ACC 356 EXAM 1 SPRING 2012 SOLUTIONS I. Multiple Choice

1. C 2. D 3. B 4. A 5. B 6. C 7. A 8. D 9. A 10. D 11. C 12. B 13. B 14. A 15. C

II. Contingencies

Part A Warranty expense = $1,200,000 x (2% + 3%) = $ 60,000 Warranty liability = $60,000 - $18,000 = $ 42,000 Part B Although the loss is reasonably estimated, PCF is required to only disclose information about

the situation since the loss is only reasonably possible. An accrual is not required since the loss is not probable.

Part C

1/1/12 Leasehold Improvements ($2,500,000 + $298,904) 2,798,904 Cash 2,500,000 Asset Retirement Obligation 298,904

12/31/12 Depreciation Expense ($2,798,904 / 5 years) 559,781 Accumulated Depreciation, Leasehold Improvements 559,781 Accretion Expense ($298,904 x 6%) 17,934 Asset Retirement Obligation 17,934

III. Current Liabilities

Part A Payroll Taxes Expense 2,268 FICA Taxes Payable ($20,000 x 7.65%) 1,530 FUTA Taxes Payable [($5,000 + $6,000 + $7,000) x 0.6%] 108 SUTA Taxes Payable [($5,000 + $6,000 + $7,000) x 3.5%] 630

Part B Wages Expense 180 Vacation Wages Payable (5 x 8 x 9 x $9.50) 3,420 Cash (5 x 8 x 9 x $10) 3,600

IV. Bonds

Part A PV principal = $2,000,000 x PVSS 4%,30 (.30832) = $ 616,640 PV interest = $100,000* x PVOA 4%,30 (17.29203) = 1,729,203 Issue price $ 2,345,843

* ($2,000,000 x 10% x 6/12)

Part B

3/1/12 Cash ($1,500,000 x 92.561%) 1,388,415 Discount on Bonds Payable 111,585 Bonds Payable 1,500,000 Unamortized Bond Issue Costs 150,000 Cash 150,000

IV. Bonds continued

12/31/12 Interest Expense ($41,777 x 4/6) 27,851 Discount on Bonds Payable ($4,277 x 4/6) 2,851 Interest Payable ($37,500 x 4/6) 25,000 Bond Issue Expense ($150,000 / 10 yrs x 10/12) 12,500 Unamortized Bond Issue Costs 12,500

Amortization schedule:

Date Cash Interest Paid (5%, semi.)

Interest Expense (6%, semi.)

Discount Amortization

Bonds Payable Carrying Value

3/1/12 (beg) $ 1,388,415

9/1/12 $ 37,500 $ 41,652 $ 4,152 1,392,567

3/1/13 37,500 41,777 4,277

Part C Reacquisition price ($5,000,000 x 1.03) $ 5,150,000 Net carrying value of bond: Face value $ 5,000,000 Unamortized bond premium [$200,000 ($200,000 x 4/10)] 120,000 Unamortized bond issue costs [$50,000 ($50,000 x 4/10)] (30,000) 5,090,000 Loss $ 60,000

V. Troubled-Debt Restructuring Part A Debtor (1) CV $ 750,000

FCP: Principal $ 600,000 Interest ($600,000 x 7% = $42,000 x 2) 84,000 684,000

CV > FCP Gain $ 66,000

(2) 1/1/12 Notes Payable 66,000 Gain on Debt Restructure 66,000

12/31/12 Notes Payable 42,000 Cash 42,000

Part B Creditor

(1) CV $ 750,000 PV of FCP: Principal [$600,000 x PVSS 2,9% (.84168)] $ 505,008 Interest [$42,000 x PVOA 2,9% (1.75911)] 73,883 578,891 Loss $ 171,109