April 16

16.
On October 10, 2010, Printfast Company sells a
commercial printer for $2,000 with a one year

warranty that covers parts. Warranty expense is
projected to be 10% of sales. On February 28,
2011, the printer requires repairs. The cost of the
parts for the repair is $100 and Printfast pays their
technician $150 to perform the repair. What is the
warranty liability (related to this sale)at the end of
2010?
A. $(50 ) debit
B. $250
C. $200
D. $450
E. None of the above
Warranty
Obligation
0
200
200 2010
250
50
2011
12. A few years ago, Baker Corporation introduced a new product

carrying a two-year warranty against defects. The total future
warranty cost are estimated to be 5% of sales. Based on past
history and industry averages, filed claims are expected to be
twice as common in the last twelve months of the contract than
in the first twelve months.
At the beginning of 1991 Baker had a $25,000 balance in its
warranty obligation account representing the estimated cost of
unfiled warranty claims from sales made in 1989 & 1990. Sales
for the year ended December 31, 1991 were $400,000 and
during 1991 the company incurred $15,000 of cost servicing
actual claims filed during 1991.
What is the dollar amount of the liability that should be reported
on the 12/31/91 balance sheet?
A. $5,000
B. $25,000
C. $15,000
D. $20,000
E. $30,000
(i) Accrue current year expense using an estimate:

Warranty Expense
Warranty Obligation
20,000
20,000
(ii) Record actual warranty expenditures:

Warranty Obligation
Cash
15,000
15,000
Warranty
Obligation
25,000
20,000
15,000
30,000
Week5#10:Acompanyneededanewbuilding.Itfoundasuitablelocationwith
anexistingoldbuildingontheland.Thecompanyreachedanagreementtobuythe
landandthebuildingfor$960,000cash.Theoldbuildingwasdemolishedtomake
wayfortheneedednewbuilding.Followingisinformationregardingthedemolition
oftheoldbuildingandconstructionofthenewone:
Land
Land
Buy land and old building for cash
Construction Cost of new building (including
$660,000 for new parking lot)
960,000
Demolition of old building
300,000
Proceeds from sale of salvaged materials from

old building
-120,000
Building
Imp.
total
960,000
8,900,0
00
660,000 9,560,000
300,000
-120,000
8,900,0
10,700,00
1,140,000
00
660,000
0
1,140,0
Land
00
8,900,0
Building
00
Land Improvements 660,000

Cash
10,700,
000
On January 1, 2015, Forest Corporation issued 3 year bonds that pay 12%
interest. The bonds have a face value of $500,000 and pay interest quarterly on
March 31, June 30, September 30 and December 31st. At the time of issuance, the
market rate was 8%.
Step 1: Calculate the Cash flows the bond will generate
Step 2: Find your applicable PV Factors
Step 3: Record the bond issuance as of January 1, 2015.
12%, 3 periods
6%, 6 periods
3%, 12 periods
8%, 3 periods
4%, 6 periods
2%, 12 periods
PV Lump Sum
0.711780
0.704960
0.701380
0.793830
0.790310
0.788490
PV of Annuity
2.401830
4.917320
9.954000
2.577100
5.242140
10.575340
market rate was 8%.
12%, 3 periods
6%, 6 periods
3%, 12 periods
8%, 3 periods
4%, 6 periods
2%, 12 periods
PV Lump Sum
0.711780
0.704960
0.701380
0.793830
0.790310
0.788490
PV of Annuity
2.401830
4.917320
9.954000
2.577100
5.242140
10.575340
At what price will the bond be issued?

A.
B.
C.
D.
E.
$462,239.80
$573,787
$552,875
$500,000
None of the above
market rate was 8%.
Cash flow
500,000.00
15,000.00
Factor
0.788490
10.575340
Price
$394,245.00
158,630.10
$ 552,875.10
FV
500,000.00
market rate was 8%.
Cash
552,875
Premium on B/P
52,875
Bonds Payable
500,000
market rate was 8%.
Step 4: Calculate the bond premium amortization
Step 5: record the periodic interest payments
Step 6: Record the repayment of face value at maturity
How much total interest expense will Forest record over the life of the bond?
A.
B.
C.
D.
E.
$180,000
$552,875
$447,125
$127,125
None of the above
$180,000.00
(52,875.00)
$127,125.00
market rate was 8%.
How much total interest expense will Forest record during 2015, assuming
premium amortization is calculated using the straight line method.
A.
B.
C.
D.
E.
$22,036
$32,934
$60,000
$42,375
None of the above
Reminder:
Cash
552,875
Premium on B/P
52,875
Bonds Payable
500,000
Cash
Premium
Interest
Bond
Discount
Carrying
Amortization
Expense
Payable
On B/P
Value
500,000
52,875.00 552,875.00
15,000.00
4,406.25
10,593.75
500,000
48,468.75
548,468.8
15,000.00
4,406.25
10,593.75
500,000
44,062.50
544,062.5
15,000.00
4,406.25
10,593.75
500,000
39,656.25
539,656.3
15,000.00
4,406.25
10,593.75
500,000
35,250.00
535,250.0
15,000.00
4,406.25
10,593.75
500,000
30,843.75
530,843.8
15,000.00
4,406.25
10,593.75
500,000
26,437.50
526,437.5
15,000.00
4,406.25
10,593.75
500,000
22,031.25
522,031.3
15,000.00
4,406.25
10,593.75
500,000
17,625.00
517,625.0
15,000.00
4,406.25
10,593.75
500,000
13,218.75
513,218.8
10
15,000.00
4,406.25
10,593.75
500,000
8,812.50
508,812.5
11
15,000.00
4,406.25
10,593.75
500,000
4,406.25
504,406.3
12
15,000.00
4,406.25
10,593.75
500,000
0.00
500,000.0
180,000.00
52,875.00
127,125.00
Each quarterly Interest Pmt.

March 31:
Interest Expense
Premium on B/P
Cash
10,593.75
4,406.25
15,000
June 30
Interest Expense
Premium on B/P
Cash
10,593.75
4,406.25
15,000
Sept 30
Interest Expense
Premium on B/P
Cash
10,593.75
4,406.25
15,000
Dec. 31
Interest Expense
Premium on B/P
Cash
10,593.75
4,406.25
15,000
$42,375
market rate was 8%.
How much total interest expense will Forest record during 2015, assuming
premium amortization is calculated using the effective interest method.
A.
B.
C.
D.
E.
$43,751
$40,456
$32,934
$60,000
None of the above
Reminder:
Cash
552,875
Premium on B/P
52,875
Bonds Payable
500,000
Cash
Premium
Interest
Bond
Discount
Carrying
Amortization
Expense
Payable
On B/P
Value
500,000 52,875.00
552,875.00
15,000.00
3,942.50
11,057.50
500,000 48,932.50
548,932.5
15,000.00
4,021.35
10,978.65
500,000 44,911.15
544,911.2
15,000.00
4,101.78
10,898.22
500,000 40,809.37
540,809.4
15,000.00
4,183.81
10,816.19
500,000 36,625.56
536,625.6
15,000.00
4,267.49
10,732.51
500,000 32,358.07
532,358.1
15,000.00
4,352.84
10,647.16
500,000 28,005.23
528,005.2
15,000.00
4,439.90
10,560.10
500,000 23,565.34
523,565.3
15,000.00
4,528.69
10,471.31
500,000 19,036.64
519,036.6
15,000.00
4,619.27
10,380.73
500,000 14,417.38
514,417.4
10
15,000.00
4,711.65
10,288.35
500,000
9,705.72
509,705.7
11
15,000.00
4,805.89
10,194.11
500,000
4,899.84
504,899.8
12
15,000.00
4,899.84
10,100.16
500,000
0.00
500,000.0
180,000.00
52,875.00
127,125.00
Each quarterly Interest Pmt.

March 31:
Interest Expense
Premium on B/P
Cash
11,057.50
3,942.50
15,000
June 30
Interest Expense
Premium on B/P
Cash
10,978.65
4,021.35
15,000
Sept 30
Interest Expense
Premium on B/P
Cash
10,898.22
4,101.78
15,000
Dec. 31
Interest Expense
Premium on B/P
Cash
10,816.19
4,183.81
15,000
$43,751
A d ju s tin g E n tr ie s
(ii)
(i)
D e f e r r a ls
(iii)
A c c r u a ls
Transactions where
cash is paid or received
before a related
expense or revenue is
recognized.
Transactions where
cash is paid or received
after a related expense
or revenue is
recognized.
E rro r
C o r r e c tio n
Deferrals: Cash was received or paid in

advance of the proper time to recognize
revenue or match expense & the
expenditure was therefore deferred on the
B/S.
Before publishing our F/S: has any of the revenue
been earned? Has any of the expense been
incurred?
Deferred Revenue
Deferred Expense
(AKA Pre-paid)
Cash Received
In Advance
Cash Spent
In Advance
Liability
(Unfulfilled obligation)
Asset
(Paid in advance for a future
benefit)
Accrual: Cash may be received or

paid after the proper time to
recognize revenue or match
expense
Nothing is on the books, no cash has been received or paid, but
according to GAAP it is time to record a revenue or expense. We
need to remember to make an entry before publishing our financial
statements!
Accrued Revenue
Accrued Expense
Accrued Liability
GreenSheet#18:InthefactsoftheproblemyouweretoldthatSplendidowed$1,500of
salariesasofDecember31st.PleaseassumethattheemployeesofSplendidworkMonday
throughFridayandarepaideveryotherFriday.Onpayday,Splendidpaid$5,000ofwages
forthetwoweekpayperiodendingonthatday.
GivenSplendid'syearendaccrualof$1,500,onwhatdayoftheweekdidDecember31st
fall?
A.
B.
C.
D.
E.
Monday
Tuesday
Wednesday
Thursday
Friday
$5,000/10 = $500 per day

$1,500/500= 3 days owed but not paid.
Sunday
Monday
Tuesday
Wednesday
Thursday
29th 30th 31st 1st

Day 1
5th
Day 6
Day 2
Day 3
6th
7th
Day 7
Day 8
Day 4
Friday
2nd
Day 5
8th 9th
Day 9
Day 10
Saturday
On December 31, 2011, The Lake Company's revenues total $300,000 and
expenses total $140,000 before consideration of the following 5 adjusting
entries made in December:
1.
2.
3.
4.
Accrued wages total $10,000;

Accrued revenues total $40,000;
Depreciation expense is $15,000;
Rental revenue of $5,000 was considered earned; the rent was prepaid
by a tenant and was initially recorded by Lake as unearned rent revenue;
5. 5. Lake Co. started the year with $15,000 of office supplies on hand,
based on a physical count it was determined that $10,000 of the supplies
had been used.
Select the answer below that correctly explains the net effect of the 5
adjusting entries on the balance sheet equation.
A. Only the income statement is impacted and as a result, the balance
sheet equation does not change.
B. Total assets decrease by $25,000.
C. Total liabilities are unchanged.
D. Total assets increase by 15,000.
E. None of the above answers accurately explain the change in the balance
Wage expense (put this to the I/S) 10,000

Wages payable 10,000
A/R 40,000
Revenue (put this to the I/S) 40,000
Depreciation expense (put this to the I/S) 15,000
A/D (reduces assets) 15,000
Unearned rent revenue (reduces liabilities)
Rent revenue (put this to the I/S)5,000
5,000
Supplies Expense (put this to the I/S) 10,000

Supplies 10,000
Assets (+40 -15 -10) = +15

Liabilities (+10 -5) = + 5
Equity (retained earnings due to I/S) -10 +40 -15 +5 -10 = +10
Balance Check: +15 = + 5 + 10
3. On November 1, 2010 Martin Company
signed a 90-day, 6% note payable, with a

face value of $5,000. Interest is payable at
maturity. Assuming no other entries have
been made for interest incurred on the note,
what amount of interest expense should
berecorded on the December 31, 2010
income statement?
A. $100
B. $25
C. $50
D. $75
E. $300
Step 1: $5,000 * 6% = $300 per year or $25 per month.

Step 2: 2 months of interest
Leonard Corporation is an architecture firm which publishes their financial statements, annually
on December 31st. Assume that no adjusting entries have yet been recorded for the entire year.
Please consider the below situation and select the choice that shows the correct adjusting journal
entry needed at 12/31/2010. On November 1st, 2010 Leonard purchased 60 radio ads for
$120,000. On November 1st, this entire expenditure was recorded to the account "advertising
expense". The ads were scheduled to air 20 per month in November through January. In early
January, the radio station sent a summary statement for 2010 which detailed that 19 ads (out of
60) were run in November and 23 ads (out of 60) were run in December.
A.
Advertising Expense
Pre-paid Advertising
80,000
80,000
B.
Advertising Expense
36,000
36,000
C.
Advertising Expense
Cash
120,000
120,000
D.
Advertising Expense
84,000
84,000
E.
None of the above
Leonard Corporation is an architecture firm which publishes their financial

statements, annually on December 31st. Assume that no adjusting entries have yet
been recorded for the entire year. Please consider the below situation and select the
choice that shows the correct adjusting journal entry needed at 12/31/2010. On
November 1st, 2010 Leonard purchased 60 radio ads for $120,000. On November
1st, this entire expenditure was recorded to the account "advertising expense". The
ads were scheduled to air 20 per month in November through January. In early
January, the radio station sent a summary statement for 2010 which detailed that 19
ads (out of 60) were run in November and 23 ads (out of 60) were run in December.
B. Pre-paid Advertising
Advertising Expense
19 + 23 = 42 used
36,000
3 step process
36,000
60-42 = 18 remaining
Prepaid
Advertising
Advertising
Expense
What is on the
books
$0
$120,000
What should be
$36,000
$84,000
$36,000 increase
$36,000 decrease
Adjustment
Depreciation = Cost Allocation

NOT Valuation
Depreciation is simply a method to allocate the cost of the asset
purchased to the various accounting periods in which the asset is being
used. Depreciation is NOT an indicator of the true value of the asset.
1.
2.
3.
4.
5.
Straight Line
(based on time)
Units of Production
(based on use)
Sum of the years digits
(accelerated method)
Double Declining Balance (accelerated method)
MACRS
(accelerated method)
A John Deere tractor purchased on 1/1/2012 for $95,000 has an

estimated useful life of 15 years and a residual value of $5,000.
1.
2.
3.
4.
Straight Line
Units of Production
Sum of the years digits
Double Declining Balance
Methods 1, 2 & 3 use the depreciable base
$95,000 - $5,000 = $90,000
Method 4- uses the BOY Net book value Cost- A/D = NBV
We can never take more depreciation than the depreciable base!

estimated useful life of 15 years (or 20,000 miles) and a residual value of
$5,000.
1. Straight Line
95,000 5,000 = $6,000 per year = $500 per month
15
You always depreciate the asset for the period of time that you own it.
If you purchased the asset on 6/30/2012
owned it for 6 months!
$500 per month * 6 = $3,000
Depreciation Expense 3,000

Accumulated Depreciation
3,000

estimated useful life of 15 years (or 20,000 miles) and a residual value of
$5,000.
2. Units of Production
95,000 5,000
20,000
= $4.50 per mile
You always depreciate the asset for the period of time that you own it.
you drove the tractor 600 miles in the first year then you would depreciate it $2,

2,700

3. Sum of the years Digits
year life = 15+14+13+12+11+10+9+8+7+6+5+4+3+2+1 =120

Or (n)(n+1) / 2
15(16)/2 = 120
Year 1: 15/120 * $90,000

Year 2: 14/120 * $90,000
Year 3: 13/120 * $90,000
Year
Base
Rate
$90,000
Depreciation
$
15/120
11,250
90,000
14/120
10,500
90,000
13/120
9,750
90,000
12/120
9,000
90,000
11/120
8,250
90,000
10/120
7,500
90,000
9/120
6,750
90,000
8/120
6,000
90,000
7/120
5,250
10 90,000
6/120
4,500
Depreciation Expense XX
11Accumulated
90,000
5/120
3,750
Depreciation
12 90,000
4/120
3,000
XX
What if the asset was placed into service on 9/1st?

Year
Base
Rate
Depreciation
$90,000
15/120
$3,750
90,000
14/120
11,000
90,000
13/120
10,250
90,000
12/120
90,000
11/120
90,000
10/120
90,000
9/120
90,000
8/120
90,000
7/120
10 90,000
6/120
11 90,000
5/120
Depreciation Expense XX
12 90,000Accumulated
4/120 Depreciation
?
4/12 in year 1 = $3,750

8/12 in year 2 = $7,500
4/12 in year 2 = $3,500
8/12 in year 3 = $7,000
4/12 in year 3 = $3,250
8/12 in year 4
And so on
Review partial year examples

posted to Compass!
XX

4. Double Declining Balance Method
Straight Line Rate= 1/8 = 12.5%
Double it!

23,750
25% * BOY NBV
Year 1: .25 * $95,000
= $23,750
Year 2: .25 * $71,250

= $17,813
(rounded)
Year 3: .25 * $53,437
= $13,359 (rounded)
ear 1 BOY NBV: 95,000 0 = 95,000

ear 2 BOY NBV: 95,000 23,750 = 71,250
ear 3 BOY NBV: 95,000 41,563 = 53,437
23,750
17,813
13,359
1
2
3
4
5
6
7
8
NBV
95,000
71,250
53,437
40,078
30,058
22,543
16,907
12,680
DDR
0.2500
0.2500
0.2500
0.2500
0.2500
0.2500
0.2500
0.2500
Expense
23,750
17,813
13,359
10,020
7,515
5,636
4,227
3,170
Year 7:
Step 1: Calculate the straight line rate 1/n
Step 2: Double the straight line rate: 2 (1/n)
A/D
23,750 Depreciable base is $80,000
41,563
54,922 $95,000 - $15,000 = $80,000
64,942
72,457 This is why depreciation is limite
78,093
82,320
85,490
1/8 = 12.5
12.5 * 2 = 25%
Step 3: Multiply the rate from step 2 times the beginning of the year net book value
($95,000 78,093) = 16,907 * 25% = $4,226.75 unrestricted
Step 4: Calculate the remaining portion of the assets depreciable base
(Depreciable Base - A/D)
Limited = ($95,000 15,000) - $78,093 = $1,907
Step 5: Take the lower of step 3 & step 4.
$1,907
epreciable base is $80,000
95,000 - $15,000 = $80,000
Year 6:
Cost
$95,000
Accum. Deprec.
(78,093)
Net Book Value
16,907
Expens
NBV DDR
e
A/D
95,00 0.250
1
0
0 23,750 23,750
71,25 0.250
2
0
0 17,813 41,563
53,43 0.250
3
7
0 13,359 54,922
40,07 0.250
4
8
0 10,020 64,942
30,05 0.250
5
8
0
7,515 72,457
22,54 0.250
Year 7 and on:
6
3
0
5,636 78,093
16,90 0.250
Cost
$95,000
7Accum.
7 Deprec.
0
1,907
80,000
(80,000)
15,00
Net
Book0.250
Value
15,000
8
0
0
0
80,000

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16.

On October 10, 2010, Printfast Company sells a

commercial printer for $2,000 with a one year

12. A few years ago, Baker Corporation introduced a new product

(i) Accrue current year expense using an estimate:

(ii) Record actual warranty expenditures:

Demolition of old building

Proceeds from sale of salvaged materials from

Land Improvements 660,000

At what price will the bond be issued?

Each quarterly Interest Pmt.

Each quarterly Interest Pmt.

Deferrals: Cash was received or paid in

Accrual: Cash may be received or

$5,000/10 = $500 per day

29th 30th 31st 1st

Accrued wages total $10,000;

Wage expense (put this to the I/S) 10,000

Supplies Expense (put this to the I/S) 10,000

Assets (+40 -15 -10) = +15

Balance Check: +15 = + 5 + 10

3. On November 1, 2010 Martin Company

signed a 90-day, 6% note payable, with a

Step 1: $5,000 * 6% = $300 per year or $25 per month.

None of the above

Leonard Corporation is an architecture firm which publishes their financial

Depreciation = Cost Allocation

A John Deere tractor purchased on 1/1/2012 for $95,000 has an

Methods 1, 2 & 3 use the depreciable base

$95,000 - $5,000 = $90,000

We can never take more depreciation than the depreciable base!

A John Deere tractor purchased on 1/1/2012 for $95,000 has an

owned it for 6 months!

$500 per month * 6 = $3,000

Depreciation Expense 3,000

A John Deere tractor purchased on 1/1/2012 for $95,000 has an

= $4.50 per mile

Depreciation Expense 2,700

A John Deere tractor purchased on 1/1/2012 for $95,000 has an

year life = 15+14+13+12+11+10+9+8+7+6+5+4+3+2+1 =120

Year 1: 15/120 * $90,000

What if the asset was placed into service on 9/1st?

4/12 in year 1 = $3,750

Review partial year examples

A John Deere tractor purchased on 1/1/2012 for $95,000 has an

Depreciation Expense 23,750

25% * BOY NBV

Year 1: .25 * $95,000

Year 2: .25 * $71,250

ear 1 BOY NBV: 95,000 0 = 95,000

epreciable base is $80,000

95,000 - $15,000 = $80,000

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