Intermediate Accounting II – ACCT 2164
Exam 2 Study Guide: Chapters 14 - 16
Exam 2 may be comprised of multiple choice, matching, short answer and problem questions. The study
questions and sample problems below should help you prepare for the exam. Please note that the study format
may not directly match the exam format.
Solutions to identification questions and problems can be found at the end of this study guide.
1. List and discuss the four criteria used to classify leases.
5.
Explain the concept of “Substance over Form” as it relates to accounting for leases.
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6. Describe the advantages and disadvantages of bond financing.
7.
Explain how the amount reported as bond interest expense is determined.
8.
Distinguish between direct financing and sales-type leases.
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10.
Discuss the difference between how bonds are accounted for by the issuer and investor.
11.
Describe early extinguishment of bonds.
12.
Explain the circumstances under which a bond would sell
a) at a discount
b) at a premium
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8.
Define the following terms relating to bonds and notes:
a.
Face value
b.
Stated (or contract) rate
c.
Effective interest rate
d.
Carrying value
e.
Convertible bond
f.
Installment note
g.
Lease residual value
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Problem 1
On July 1, 2014, Macon Operations sold $20 million of 10% convertible bonds that mature on July 1, 2024.
The bonds sold at 102. Interest is payable each year on January 1 and July 1. Each $1,000 bond is convertible
into 5 shares of Macon’s no par common stock. On June 30, 2015, ½ of the outstanding bonds were converted
to stock when Macon’s common stock had a market price of $10 per share.
Required:
1) Journalize the entry to record the issuance of the bonds
2) Journalize the entry to record the first interest payment on January 1, 2015. The straight-line method of
amortization is used.
3) Journalize the entry to record conversion of ½ of the bonds on June 30, 2015
Problem 2
Information for Kent Corp for the year 2013:
Pretax accounting income
Permanent differences
Temporary difference – depreciation
Taxable income
Current balance in Deferred Tax Liability
Tax Rate
$193,000
(15,000)
(25,000)
$153,000
$3,900
30%
Required: Prepare the journal entry to record Kent’s income taxes for 2013
Problem 3
On January 1, 2013, Mania Enterprises issued 12% bonds dated January 1, 2013, with a face amount of $20
million. The bonds mature in 2022 (10 years). For bonds of similar risk and maturity, the market yield is 10%.
Interest is paid semiannually on June 30 and December 31.
Required:
1) Determine the price of the bonds at January 1, 2013.
2) Prepare the journal entry to record the bond issuance by Mania on January 1, 2013.
3) Prepare the journal entry to record interest on June 30, 2013, using the effective interest method.
4) Prepare the journal entry to record interest on December 31, 2013, using the effective interest method.
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Problem 4
On January 1, 2013, Gibson Corporation entered into a four-year operating lease for manufacturing equipment.
Annual lease payments of $20,000 were due to Bender Company each January 1 beginning January 2013. The
equipment cost Bender $100,000 and are expected to have a useful life of 10 years with a residual value of $10,000.
Required:
1) Journalize the entries required by Gibson Corporation for 2013.
2) Journalize the entries required by Bender Company for 2013.
Problem 5
A company purchased new office equipment for a total of $250,000 on January 1, 2015. The company paid
$40,000 cash and signed a $210,000, 3-year, 8% note for the remaining balance. The note is to be paid in
three annual end-of-year payments of $81,487 each, with the first payment on December 31, 2015. Each
payment includes interest on the unpaid balance plus principal.
Required: Complete the note amortization table below:
Payment
Date
12/31/2015
12/31/2016
12/31/2017
Cash
Payment
Interest
Expense
Principal
Reduction
Ending
Principal
Balance
Problem 6
Southern leased high-tech electronic equipment from Eastley Leasing on January 1, 2013. Eastley purchased
the equipment from International Machines at a cost of $112,080. Accounting methods used include the
Effective Interest Method and straight-line depreciation.
Required:
1) Journalize the entries required by Southern for 2013.
2) Journalize the entries required by Eastley for 2013.
It may be helpful to prepare an amortization schedule to allocate quarterly interest and lease payments.
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Problem 7
Allmond Corporation, organized on January 3, 2013, had pretax accounting income of $14 million and
taxable income of $20 million for the year ended December 31, 2013. The 2013 tax rate is 35%. The only
difference between accounting income and taxable income is estimated product warranty costs. Expected
payments and scheduled tax rates (based on recent tax legislation) are as follows:
2014
$2,000,000
35%
2015
$1,000,000
30%
2016
$1,000,000
30%
2017
$2,000,000
25%
Required:
1) Determine the amounts necessary to record Allmond's income taxes for 2013 and prepare the
appropriate journal entry.
2) Prepare the journal entry for Allmond’s 2013 income tax.
3) What is Allmond's 2013 net income?
Schedule for Requirement 1
Temporary Difference
Tax
Rate
Warranty costs reversing in:
2014
2015
2016
2014
Deferred tax asset/liability
Income taxable in current year
Income tax expense
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Totals
Problem 8
Fores Construction Company reported a pretax operating loss of $135 million for financial and tax reporting
purposes in 2013. The enacted tax rate is 40%. There were no temporary differences at the beginning of the
year. Taxable income in Fores's two previous years of operation is shown below. Fores elects the carryback
option.
Required:
1) Prepare the journal entry to record the income tax benefit from the 2013 operating loss. Complete the
schedule below to determine the amounts necessary for the journal entry.
2) Determine the net loss that will be reported on the 2013 income statement including the income tax
benefit.
Computation of Loss Carryback/Carryforward
Current Operating
Loss
Prior Years
2011
Loss Carryback/forward
Tax Rate
Tax Refund
Deferred Tax Asset
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Future Year
2012
2014
Intermediate Accounting I - ACCT 2164
Exam 1 Study Guide: Chapters 11 – 13
Answer Key
Problem 1
1) Cash
Computations
$20,000,000 X 1.02
20,400,000
Premium on Bonds Payable
Convertible Bonds Payable
400,000
20,000,000
2) Interest Expense
Premium on Bonds Payable
Cash
960,000
40,000
3) Convertible Bonds Payable
Premium on Bonds Payable
Common Stock
10,000,000
180,000
1,000,000
10,180,000
Face Value
To balance
$400,000/10 years
$20,000,000 X 5%
½ Face Value
($400,000-$40,000)/2
To balance
Problem 2
Income Tax Expense
Deferred Tax Liability
Income Tax Payable
DR
49,500
CR
3,600
45,900
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Computations
To balance
($25,000 X 30%) - $3,900
$153,000 X 30%
Problem 3
Problem 4
Since this is an operating lease, the lessee simply records rent expense. The lessor records rent revenue and is also
responsible for all costs related to the asset including depreciation.
Gibson (Lessee)
Date
Jan 1 Rent Expense
Cash
Bender (Lessor)
Date
Jan 1 Cash
Rent Revenue
Dec 31
Depreciation Exp
Accum Dep
Problem 5
Payment
Date
12/31/2015
12/31/2016
12/31/2017
Cash
Payment
$81,487
$81,487
$81,487
DR
20,000
CR
Computations
20,000
DR
20,000
CR
Computations
20,000
9,000
($100,000 - $10,000)/10
9,000
Interest
Expense
$16,800
Principal
Reduction
$64,687
Ending Principal
Balance
$145,313
($210,000 X 8%)
($81,487-$16,800)
($210,000-$64,687)
$11,625
$69,862
$75,451
($145,313 X 8%)
($81,487-$11,625)
($145,313-$69,862)
$6,036
$75,451
$0
(to balance)
(to eliminate
principal)
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Problem 6
Southern (Lessee)
January 1, 2013
Leased equipment
Lease payable
Lease payable
Cash (lease payment)
112,080
112,080
15,000
15,000
April 1, 2013
Interest expense (2% x [$112,080 – 15,000])
Lease payable (difference)
Cash (lease payment)
1,942
13,058
July 1, 2013
Interest expense (2% x $84,022: from schedule)
Lease payable (difference)
Cash (lease payment)
1,680
13,320
October 1, 2013
Interest expense (2% x $70,702: from schedule)
Lease payable (difference)
Cash (lease payment)
1,414
13,586
December 31, 2013
Interest expense (2% x $57,116: from schedule)
Interest payable
1,142
Depreciation expense ($112,080 ÷ 2 years)
Accumulated depreciation
15,000
15,000
15,000
1,142
56,040
56,040
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Problem 6
Eastley (Lessor)
January 1, 2013
Lease receivable (fair value)
Inventory of equipment (lessor’s cost)
Cash (lease payment)
Lease receivable
112,080
112,080
15,000
15,000
April 1, 2013
Cash (lease payment)
15,000
Lease receivable (difference)
Interest revenue (2% x [$112,080 – 15,000])
13,058
1,942
July 1, 2013
Cash (lease payment)
15,000
Lease receivable (difference)
Interest revenue (2% x $84,022: from schedule)
13,320
1,680
October 1, 2013
Cash (lease payment)
15,000
Lease receivable (difference)
Interest revenue (2% x $70,702: from schedule)
13,586
1,414
December 31, 2013
Interest receivable
1,142
Interest revenue (2% x $57,116: from schedule)
1,142
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Problem 7
Requirement 1
Tax
Rate
Temporary Difference
Warranty costs reversing in:
2014
2015
2016
2014
Deferred tax asset/liability
Income taxable in current year
Income tax expense
Totals
$2,000,000
$1,000,000
$1,000,000
$2,000,000
35%
30%
30%
25%
$700,000
$300,000
$300,000
$500,000
$1,800,000
$20,000,000
35%
$7,000,000
$5,200,000
Requirement 2
Account
Debit
Income Tax Expense
5,200,000
Deferred Tax Asset
1,800,000
Income Tax Payable
7,000,000
Requirement 3
Net Income:
Income Before Taxes
Income Tax Expense
Net Income
Credit
$14,000,000
5,200,000
$ 8,800,000
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Problem 8
Requirement 1
Computation of Loss Carryback/Carryforward
Current Operating
Loss
Loss Carryback/forward
Prior Years
2011
$135 M
Income Tax Refund Receivable
($30,000,000+$12,000,000)
Deferred Tax Asset
2014
$30 M
$30 M
($135-$75-$30)
40%
40%
$12 M
$12 M
40%
$ 30 M
Debit
Credit
42,000,000
12,000,000
Income Tax Benefit
52,000,000
Requirement 2
Net Loss:
Operating Loss Before Taxes
Less: Income Tax Benefit
Net Operating Loss
2012
$75 M
Tax Rate
Tax Refund
Deferred Tax Asset
Account
Future Year
$135,000,000
52,000,000
$ 83,000,000
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