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Here are a couple of changes that you need to consider for the exam corrections.
Problem #2 – Bonds Payable
– You will need to provide the 2025 J/E’s (through 31-Dec-2025) (Including the
2025 bond retirement).
– E/C for the Bonds Problem (Below)
Extra Credit – On February 1, 2026, the company retired 20% of the remaining
outstanding bonds, for $1,110 for each $1,000 bond (not including accrued
interest). What is the journal entry to record this bond, and what is the journal
entry to record the interest payment on April 30, 2026, for the remaining bonds.
Problem #3 – Leases
– You will need to provide the 2025 J/E’s (through 31-Dec-2025) for both the
Lessor and Lessee.
Finley Roofing is involved with several situations that possibly involve contingencies.
Each is described below. Finley’s fiscal year ends December 31, and the 2023
financial statements are issued on March 20, 2024.
1.
Finley is involved in a lawsuit resulting from a dispute with a customer. On
January 25, 2023, judgment was rendered against Finley in the amount of $40 million
plus interest, a total of $44 million. Finley plans to appeal the judgment, and believes it
highly probable that the judgement will be reduced to between $24 million to $26
million.
2.
At March 20, 2023, the EPA is in the process of investigating possible
environmental violations at one of Finley’s work sites, but has not proposed a
deficiency assessment. Management feels an assessment is probable, and if an
assessment is made an unfavorable settlement of $15 million is reasonably possible.
3.
Finley is the plaintiff in a $45 million lawsuit filed against AA Asphalt for
damages due to lost profits from rejected contracts and for unpaid receivables. The
case is in final appeal and legal counsel advises that it is certain that Finley will prevail
and be awarded $41 million. The settlement is material to Finley’s financial statements.
4.
In October 2022, the State of Montana filed suit against Finley, seeking civil
penalties and injunctive relief for violations of environmental laws regulating hazardous
waste. At the time, the company’s lawyers stated that it was probable that the company
would have to pay $45 million in fines. On February 3, 2023, Finley reached a
settlement with state authorities. Based upon discussions with legal counsel, the
Company feels it is probable that $52 million will be required to cover the cost of
violations.
Instructions:
1.
Determine the appropriate means of reporting each situation and explain why
2.
Prepare any necessary journal entry.
Question 1
Determine the appropriate means of reporting SCENARIO #1 (ACCRUE & DISCLOSE,
DISCLOSE, or NO DISCLOSURE REQUIRED) and explain why:
Prepare any necessary journal entry for SCENARIO #1. If no journal entry is required,
write “N/A.”
FORMAT YOUR ANSWER AS FOLLOWS:
DR ACCOUNT NAME $AMOUNT
CR ACCOUNT NAME $AMOUNT
Question 2
Prepare any necessary journal entry for SCENARIO #1. If no journal entry is required,
write “N/A.”
FORMAT YOUR ANSWER AS FOLLOWS:
DR ACCOUNT NAME $AMOUNT
CR ACCOUNT NAME $AMOUNT
Question 3
Determine the appropriate means of reporting SCENARIO #2 (ACCRUE
& DISCLOSE, DISCLOSE, or NO DISCLOSURE REQUIRED) and
explain why:
Question 4
Prepare any necessary journal entry for SCENARIO #2. If no journal entry is required,
write “N/A.”
FORMAT YOUR ANSWER AS FOLLOWS:
DR ACCOUNT NAME $AMOUNT
CR ACCOUNT NAME $AMOUNT
Question 5
Determine the appropriate means of reporting SCENARIO #3 (ACCRUE & DISCLOSE,
DISCLOSE, or NO DISCLOSURE REQUIRED) and explain why:
Question 6
Prepare any necessary journal entry for SCENARIO #3. If no journal entry is required,
write “N/A.”
FORMAT YOUR ANSWER AS FOLLOWS:
DR ACCOUNT NAME $AMOUNT
CR ACCOUNT NAME $AMOUNT
Question 7
Determine the appropriate means of reporting SCENARIO #4 (ACCRUE & DISCLOSE,
DISCLOSE, or NO DISCLOSURE REQUIRED) and explain why:
Question 8
Prepare any necessary journal entry for SCENARIO #4. If no journal entry is required,
write “N/A.”
FORMAT YOUR ANSWER AS FOLLOWS:
DR ACCOUNT NAME $AMOUNT
CR ACCOUNT NAME $AMOUNT
Question 9
Upload your work for the Contingent Liabilities problem (page 2 of the answer
sheets), here.
Vanguard Corporation issued $11,000,000 of 10% bonds on September 1, 2023,
due on September 1, 2029. The interest is to be paid twice a year on August 31
and February 28. The bonds were sold to yield 6% effective annual interest. Grove
Corporation closes its books annually on December 31.
Present value of 1 for 12 periods at 3.0%
0.70138
Present value of 1 for 12 periods at 5.0%
0.55684
Present value of an ordinary annuity for 12 periods at 3.0%
9.95400
Present value of an ordinary annuity for 12 periods at 5.0%
8.86325
On February 1, 2025, the company retired 20% of the outstanding bonds, for
$1,160 for each $1,000 bond (not including accrued interest). What is the journal
entry to record this bond, and what is the journal entry to record the interest
payment on April 30, 2025, for the remaining bonds.
Extra Credit – On February 1, 2026, the company retired 20% of the remaining
outstanding bonds, for $1,180 for each $1,000 bond (not including accrued
interest). What is the journal entry to record this bond, and what is the journal
entry to record the interest payment on April 30, 2026, for the remaining bonds?
Instructions
(a)
Calculate the issuing price of the bonds (show your work)
(b) Prepare the journal entries for 2025 using the effective-interest method
(c) Compute the interest expense to be reported in the income statement for the
year ended, December 31, 2025
Question 10
What is the issuing price of the bonds?
Question 11
Prepare the 2025 journal entries using the effective-interest method.
FORMAT YOUR ANSWER AS FOLLOWS:
DR ACCOUNT NAME $AMOUNT
CR ACCOUNT NAME $AMOUNT
Question 12
What is the value of Interest Expense for Fiscal Year 2025?
Question 13
On February 1, 2026, the company retired 20% of the outstanding bonds. What is the
journal entry to record this bond, and what is the journal entry to record the next interest
payment, for the remaining bonds.
FORMAT YOUR ANSWER AS FOLLOWS:
DR ACCOUNT NAME $AMOUNT
CR ACCOUNT NAME $AMOUNT
Question 14
Upload your work for the long-term debt problem (page 3 of the answer sheets),
here.
Lehman Dairy leases its milking equipment from Chavez Finance Company under
the following lease terms.
● The lease term is 12 years, non-cancelable, and requires equal rental
payments due at the beginning of each year starting January 1, 2024.
● The equipment has a fair value of $727,500, and cost Chavez $485,000,
at the inception of the lease (January 1, 2024).
● Lehman Dairy has the option to purchase the equipment for $9,000. This
represents a significant discount on the equipment.
● The estimated economic life of the equipment is 14 years, and a residual
value (which is guaranteed by Lehman Dairy) of $20,000. If the purchase
option is not exercised, Lehman Dairy expects to pay $15,000 under the
guaranteed residual value.
● The lease contains no renewable options, and the equipment reverts to
Chavez Finance Company upon termination of the lease, if the purchase
option is not exercised.
● Lehman Dairy’s incremental borrowing rate is 12% per year. Chavez’s
implicit rate is 10% and is known to Lehman Dairy.
● Collectability of the payments is reasonably predictable, and there are
no important uncertainties surrounding the costs yet to be incurred by
the lessor.
Present value of 1 for 12 periods at 10%
0.31
863
Present value of 1 for 12 periods at 12%
0.25
668
Present value of an ordinary annuity for 12 periods at 10%
6.81
369
Present value of an ordinary annuity for 12 periods at 12%
6.19
437
Present value of an annuity due for 12 periods at 10%
7.49
506
Present value of an annuity due for 12 periods at 12%
6.93
770
Instructions
(Assume the accounting period ends on December 31.)
(a) Calculate the required payment Chavez Finance requires to earn the Fair
Value of the asset, using the LESSEE’S Borrowing Rate?
(b) Lehman Dairy is able to negotiate the payment down to $100,000 per year.
Compute the present value of the minimum lease payments for both the lessee
and lessor.
(c) What type of lease is this for the lessor? For the lessee? Why?
(d) Prepare the journal entries Chavez would make in 2025 related to the lease
arrangement.
(e) Prepare the journal entries Lehman would make in 2025 related to the lease
arrangement.
Question 15
What is the payment amount that Chavez Finance requires to earn the Fair Value of the
asset using the LESSEE’S Borrowing Rate?
Question 16
Upload the first page of your work for the long-term debt problem (page 4 of the
answer sheets), here.
Question 17
What is the present value of the minimum lease payments for both the lessee and
lessor using the negotiated payment amount.
FORMAT YOUR ANSWER AS FOLLOWS:
LESSOR PV =
LESSEE PV =
Question 18
What type of lease is this for the LESSOR and LESSEE?
FORMAT YOUR ANSWER AS FOLLOWS:
LESSOR
Lease Type – WHY?
LESSEE
Lease Type – WHY?
Question 19
Upload the second page of your work for the lease problem (page 6 of the answer
sheets), here.
Question 20
Prepare the journal entries Chavez would make in 2025 related to the lease
arrangement.
FORMAT YOUR ANSWER AS FOLLOWS:
DATE
DR ACCOUNT NAME $AMOUNT
CR ACCOUNT NAME $AMOUNT
Question 21
Prepare the journal entries Lehman would make in 2025 related to the lease
arrangement.
FORMAT YOUR ANSWER AS FOLLOWS:
DATE
DR ACCOUNT NAME $AMOUNT
CR ACCOUNT NAME $AMOUNT
Question 22
Upload your work for the lease problem (page 7 of the answer sheets), here.
ACCTG 334 – Intermediate Accounting II
Spring 2024
Exam Corrections Answer Sheets
Due: 29-February-2024
Last Name:
First Name:
Red ID:
ALL ANSWERS MUST BE PROVIDED ON THIS ANSWER SHEET, IN THE SPACES
PROVIDED
PROBLEM #1
SCENARIO
1
CIRCLE ONE
Accrue and Disclose
Disclose
No Disclosure
2
Accrue and Disclose
Disclose
No Disclosure
3
Accrue and Disclose
Disclose
No Disclosure
4
Accrue and Disclose
Disclose
No Disclosure
SCENARIO
1
JOURNAL ENTRY (write N/A if no journal entry is required)
2
3
4
LIST AMOUNT AND EXPLANATION
DATE
DR/CR ACCOUNT
2/1/2025 DR
Interest
DR
Expense
CR
2025 Bond
Redemption
Payoff
B/P
DR
DR
DR
CR
Interest
Payment
4/30/2025 DR
DR
DR
CR
Interest
Payment
10/31/2025 DR
DR
CR
Accrued
Interest
12/31/2025 DR
DR
CR
EXTRA CREDIT
2/1/2026 DR
Interest
DR
Expense
CR
2026 Bond
Redemption
Payoff
B/P
DR
DR
DR
CR
INTEREST EXPENSE – 2025
AMOUNT
DATE
DR/CR ACCOUNT
2/1/2025 DR
Interest
DR
Expense
CR
2025 Bond
Redemption
Payoff
B/P
DR
DR
DR
CR
Interest
Payment
2/28/2025 DR
DR
DR
CR
Interest
Payment
8/31/2025 DR
DR
CR
Accrued
Interest
12/31/2025 DR
DR
CR
EXTRA CREDIT
2/1/2026 DR
Interest
DR
Expense
CR
2026 Bond
Redemption
Payoff
B/P
DR
DR
DR
CR
INTEREST EXPENSE – 2025
AMOUNT
PROBLEM #3
Step 1 – Identify Key Values
Interest Rate
=
Lease Term (Years)
=
Number of Lease Payments per Year
=
Residual Value
=
Bargain Purchase Option
=
Step 2 – Identify i and n and Interest Payments for the Lessor
Interest Rate
÷ Number of Lease Payments per Year
Lease Term
* Number of Lease Payments per Year
=i=
=n=
Step 3 – Find the Present Value Factors
Use Annuity Due if payment is due at the beginning of the Lease
Lessor
Present Value of $1
=
Present Value of an Ordinary Annuity
=
Present Value of an Annuity Due
=
Step 4 – Calculate the Lease Payments Required by the Lessor
Lessor
Fair Value of the Asset
=
LESS: Present Value of the BPO or Residual Value
=
LESS: Down Payment
=
EQUALS: PV of Lease Payments
DIVIDED BY: PV Factor of Annuity or Annuity Due
=
EQUALS: Periodic Lease Payments
LESSOR
CIRCLE ONE
SALES-TYPE (w/ SELLING
PROFIT)
EXPLANATION
LESSEE
CIRCLE ONE
FINANCING
EXPLANATION
LESSOR
Payment
GRV/BPO
TOTAL
Amount
81,000.00
9,000.00
PVF (n = ___, i = ___)
Present Value
Amount
81,000.00
9,000.00
PVF (n = ___, i = ___)
Present Value
LESSEE
Payment
GRV/BPO
TOTAL
Date
1/1/2024
1/1/2024
1/1/2025
1/1/2026
Lease Payment
Interest on
Receivable/Liability
Reduction of Lease
Receivable/Liability
Lease Balance
Receivable/Liability
404,288.64
LESSOR
CIRCLE ONE
SALES-TYPE (w/ SELLING
PROFIT)
EXPLANATION
LESSEE
CIRCLE ONE
FINANCING
EXPLANATION
LESSOR
Payment
GRV/BPO
TOTAL
Amount
98,000.00
10,200.00
PVF (n = ___, i = ___)
Present Value
Amount
98,000.00
10,200.00
PVF (n = ___, i = ___)
Present Value
LESSEE
Payment
GRV/BPO
TOTAL
Date
1/1/2024
1/1/2024
1/1/2025
1/1/2026
Lease Payment
Interest on
Reduction of Lease Lease Balance
Receivable/Liability Receivable/Liability Receivable/Liability
568,273.34
LESSOR
CIRCLE ONE
SALES-TYPE (w/ SELLING
PROFIT)
EXPLANATION
LESSEE
CIRCLE ONE
FINANCING
EXPLANATION
LESSOR
Payment
GRV/BPO
TOTAL
Amount
100,000.00
9,000.00
PVF (n = ___, i = ___)
Present Value
Amount
100,000.00
9,000.00
PVF (n = ___, i = ___)
Present Value
LESSEE
Payment
GRV/BPO
TOTAL
Date
1/1/2024
1/1/2024
1/1/2025
1/1/2026
Lease Payment
Interest on
Reduction of Lease Lease Balance
Receivable/Liability Receivable/Liability Receivable/Liability
617,611.04
LESSOR
CIRCLE ONE
SALES-TYPE (w/ SELLING
PROFIT)
EXPLANATION
LESSEE
CIRCLE ONE
FINANCING
EXPLANATION
LESSOR
Payment
GRV/BPO
TOTAL
Amount
107,000.00
8,400.00
PVF (n = ___, i = ___)
Present Value
Amount
107,000.00
8,400.00
PVF (n = ___, i = ___)
Present Value
LESSEE
Payment
GRV/BPO
TOTAL
Date
1/1/2024
1/1/2024
1/1/2025
1/1/2026
Lease Payment
Interest on
Reduction of Lease Lease Balance
Receivable/Liability Receivable/Liability Receivable/Liability
664,723.30
LESSOR
DATE
1/1/24
DR/CR
DR
DR
CR
CR
ACCOUNT
AMOUNT
DR
CR
SKIP REMAINING 2024 J/E
1/1/25
DR
CR
CR
12/31/25
DR
CR
LESSEE
DATE
1/1/24
DR/CR
DR
CR
ACCOUNT
AMOUNT
DR
CR
SKIP REMAINING 2024 J/E
1/1/25
DR
DR
CR
12/31/25
DR
CR
DR
CR
PROBLEM #2
Payment
Bond Face Value
Interest Payment
TOTAL
PVF
PV
Premium
Bond
Net Carrying Amount
PMT #
Interest Paid Interest on Liability Reduction of Bond Premium Account Balance Face Value
on Bond
11/1/2023
7,000,000.00
4/30/2024
7,000,000.00
10/31/2024
7,000,000.00
10/31/2024
2/1/25
Retirement
3/6 months
Accrual @
12/31/24
2/3 months
2/1/25
Retirement
1/3 months
20% of Bond Issuance (to retire @ 2/1/25) – 1,400 Bonds
10/31/2024
4/30/2025
Accrual @
12/31/24
2/6 months
4/30/2025
80% of Bond Issuance (Remaining Bonds) – 5,600 Bonds
–
1,400,000.00
1,400,000.00
1,400,000.00
1,400,000.00
5,600,000.00
5,600,000.00
5,600,000.00
5,600,000.00
10/31/2025
5,600,000.00
10/31/2025
2/1/26
Retirement
3/6 months
Accrual @
12/31/25
2/6 months
2/1/26
Retirement
1/6 months
20% of Bond Issuance (to retire @ 2/1/25) – 1,120 Bonds
10/31/2025
4/30/2026
Accrual @
12/31/24
2/6 months
80% of remaining bonds (Remaining Bonds) – 4,480 Bonds
1,120,000.00
1,120,000.00
1,120,000.00
1,120,000.00
4,480,000.00
4,480,000.00
4,480,000.00
PROBLEM #2
Payment
Bond Face Value
Interest Payment
TOTAL
PVF
PV
Premium
Bond
Net Carrying Amount
PMT # Interest Paid Interest on Liability Reduction of Bond Premium Account Balance Face Value
on Bond
9/1/2023
8,000,000.00
2/29/2024
8,000,000.00
8/31/2024
8,000,000.00
8/31/2024
2/1/25
Retirement
3/6 months
Accrual @
12/31/24
2/3 months
2/1/25
Retirement
1/3 months
20% of Bond Issuance (to retire @ 2/1/25) – 1,400 Bonds
8/31/2024
2/28/2025
Accrual @
12/31/24
2/6 months
2/28/2025
80% of Bond Issuance (Remaining Bonds) – 5,600 Bonds
–
1,600,000.00
1,600,000.00
1,600,000.00
1,600,000.00
6,400,000.00
6,400,000.00
6,400,000.00
6,400,000.00
8/31/2025
6,400,000.00
8/31/2025
2/1/26
Retirement
3/6 months
Accrual @
12/31/25
2/6 months
2/1/26
Retirement
1/6 months
20% of Bond Issuance (to retire @ 2/1/25) – 1,120 Bonds
8/31/2025
2/28/2026
Accrual @
12/31/24
2/6 months
80% of remaining bonds (Remaining Bonds) – 4,480 Bonds
1,280,000.00
1,280,000.00
1,280,000.00
1,280,000.00
5,120,000.00
5,120,000.00
5,120,000.00
PROBLEM #2
Payment
Bond Face Value
Interest Payment
TOTAL
PVF
PV
Premium
Bond
Net Carrying Amount
PMT #
Interest Paid Interest on Liability Reduction of Bond Premium Account Balance Face Value
on Bond
11/1/2023
9,000,000.00
4/30/2024
9,000,000.00
10/31/2024
9,000,000.00
10/31/2024
2/1/25
Retirement
3/6 months
Accrual @
12/31/24
2/3 months
2/1/25
Retirement
1/3 months
20% of Bond Issuance (to retire @ 2/1/25) – 1,400 Bonds
10/31/2024
4/30/2025
Accrual @
12/31/24
2/6 months
4/30/2025
80% of Bond Issuance (Remaining Bonds) – 5,600 Bonds
–
1,800,000.00
1,800,000.00
1,800,000.00
1,800,000.00
7,200,000.00
7,200,000.00
7,200,000.00
7,200,000.00
10/31/2025
7,200,000.00
10/31/2025
2/1/26
Retirement
3/6 months
Accrual @
12/31/25
2/6 months
2/1/26
Retirement
1/6 months
20% of Bond Issuance (to retire @ 2/1/25) – 1,120 Bonds
10/31/2025
4/30/2026
Accrual @
12/31/24
2/6 months
80% of remaining bonds (Remaining Bonds) – 4,480 Bonds
1,440,000.00
1,440,000.00
1,440,000.00
1,440,000.00
5,760,000.00
5,760,000.00
5,760,000.00
PROBLEM #2
Payment
Bond Face Value
Interest Payment
TOTAL
PVF
PV
Premium
Bond
Net Carrying Amount
PMT # Interest Paid Interest on Liability Reduction of Bond Premium Account Balance Face Value
on Bond
9/1/2023
11,000,000.00
2/29/2024
11,000,000.00
8/31/2024
11,000,000.00
8/31/2024
2/1/25
Retirement
3/6 months
Accrual @
12/31/24
2/3 months
2/1/25
Retirement
1/3 months
20% of Bond Issuance (to retire @ 2/1/25) – 1,400 Bonds
8/31/2024
2/28/2025
Accrual @
12/31/24
2/6 months
2/28/2025
80% of Bond Issuance (Remaining Bonds) – 5,600 Bonds
–
2,200,000.00
2,200,000.00
2,200,000.00
2,200,000.00
8,800,000.00
8,800,000.00
8,800,000.00
8,800,000.00
8/31/2025
8,800,000.00
8/31/2025
2/1/26
Retirement
3/6 months
Accrual @
12/31/25
2/6 months
2/1/26
Retirement
1/6 months
20% of Bond Issuance (to retire @ 2/1/25) – 1,120 Bonds
8/31/2025
2/28/2026
Accrual @
12/31/24
2/6 months
80% of remaining bonds (Remaining Bonds) – 4,480 Bonds
1,760,000.00
1,760,000.00
1,760,000.00
1,760,000.00
7,040,000.00
7,040,000.00
7,040,000.00
