000
Land Improvements ............................................ 122,000
Land ..................................................................... 18,000
Cash................................................................ 541,000*

*($266,000 + $135,000 + $122,000 + $18,000)

3. Equipment ........................................................ 265,300
Cash..................................................................................... 265,300
($10,500 plus $254,800, which is 98% (1.00 - .02)
of $260,000.)

CHAP 11

EXERCISE 11.5
A,($117,900 – $12,900)/5 = $21,000/yr. = $21,000 X 5/12 = $8,750

2020 Depreciation—Straight line = $8,750

B,($117,900 – $12,900)/21000 = $5.00/hr.

reciation—Machine Usage = 800 X $5.00 = $4,000

D, 2020 .40 X ($117,900) X 5/12 = $19,650

2021 .40 X ($117,900 – $19,650) = $39,300

OR (1.0 ÷ 5 years) X 2 = D.D.B. Rate of 40% ‘

1st full year (.40 X $117,900) = $47,160

2nd full year [.40 X ($117,900 – $47,160)] = $28,296

2020 Depreciation = 5/12 X $47,160 = $19,650

2021 Depreciation = 7/12 X $47,160 = $27,510 5/12 X $28,296 = 11,790

$39,300

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EXERCISE 11.6
(a) 2020 Straight-line ($212,000 – $12,000)/8 = $25,000/year
3 months—Depreciation $6,250 = ($25,000 X 3/12)
(b) 2020 Output ($212,000 – $12,000)/ 40,000 = $5.00/output unit
1,000 units X $5.00 = $5,000
(c) 2020 Working hours ($212,000 – $12,000)/ 20,000 = $10.00/hour
525 hours X $10.00 = $5,250
(d) Double-declining balance 2021: 1.0/8 X 2 = 25%.
2020: .25 X $212,000 X 3/12 = $13,250
2021: .25 X ($212,000 – $13,250) = $49,688

EXERCISE 11.11
(a) No correcting entry is necessary because changes in estimate are handled in the current and
prospective periods.

(b) Revised annual charge

Book value as of 1/1/2021 [$60,000 – ($7,000* X 5)] = $25,000

Remaining useful life, 5 years (10 years – 5 years)

Revised salvage value, $4,500 ($25,000 – $4,500) ÷ 5 = $4,100

*($60,000 - $4,000) / 8 years = $7,000 Annual depreciation

Depreciation Expense ........................................... 4,100

Accumulated Depreciation—Machinery …………………………….... 4,100

EXERCISE 11.12

(a) 1994–2003—($2,000,000 – $60,000) ÷ 40 = $48,500/yr.

(b) 2004–2021—Building ($2,000,000 – $60,000) ÷ 40 = $48,500/yr.

Addition ($500,000 – $20,000) ÷ 30 = 16,000/yr.

$64,500/yr.

(c) No entry required.

(d) Revised annual depreciation

Building

Book value: ($2,000,000 – $1,358,000*) $642,000

Salvage value 60,000

582,000

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 Remaining useful life : 32 years

Annual depreciation $ 18,188

*$48,500 X 28 years = $1,358,000 11-26

Addition

Book value: ($500,000 – $288,000**) $ 212,000

Less: Salvage value 20,000

192,000

Remaining useful life ÷ 32 years

Annual depreciation $ 6,000

**$16,000 X 18 years = $288,000

Annual depreciation expense—building

($18,188 + $6,000) $24,188

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