ASSIGNMENT FOR INTERMEDIATE FINANCIAL ACCOUNTING II

(to be submitted on class end date)

INSTRUCTION
1. All questions should be attempted
2. Answers must be provided clearly

Questions

1. Hendricks Corporation purchased trading investment bonds for $50,000 at par. At December 31,
Hendricks received annual interest of $2,000, and the fair value of the bonds was $47,400.
Prepare Hendricks’ journal entries for (a) the purchase of the investment, (b) the interest
received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment
account.)

2. Fairbanks Corporation purchased 400 shares of Sherman Inc. common stock as an availablefor-
sale investment for $13,200. During the year, Sherman paid a cash dividend of $3.25 per share.
At yearend, Sherman stock was selling for $34.50 per share. Prepare Fairbanks’ journal entries
to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value
adjustment. (Assume a zero balance in the Fair Value Adjustment account.)

3. On January 1, 2013, Dagwood Company purchased at par 12% bonds having a maturity value of
$300,000. They are dated January 1, 2013, and mature January 1, 2018, with interest receivable
December 31 of each year. The bonds are classified in the held-to-maturity category.
Instructions
(a) Prepare the journal entry at the date of the bond purchase.
(b) Prepare the journal entry to record the interest received for 2013.
(c) Prepare the journal entry to record the interest received for 2014.

4. Arantxa Corporation made the following cash purchases of securities during 2014, which is the
first year in which Arantxa invested in securities.
1. On January 15, purchased 10,000 shares of Sanchez Company’s common stock at
$33.50 per share plus commission $1,980.
2. On April 1, purchased 5,000 shares of Vicario Co.’s common stock at $52.00 per share
plus commission $3,370.
3. On September 10, purchased 7,000 shares of WTA Co.’s preferred stock at $26.50 per
share plus commission $4,910.

On May 20, 2014, Arantxa sold 4,000 shares of Sanchez Company’s common stock at a market
price of $35 per share less brokerage commissions, taxes, and fees of $3,850. The year-end fair

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 values per share were Sanchez $30, Vicario $55, and WTA $28. In addition, the chief accountant
of Arantxa told you that Arantxa Corporation plans to hold these securities for the long term but
may sell them in order to earn profits from appreciation in prices.

Instructions

(a) Prepare the journal entries to record the above three security purchases.

(b) Prepare the journal entry for the security sale on May 20.

(c) Compute the unrealized gains or losses and prepare the adjusting entries for Arantxa on
December 31, 2014.

5. Jaycie Phelps Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on
December 31, 2013. The purchase price was $1,200,000 for 50,000 shares. Kulikowski Inc.
declared and paid an $0.85 per share cash dividend on June 30 and on December 31, 2014.
Kulikowski reported net income of $730,000 for 2014. The fair value of Kulikowski’s stock was
$27 per share at December 31, 2014.
Instructions
(a) Prepare the journal entries for Jaycie Phelps Inc. for 2013 and 2014, assuming that Phelps
cannot exercise significant influence over Kulikowski. The securities should be classified as
availablefor-sale.
(b) Prepare the journal entries for Jaycie Phelps Inc. for 2013 and 2014, assuming that Phelps
can exercise significant influence over Kulikowski.
(c) At what amount is the investment in securities reported on the balance sheet under each of
these methods at December 31, 2014? What is the total net income reported in 2014 under
each of these methods?

6. Indiana Jones Corporation enters into a 6-year lease of equipment on January 1, 2014, which
requires 6 annual payments of $40,000 each, beginning January 1, 2014. In addition, Indiana
Jones guarantees the lessor a residual value of $20,000 at lease-end. The equipment has a
useful life of 6 years. Prepare Indiana Jones’ January 1, 2014, journal entries assuming an
interest rate of 10%.

7. Geiberger Corporation manufactures replicators. On January 1, 2014, it leased to Althaus

Company a replicator that had cost $110,000 to manufacture. The lease agreement covers the
5-year useful life of the replicator and requires 5 equal annual rentals of $40,800 payable each
January 1, beginning January 1, 2014. An interest rate of 12% is implicit in the lease agreement.
Collectibility of the rentals is reasonably assured, and there are no important uncertainties
concerning costs. Prepare Geiberger’s January 1, 2014, journal entries.

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 8. On January 1, 2014, Irwin Animation sold a truck to Peete Finance for $33,000 and immediately
leased it back. The truck was carried on Irwin’s books at $28,000. The term of the lease is 5
years, and title transfers to Irwin at lease-end. The lease requires five equal rental payments of
$8,705 at the end of each year. The appropriate rate of interest is 10%, and the truck has a
useful life of 5 years with no salvage value. Prepare Irwin’s 2014 journal entries.

9. Assume that on January 1, 2014, Kimberly-Clark Corp. signs a 10-year noncancelable lease
agreement to lease a storage building from Sheffield Storage Company. The following
information pertains to this lease agreement.
A. The agreement requires equal rental payments of $72,000 beginning on January 1, 2014.
B. The fair value of the building on January 1, 2014 is $440,000.
C. The building has an estimated economic life of 12 years, with an unguaranteed residual value of
$10,000. Kimberly-Clark depreciates similar buildings on the straight-line method.
D. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
E. Kimberly-Clark’s incremental borrowing rate is 12% per year. The lessor’s implicit rate is not
known by Kimberly-Clark.
F. The yearly rental payment includes $2,471 of executory costs related to taxes on the property.
Instructions

Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to
record the payments and expenses related to this lease for the years 2014 and 2015. Kimberly-Clark’s
corporate year-end is December 31.

10. On January 1, 2014, Burke Corporation signed a 5-year noncancelable lease for a machine. The
terms of the lease called for Burke to make annual payments of $8,668 at the beginning of each
year, starting January 1, 2014. The machine has an estimated useful life of 6 years and a $5,000
unguaranteed residual value. The machine reverts back to the lessor at the end of the lease
term. Burke uses the straight-line method of depreciation for all of its plant assets. Burke’s
incremental borrowing rate is 10%, and the Lessor’s implicit rate is unknown.
Instructions
(a) What type of lease is this? Explain.
(b) Compute the present value of the minimum lease payments.
(c) Prepare all necessary journal entries for Burke for this lease through January 1, 2015.

11. Dixon Construction Company was awarded a contract to construct an interchange at the junction of
U.S. 94 and Highway 30 at a total contract price of $8,000,000. The estimated total costs to complete
the project were $6,000,000.

Instructions

 (a) Make the entry to record construction costs of $3,600,000, on construction in process to date.

 (b) Make the entry to record progress billings of $2,000,000.

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 (c) Make the entry to recognize the profit that can be recognized to date, on a percentage-of-
completion basis.

12. Dalton Construction Co. contracted to build a bridge for $5,000,000. Construction began in 2010
and was completed in 2011. Data relating to the construction are:

2010 2011

Costs incurred $1,650,000 $1,375,000

Estimated costs to complete 1,350,000 —

Dalton uses the percentage-of-completion method.

Instructions

 (a) How much revenue should be reported for 2010? Show your computation.

 (b) Make the entry to record progress billings of $1,650,000 during 2010.

 (c) Make the entry to record the revenue and gross profit for 2010.

 (d) How much gross profit should be reported for 2011? Show your computation.

13. Penner Builders contracted to build a high-rise for $14,000,000. Construction began in 2010 and
is expected to be completed in 2013. Data for 2010 and 2011 are:

2010 2011

Costs incurred to date $1,800,000 $5,200,000

Estimated costs to complete 7,200,000 4,800,000

Penner uses the percentage-of-completion method.

Instructions

 (a) How much gross profit should be reported for 2010? Show your computation.

 (b) How much gross profit should be reported for 2011?

 (c) Make the journal entry to record the revenue and gross profit for 2011.

14. On February 1, 2010, Marsh Contractors agreed to construct a building at a contract price of
$6,000,000. Marsh estimated total construction costs would be $4,000,000 and the project

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 would be finished in 2012. Information relating to the costs and billings for this contract is as
follows:

2010 2011 2012

Total costs incurred to date $1,500,000 $2,640,000 $4,600,000

Estimated costs to complete 2,500,000 1,760,000 -0-

Customer billings to date 2,200,000 4,000,000 5,600,000

Collections to date 2,000,000 3,500,000 5,500,000

Instructions

Fill in the correct amounts on the following schedule. For percentage-of-completion accounting and for
completed-contract accounting, show the gross profit that should be recorded for 2010, 2011, and 2012.

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