Unity University- College of Distance Education – Financial Accounting II-31

UNITY UNIVERSITY

COLLEGE OF DISTANC EDUCATION

DEPARTMENT OF Accounting and Finance

Financial Accounting II

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WORKSHEET

Name: _________________________________________________

ID No._________________

Center: ____________________ Semester _________ Academic Year ________

This is a worksheet paper you are expected to do on your own. It carries 25 points. The paper
should be completed and mailed to the College of Distance Education. Do not try to complete
the worksheet until you have covered all the lessons and exercises in the course material.

Any questions in the course that you have not been able to understand should be stated on a
separate sheet of paper and attached to this worksheet then your tutor will clarify them for
you.

After completing this paper, be certain to write your Name, Id No and Address on the first
page and the answer sheet.

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 Unity University- College of Distance Education – Financial Accounting II-31

Part One: Write True if the statement is correct and False if the statement is incorrect in the
space provided. (0.5 pts)

1. The amortization of a bond discount increases the amount of bond interest expense
recorded each year.
2. If the note is a non interest bearing note, the present value of the note is equal to the face
value of the note.
3. If a company purchases land with an old building on it, then the cost of demolishing the old
building relates to the cost of the building.
4. Under IFRS, companies may choose to value long-lived asset at cost or at fair value.
5. A lease that contains a purchase option must be capitalized by the lessee.
6. Executory costs should be excluded by the lessee in computing the present value of the
minimum lease payments.
7. When a company changes an accounting principle under the retrospective approach it may
adjust its financial statements for each prior period presented.
8. Companies report changes in accounting estimates retrospectively.
9. The corporation incurs a legal liability for dividend only when it is formally declared by the
Board of Directors.
10. Practically, a current liability is measured at the present value of future cash payments.

Part Two: Choose the best answer and encircle the letter of your choice. ( 0.5pts each)

1. XYZ Company exchanged a truck with a carrying amount of Br 12,000 and a fair value of Br
20,000 for a truck and Br 5,000 cash. The fair value of the truck received was Br 15,000. At
what amount should XYZ record the truck in exchange assuming that the exchange has
commercial substance?
a) Br 7,000 c) Br 12,000
b) Br 9,000 d) Br 15,000 e) None
2. The amount of cash to be paid for interest on bonds payable for any given year is calculated
by multiplying the
a) Face value by the coupon rate
b) Face value by the yield rate at the date of issuance
c) Carrying value at the beginning of the year by the market interest rate
d) Carrying value at the beginning of the by the stated interest rate
3. On January 1, Blue Company issued Br 1,000,000, 9% bonds for Br 938,554. The market rate
of interest for these bonds is 10%. Interest is payable annually on December 31. Blue uses
the effective interest method of amortizing bond discount. At the end of the first year , Blue
should report unamortized bond discount of
a) Br 54,900 c) Br 57,591 e) None of the above

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b) Br 51,610 d) Br 51,000
4. What type of accounting change should always be accounted for in current and future
periods?
a) Change in accounting principles c) Change in reporting entity
b) Change in accounting estimate d) Correction of an error
5. Which of the following is ( are) the proper time period (s) to record the effects of a change in
accounting estimates
a) Current period and prospectively c) Current period and retrospectively
b) Retrospectively only d) Current period only
6. When selling common stock on subscription , the common stock account will be credited:
a) When the subscription contract is singed
b) When the first payment is received
c) As each payment is received
d) When the total payments on stocks subscribed are collected
7. Debt securities that are accounted for at amortized cost are
a) Held for collection c) Held for trading
b) Available for sale debt securities d) Never –sell debt securities
8. On January 1, 2017, Hot Company issued Br 5,000,000, 5 year, 12% bonds at 96 with interest
payable annually on December 31. The entry on December 31, 2018, to record payment of
bond interest and the amortization of bond discount using effective interest method will
include a
a) Debit to interest expense Br 300,000 c) Debit to interest expenses Br 600,000
b) Credit to bonds payable 40,000 d) Credit to bonds payable 20,000
c) None of the above
9. On January 1, Year 7 when the market rate for bond interest was 14%, Sun Corporation
issued bonds in the face amount of $500,000, with interest at 12% payable semiannually.
The bonds mature on December 31, Year 17, and were issued at a discount of $53,180. How
much of the discount should be amortized by the effective interest method at July 1, Year 7?
A. Br 3,191 C. Br 2,659
B. Br 1,277 D. Br 3,723
10. On May 1, Year 4, Moon Company issued $1,000,000 face amount of 10% debenture bonds
dated March 1, Year 4, with interest payable March 1 and September 1. The debenture
bonds were issued at face amount plus accrued interest. Moon Company’s debit to Cash
ledger account on May 1, Year 4, is;
A. Br 1,033,333 C. Br 1,016, 667
B. Br 966, 667 D. Br 983, 333

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Part Three: Workout the following exercise. Show all the relevant steps clear and neat ( 15 pts)
1. Assume that instead of on January 1, year 5, Star Company issued its five- year bonds, dated
January 1, year 5, on May 1 year 5, at par. Assume Interest is payable semiannually instead of
annually. ( June 30 and December 31)
a) Determine the bond price and record the issuance of the bonds between interest
dates at par, at a discount and at a premium and prepare discount (premium)
amortization table.
b) On June 30, year 5, Star pays the investors six month’s interest. Record the entry
c) On December 31, year 5, Star pays the investors six month’s interest. Record the entry
2. Assume that the Evergreen Company’s Br 100,000, 8% bonds dated January 1, years 5 were
issued on May 1 , Year 5, to yield 6%. Interest is payable semi annually on June 30 and Dec 31.
The bonds mature after 5 years
a) Record the issuance of the bonds between interest dates if bonds were issued at
108.039
b) Record the interest payment on June 30 , year 5 and Dec 31 year 5
c) Prepare premium amortization table and record the journal entries from the table
3. Assume that on December 10, year 5, Root Corporation purchased 1,000 shares of Red
Company for Br 20.75 per share. The investment represents less than a 20% interest. The
investment is a non trading investment
a) Record the acquisition of the equity investment
b) On December 27, year 5, Root receives a cash dividend of Br 450 on its investment in
the ordinary shares of Red Company. Record the entry.
c) At December 31, year 5 , Root’s investment in Red Company has the carrying value and
fair value Br 20,750 and Br 24,000 respectively. Adjust the investment to fair value
d) On December 20, year 6, Root sold all of its Red Company’s ordinary shares receiving
proceeds of Br 22,500. Record entry to adjust the carrying value of the non- trading
investment to fair value and the sale of the equity investment
4. Ethiopian Airlines enters into a lease agreement as lessor on January 1, year 8, to lease an
airplane to National Airlines. The term of the non- cancellable lease is 8 years and payments
are required at the end of each year. The following information relates to this agreement:

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a) National Airlines has the option to purchase the airplane for Br 9 million, when the lease
expires at which time the fair value is expected to be Br 15million
b) The airplane has a cost of Br 38 million to Ethiopian Airlines , an estimated useful life of 14
years , and a salvage value of zero at the end of that time due to technological changes
c) National Airlines will pay all executory cost related to the leased airplane
d) Annual year – end lease payments of Br 5,766,428 allow Ethiopian Airlines to earn an 8%
return on its investment
e) Collectibility of the payments is reasonably predicable , and there are no important
uncertainties surrounding the costs yet to be incurred by Ethiopian Airlines
f) The lessor does not realize profit or loss on this transaction other than interest revenue
Required:
a) Prepare a lessor lease amortization table ( direct financing lease)
b) Prepare all the appropriate journal entries to record a direct financing lease for the lessor
Answer sheet

Part I: True or False

1. ______ 6. ______
2. ______ 7. ______
3. ______ 8. ______
4. ______ 9. ______
5. ______ 10. _____

Part II: Multiple Choices

1. ______ 6. _____
2. ______ 7. _____
3. ______ 8. _____
4. ______ 9. _____
5. _____ 10. _____