AnswertoquestionsinChapter4

MultipleChoiceQuestions

1.D2.B3.D4.A5.D6.D7.B

DiscussionQuestions

Whatcriteriamustbesatisfiedforaninvestmentinbondstobeclassifiedas‘investmentindebtinstruments’?

Answer:

Someinvestmentsindebtinstrumentsaremeasuredatamortizedcost.AccordingtoIFRS9,afinancialassetshallbemeasuredatamortizedcostifbothofthefollowingcriteriaaremet:

1)Theassetisheldwithinabusinessmodelwhoseobjectiveistoholdassetsinordertocollectcontractualcashflows.

2)Thecontractualtermsofthefinancialassetgiveriseonspecifieddatestocashflowsthataresolelypaymentsofprincipalandinterestontheprincipalamountoutstanding.

Define‘debtinstrumentsmeasuredatFVTOCI’.HowaretheypresentedintheBalanceSheet?

Answer:

Allfinancialassetsareclassifiedonthebasisoftheentity’sbusinessmodelformanagingthefinancialassetsandthecontractualcashflowcharacteristicsofthefinancialasset.Atinitialrecognition,anentitymaymakeanirrevocableelectiontopresentinothercomprehensiveincomesubsequentchangesinthefairvalueofaninvestmentinadebtinstrumentthatisnotheldfortrading.Afterinitialrecognition,anentityshallmeasureinvestmentsindebtinstrumentsattheirfairvalue.OneachBalanceSheetdate,theirbookvalueareadjustedtotheclosingquotedprice.

Whatismeantby‘a(chǎn)ssociatecompanies’?Whatisthekeypointindeterminingwhetheraninvesteeisanassociateornot?

Answer:

Sometimesabusinessonlyholdsaless-than-majorityinterestinanothercorporation.Inthiscase,theinvestorcompanyonlyreportsitsownershipinterestintheinvesteecompanyasaninvestment.Associatecompaniesinwhichtheinvestor’svotingstockinterestgivestheinvestortheabilitytoexercisesignificantinfluenceoveroperatingandfinancialpoliciesoftheinvestee.

Significantinfluenceisthekeycharacteristicindeterminingtherelationshipbetweenaninvestorcompanyanditsassociate.Significantinfluenceexistswhentheinvestorhasthepowertoparticipateinthefinancialandoperatingpolicydecisionsoftheinvestee.Indicatorsofsignificantinfluencecouldbe:20%ormoreofthevotingpoweroftheinvestee,representationontheboardofdirectorsorequivalentgoverningbodyoftheinvestee,participationinpolicy-makingprocess,materialtransactionsbetweentheinvestorandinvestee,interchangeofmanagerialpersonnel,andprovisionofessentialtechnicalinformation.

Describethemainaccountableeventsundertheequitymethod.

Answer:

Theequitymethodusedinaccountingforlong-termequityinvestmentsisintendedtoreflecttheinvestor’schangingequityorinterestintheinvestee.Thus,thecarryingamountofinvestmentisadjustedperiodicallyforthechangesinstockholders’equityoftheinvesteeoccasionedbyitsprofitorloss,dividenddeclarations,andotherchangesinotherstockholder’sequityitems.

Explainthedifferencebetweencostmethodandequitymethod.

Answer:

Costmethodisappliedwhenthebuyingcompanyholdsacontrollinginterestoftheinvestee.Atthetimeofacquisition,theparentcompanyrecordsitsinvestmentincommonsharesofthesubsidiaryatthetotalcostincurredinthestockacquisition.Dividendsdeclaredbythesubsidiaryaretreatedasinvestmentincome.Thebookvalueoftheinvestmentremainsunchangeduntilitissold.

Theequitymethodisusedfornon-subsidiaryinvestments,includingjointventuresandassociatecompanies.Atinitialrecognition,theinvestorcompanyrecordstheinvestmentintheassociateatthetotalacquisitioncost.Afterthat,theacquisitioncostiscomparedtotheinvestorcompany’sinterestinthenetfairvalueoftheinvestee’snetidentifiableassets.Iftheacquirer’sinterestinthefairvalueofthenetidentifiableassetsexceedstheacquisitioncost,thistransactionisregardedasabargainpurchaseandanyexcessshouldberecognizedimmediatelyinprofitorloss.Theacquisitioncostisadjusteduptoitssharesinthenetfairvalueoftheinvestee’snetidentifiableassetsaswell.Theequitymethodusedinaccountingforlong-termequityinvestmentsisintendedtoreflecttheinvestor’schangingequityorinterestintheinvestee.Undertheequitymethod,theinvestorcompanyshallincreaseordecreasethecarryingamountoftheinvestmentbytheinvestor’ssharesoftheprofitorlossoftheinvesteeafterthedateofacquisition.Unlikeunderthecostmethod,thedividendsdeclaredareviewedasreductionsintheinvestee’sequityundertheequitymethod.Atthetimedividendsaredeclaredbytheinvestee,thecarryingamountoftheinvestmentisreducedtoreflectthedistributionofearnings,sincetheinvestor’sshareofincomehasbeenrecognizedasitisearnedbytheassociate.

Definedepreciationandexplainhowthedouble-declining-balancemethodworksindeterminingyearlydepreciationexpenseovertheplantassets’usefullife.

Answer:

Depreciationisarationalandsystematicallocationofthecostofaplantassettoexpensesduringitsservicelife.

Underthedouble-declining-balancemethod,thecomputationofannualdepreciationexpenseisasfollows:

Depreciationexpenseperannum=Remainingcarryingvalue×Accelerateddepreciationrate

Theaccelerateddepreciationrateistwiceasmuchastherateunderthestraight-linemethodandthistellswhatdoublemeans.Theremainingcarryingvalueistheundepreciatedcostoftheassetatthebeginningofeachyear.Withthepassageoftime,thevalueofassetisgraduallywrittenoffandchargedtodepreciationexpense.Asaresult,theremainingcarryingvaluekeepsgoingdown.Thatisthereasonthemethodiscalledadecliningbalance.

Giveanexampletodescribewhatismeantbyanaccelerateddepreciationmethod.

Answer:

Boththedouble-declining-balancemethodandthesum-of-the-years’digitsmethodareaccelerateddepreciationmethods.Accelerateddepreciationmethodsrecognizelargeramountsofdepreciationexpenseintheearlyyearsoftheasset’susefullifeandsmalleramountsinlateryears.Forexample,assumeanassethasausefullifeof3years.Underthesum-of-the-years’digitsmethod,thefractiontobedepreciatedappliedtotheassetillustratedabovewillbe3/6forthefirstyear,2/6forthesecondyear,and1/6forthelastyear.

Explainwhatismeantbytheterm‘double’and‘decliningbalance’forthedouble-declining-balancemethod?

Answer:

Underthedouble-declining-balancemethod,theaccelerateddepreciationrateistwiceasmuchastherateunderthestraight-linemethodandthistellswhatdoublemeans.Theremainingcarryingvalueistheundepreciatedcostoftheassetatthebeginningofeachyear.Withthepassageoftime,thevalueofassetisgraduallywrittenoffandchargedtodepreciationexpense.Asaresult,theremainingcarryingvaluekeepsgoingdown.Thatisthereasonthemethodiscalledadecliningbalance.

Forinternallygeneratedintangibles,whatpartofexpenditurescanbecapitalized?Explain.

Answer:

Asforinternallydevelopedintangibleassets,thereisnoguaranteeofsuccessatthecommencementoftheproject.Theentiregenerationprocessisclassifiedintotwophases:researchanddevelopment(R&D).Researchphaseisdedicatedtogainnewscientificortechnicalknowledgeorunderstandingandinvolvesgreaterriskanduncertainty.Inthedevelopmentphase,thenewlygeneratedknowledgeandfindingsareappliedtoaplanordesignfortheproductionofnewproducts.Giventheheighteneduncertaintyandtokeepinconformitywiththeapplicationoftheconservatismconcept,accountingstandardsrequirethatalloutlaysonresearchshouldbeexpensedandchargedtoR&Dexpensestooffsetagainstrevenueinthecurrentaccountingperiod.Theaccountingtreatmentforexpenditureoccurredinthedevelopmentphasedependsonwhetheralistofspecificcriteriacanbemet.Thesecriteriafocusontechnicalfeasibility,intentiontocompleteandsell,abilitytouseorsell,existenceofamarket,availabilityofresources,andtheabilitytomeasurecostreliably.Alloftherequirementsmustbesatisfiedbeforeanyoutlaysondevelopmentarecapitalizedandrecognizedasanintangibleasset.

Areallintangibleassetssubjecttoamortization?Explain.

Answer:

Notallintangibleassetsaresubjecttoamortization.Intangiblescanbeclassifiedaccordingtothecertaintyoftheirusefullivesorservicelives.Ifanintangibleassethasalimitedorfiniteusefullifeprescribedbylaworcontract,suchasapatent,itsacquisitioncostissubjecttoamortizationandtheamortizablecostwillspreadthroughoutthespanoftimeduringwhichitbenefitstheoperation.Forinstance,apatentwith17yearsoflegallifegrantedbyacertaingovernmentagencyand10yearsofestimatedservicelife,shouldbeamortizedwithin10years.Otherwise,iftheusefullifeofanintangibleassetisindefiniteandcannotbepredetermined,theintangibleassetwillnotbesubjecttoamortization.Instead,itwillbescrutinizedforimpairmenteachyear.

Problems

Problem4-1

ThesubsidiaryaccountsofcompanyWprovidethefollowingdetailedinformationabout3itemsoffixedassets:

Purchase

Date

Acquisition

Cost($)

ServiceLife

Residual

Value($)

Depreciation

Method

Recoverable

ValueonDec.31,

2021($)

Building

Jun.12,2005

20,000,000

50years

500,000

Straight-line

19,000,000

Vehicle

Sep.28,2015

460,000

600,000

kilometers

10,000

Units-of-output

320,000

Computer

Dec.25,2020

23,000

5years

0

Double-declining-balance

12,800

Note:thevehicle’sodometerreads150,000kilometersattheendof2020and200,000kilometersattheendof2021.Thedepreciationprocessbeginswiththemonthsubsequenttoacquisition.

Required

Calculatethedepreciationexpenseforeachfixedassetfor2021.

DepreciationExpenseforBuilding=(20,000,000-500,000)/50=390,000

DepreciationExpenseforVehicle=(460,000-10,000)/600,000*(200,000-150,000)=37,500

DepreciationExpenseforComputers=23,000*2/5=9,200

Calculatethebalanceofaccumulateddepreciationforeachfixedassetattheendof2021.

BalanceofAccumulatedDepreciationfortheBuilding=390,000*16.5=6,435,000

BalanceofAccumulatedDepreciationforVehicle=(460,000-10,000)/600,000*200,000=150,000

BalanceofAccumulatedDepreciationforComputers=9,200

Doesimpairmentlossincurforanyofthem?

Yes,therecoverablevalueofthecomputerisbelowthecarryingvalueonDecember31,2021.Thus,theimpairmentlossincurredonthisitemwillbe$1,000(13,800-12,800).

Prepareajournalentrytorecordtheimpairmentlossandcomputetheamountofdepreciationexpensetoberecognizedforthenextyear.

AssetsImpairmentLoss$1,000

AllowanceforLossonFixedAssets$1,000

Torecordtheimpairmentlossoncomputers.

DepreciationExpenseforComputersfortheYear2022=12,800*2/5=5,120

Whataretheirbookvaluesattheendof2021respectively?

BookValueoftheBuilding=20,000,000-390,000*16.5=13,565,000

BookValueofVehicle=460,000-150,000=310,000

BookValueofComputers=12,800

Problem4-2

OnMay12,companyWpurchased20,000sharesofalistedcompanyXfor$25,600($1.28pershare),plusabrokeragecommissionof$40.Theinvestmentwasdesignatedasafinancialinstrumentmeasuredatfairvaluethroughothercomprehensiveincome(FVTOCI).OnMay30,companyXdeclaredadividendof$0.05pershare.OnJune5,companyWreceivedthedividendonits20,000shares.OnJune30,themarketpriceoftheinvestmentdroppedto$1.26pershare.OnJuly25,companyWsold10,000sharesofcompanyXstockfor$1.31pershare,less$10brokeragecommission.

Required

PreparenecessaryjournalentriestorecordallthetransactionsengagedbycompanyXrelatingtotheinvestmentincompanyXstocks.

May12

EquityInstrumentsMeasuredatFVTOCI—ParValue

25,640

Cash

25,640

Torecordtheacquisitionofinvestmentinequityinstruments(FVTOCI).

May30

DividendsReceivable

1,000

DividendsRevenue

TorecordthedividenddeclaredbyCompanyX.

1,000

June5

Cash

DividendsReceivable

ReceiveddividendfromCompanyX

1,000

1,000

June30

OtherComprehensiveIncome440

EquityInstrumentsMeasuredatFVTOCI—ChangesinFairvalue

440

ToadjustthebookvalueofequityinvestmentinCompanyXatyear-end.

July25

Cash13,090

EquityInstrumentsMeasuredatFVTOCI

—ChangesinFairvalue220

EquityInstrumentsMeasuredatFVTOCI—ParValue

12,820

OtherComprehensiveIncome

220

RetainedEarnings

270

Torecordthesaleof10,000sharesofCompanyX.

Problem4-3

CompanyWacquired30%ofinterestincompanyYfor$3milliononJanuary8,2021.Thenetidentifiableassetsoftheinvesteewerereportedat$7.5million,andtherewasnosignificantdifferencebetweentheirbookvalueandfairvalue.On28June2021,companyYdistributedadividendof$500,000toitsshareholders.AsshowninthestatementofcomprehensiveincomeofcompanyYfortheyear2021,aprofitof$906,000wasearnedandtheothercomprehensiveincomewasincreasedbytheamountof$15,000.

Required

Preparenecessaryjournalentriestorecordtransactionsrelatingtothelong-termequityinvestmentincompanyY.

Jan.8,2021

Long-TermEquityInvestment—CompanyY

3,000,000

Cash

3,000,000

Torecordtheacquisitionof30%sharesofcompanyY.

June28,2021

DividendsReceivable

150,000

Long-TermEquityInvestment—CompanyY

150,000

Toadjustthebookvalueoflong-termequityinvestmentforcompanyY’sdividends.

Mar.11,2020

Long-TermEquityInvestment—CompanyY

276,300

GainsandLossesonInvestments

271,800

OtherComprehensiveIncome

4,500

Toadjustthebookvalueoflong-termequityinvestmentforcompanyY’sprofitandOCI.

Chapter5Liabilities

AnswerstoMultipleChoiceQuestions

1.D

2.D

3.A

4.A

5.C

6.C

7.D

8.D

9.D

10.D

11.C*

12.A**

4901036′0.04-5000000′0.039=1041

4901036′0.04+(4901036+1041)′0.04=392124

**4901039+1041+[(4901036+1041)′0.04-5000000′0.039]=4903160

AnswerstoDiscussionQuestions

1.a. Receivinggoodsandservicespriortomakingpayment

b. Receivingpaymentpriortodeliveringgoodsandservices

2. Short-termnotespayablemaybeissuedtopurchasemerchandiseorotherassetsortosatisfyanaccountpayablecreatedearlier.

3. Tomatchrevenuesandexpensesproperly,theliabilitytocoverproductwarrantiesshouldberecordedintheperiodduringwhichthesaleoftheproductismade.

4. Whenthedefectiveproductisrepaired,therepaircostswouldberecordedbydebitingProvisions-WarrantiesandcreditingCash,Supplies,oranotherappropriateaccount.

5. Liabilitiesaredebtsorobligationsarisingfrompasttransactionsorevents,andwhichrequiresettlementatafuturedate.Liabilitiesandowners’equityarethetwoprimarymeansbywhichabusinessfinancesownershipofitsassetsanditsbusinessoperations.

Thefeaturewhichmostdistinguishesliabilitiesfromequityisthatliabilitiesmatureandmustbepaidatsomefuturedate,whereasowners’equitydoesnot.Intheeventofliquidationofthebusiness,theclaimsofcreditors(liabilities)havepriorityovertheclaimsofowners(equity).Also,interestpaidtocreditorsisdeductibleinthedeterminationoftaxableincome,whereasdividendspaidtostockholdersarenotdeductible.

6. Intheeventofliquidationofabusiness,theclaimsofcreditors(liabilities)havepriorityovertheclaimsofowners(equity).Therelativeprioritiesofindividualcreditors,however,varygreatly.Securedcreditorshavetopprioritywithrespecttoproceedsstemmingfromthesaleofthespecificassetsthathavebeenpledgedascollateralsecuringtheirloans.Thepriorityofunsecuredcreditorsisdeterminedbylegalstatutesandindenturecontracts.

7. Currentliabilitiesarethosematuringwithinoneyearorthecompany’soperatingcycle(whicheverislonger)andexpectedtobepaidfromcurrentassets.Liabilitiesclassifiedaslong-termincludeobligationsmaturingmorethanoneyearinthefuture,andalsoshortertermobligationsthatwillberefinancedorpaidfromnon-currentassets.

A10-yearbondissuewouldbeclassifiedasacurrentliabilityonceitsduedatecomeswithin12monthsofthematuritydate,assumingthattheissuewillbepaidfromcurrentassets.

Anotepayablematuringin30dayscouldbeclassifiedasalong-termliabilityif(a)managementhadboththeintentandtheabilitytorefinancethisobligationonalong-termbasis,or(b)theliabilitywillbepaidfromnon-currentassets.

8. Employersarerequiredbylawtopaythefollowingpayrolltaxesandinsurancepremiums:SocialSecurityandMedicaretaxes,unemploymenttaxes,andworkers’compensationinsurancepremiums.Inaddition,manyemployersincludethefollowingaspartofthe“compensationpackage”providedtoemployees:grouphealthinsurancepremiums,contributionstoemployeepensionplans,andpost-retirementbenefits(suchashealthinsurance).Bothmandatedanddiscretionarycostsareincludedaspartoftotalpayrollcostinadditiontothewagesandsalariesearnedbyemployees.

9. Fromaninvestor’sperspective,abondrepresentsaseriesoffuturecashreceiptsthatarefixedinamountbythecontractrateofinterestonthebondsandbythebonds’maturityvalue.Asmarketinterestratesrise,aseriesoffuturereceiptsthatarefixedindollaramountbecomelessattractiveinrelationtootherinvestmentopportunities,andthepriceofthebondfalls.Asinterestratesfall,anyseriesoffixedcashreceiptsbecomemoreattractiveinrelationtootheropportunities,andbondpricesrise.

10. Bondswithcontractratesofinterestabovecurrentmarketinterestratesshouldbetradingatpricesabovetheirfacevalues.Bondpricesvaryinverselywithmarketinterestrates.

11. Estimatedliabilitieshavetwobasiccharacteristics:(1)theliabilityisknowntoexistatthebalancesheetdateand(2)theprecisedollaramountcannotbedetermineduntilalaterdate.Examplesincludetheliabilitytohonorwarrantiesonproductssoldandanaccrualofaliabilityrelatingtoalosscontingency.

12. Alosscontingencyisapossibleloss(orexpense)stemmingfrompasteventsthatwillberesolvedastoexistenceandamountbysomefutureevent.Examplesincludependinglitigation,theallowanceforuncollectibleaccounts,andtheriskthatthepoliticalclimateinforeigncountrieshasimpairedthevalueofassetsinthoselocations.

Losscontingenciesareaccrued(recorded)ifitisboth(1)probablethatalosshasbeenincurred,and(2)theamountoflosscanbeestimatedreasonably.Eveniftheseconditionsarenotmet,losscontingenciesshouldbedisclosedinfinancialstatementsifitisreasonablypossiblethatamateriallosshasbeenincurred.

AnswerstoProblems

Problem5-1

Apr.

30

AccountsPayable

100,000

Short-TermNotesPayable

100,000

May

30

Short-TermNotesPayable

100,000

FinancialExpenses-InterestExpenses

500

Cash

100,500

100000′6%÷12=900

Problem5-2

1.

Oct.

1

Cash

89,100

FinancialExpenses-InterestExpenses

900

Short-termNotesPayable

90,000

90000′6%′(60÷360)=900

Nov.

30

Short-termNotesPayable

90,000

Cash

90,000

2.

Oct.

1

Cash

90,000

Short-TermNotesPayable

90,000

Nov.

30

Short-TermNotesPayable

90,000

FinancialExpenses-InterestExpenses

900

Cash

90,900

90000′6%′(60÷360)=900

3.Option2ismorefavorable.Theeffectiveinterestrateforoption1isgreaterthan6%.

[900÷89,100′(360÷60)=6.06%]

Problem5-3

Borrower

June

1

MerchandiseInventory

60,000

AccountsPayable

60,000

30

AccountsPayable

60,000

Short-TermNotesPayable

60,000

Aug.

29

Short-TermNotesPayable

60,000

FinancialExpenses-InterestExpenses

500

Cash

60,500

60000′5%′(60÷360)=500

Creditor

June

1

AccountsReceivable

60,000

Sales

60,000

.

30

NotesReceivable

60,000

AccountsReceivable

60,000

Aug.

29

Cash

60,500

NotesReceivable

60,000

InterestRevenue

500

60000′5%′(60÷360)=500

Problem5-4

Nov.

1

MerchandiseInventory

30,000

AccountsPayable

30,000

Dec.

1

AccountsPayable

30,000

Short-TermNotesPayable

30,000

31

FinancialExpenses-InterestExpenses

125

InterestPayable

125

30000′5%÷12=125

Mar.

1

Short-TermNotesPayable

30,000

FinancialExpenses-InterestExpenses

250

InterestPayable

125

Cash

30,375

30000′5%÷12′2=250

Problem5-5

Jun.

30

FixedAssets

230,000

NotesPayable

180,000

Cash

50,000

Dec.

31

NotesPayable

36,000

FinancialExpenses-InterestExpenses

4,500

Cash

40,500

180000÷5=36000

180000′5%÷12′6=4500

Jun.

30

NotesPayable

36,000

FinancialExpenses-InterestExpenses

3,600

Cash

39,600

(180000-36000)′5%÷12′6=3600

Problem5-6

1. Thecontingentliabilityshouldnotbeaccruedbecausethelossisnotprobable,butshouldbedisclosedinthenotestothefinancialstatementstheexistenceofapossiblecontingentliabilityrelatedtothelawsuitandtherangeofthepossibleloss.

2.

Dec.

31

AdministrationExpenses

600,000

Provisions-PendingLitigation

600,000

Theaccrualismadebecauseitisprobablethataliabilityhasbeenincurredandtheamountofthelosscanbereasonablyestimated.Thelowestamountoftherangeofpossiblelossesisusedwhennoamountisabetterestimatethananyotheramount.

TomCo.shoulddisclosethefollowinginthenotestothefinancialstatements:theamountofthesuit,thenatureofthecontingency,thereasonfortheaccrual,andtherangeofthepossibleloss.

3. Petershouldnotrecordthegaincontingencyuntilit’srealized.Usually,gaincontingenciesareneitheraccruednordisclosed.The$1,000,000gaincontingencyshouldbedisclosedonlyiftheprobabilitythatitwillberealizedisveryhigh.

Problem5-7

1.

May

10

Inventory

49,000

AccountsPayable

49,000

18

AccountsPayable

49,000

Cash

49,000

June

1

FixedAssets

60,000

NotesPayable

40,000

Cash

20,000

Sept.

30

Cash

108,000

DiscountonNotesPayable

12,000

NotesPayable

120,000

2.

Dec.

31

FinancialExpenses-InterestExpenses

2,100

InterestPayable

2,100

40000′9%′(7÷12)=2100

FinancialExpenses-InterestExpenses

3,000

DiscountonNotesPayable

3,000

12000′(3÷12)=3000

3.CurrentLiabilities

Interestpayable

Notepayable—NolanCompany

Notepayable—FirstStateBank

Less:Discountonnote

120,000

9,000

$2,100

40,000

111,000

$153,100

Problem5-8

2022

AccountsReceivable

1,050,000

Sales

1,050,000

WarrantyExpense

63,000

Provisions-Warranties

63,000

2023

Provisions-Warranties

28,000

EmployeeBenefitsPayable

18,000

Inventory

10,000

2022CurrentLiabilities—Provisions-Warranties$31,500

(Theremainderofthe$63,000liabilityisalong-termliability.)

Problem5-9

1.

2023

Dec.

1

Cash

2,000

Short-termNotesPayable

2,000

Dec.

31

FinancialExpenses-InterestExpenses

19.73

InterestPayable

19.73

$2,000×30/365×12%=$19.73.(adjustingentry)

2024

Mar.

1

FinancialExpenses-InterestExpenses

39.45

InterestPayable

19.73

Short-termNotesPayable

2,000

Cash

2,059.18

Interestthisyearis$39.45($2,000×60/365×12%).

2.

2023

Jan.

1

Cash

4,000

NotesPayable

4,000

Dec.

31

FinancialExpenses-InterestExpenses

480

Cash

480

$4,000×12%×=480

OnDecember31,2024,thejournalentryisthesameastheonepreparedonDecember31,2023.

2025

Dec.

31

FinancialExpenses-InterestExpenses

480

NotesPayable

4,000

Cash

4,480

3.

Thediscountedamountis$3,559($5,000×presentvaluefactorof0.7118).

AmortizationSchedule

Date

InterestExpense

LoanBalance

BeginningBalance

$3,559,00

December31,2023

(0.12×$3,559)=$427.08

3,986.08

December31,2024

(0.12×$3,986.08)=$478.33

4,464.41

December31,2025

(0.12×$4,464.41)=$535.73

5,000.14

Basedonthisamortizationschedule,entriesforthenotewouldbeasfollows:

2023

Jan.

1

FixedAssets

3,559

DiscountonNotePayable

1,441

NotePayable

5,000

2023

Dec.

31

FinancialExpenses-InterestExpenses

427.08

DiscountonNotePayable

427.08

2024

Dec.

31

FinancialExpenses-InterestExpenses

478.33

DiscountonNotePayable

478.33

2025

Dec.

31

FinancialExpenses-InterestExpenses

535.73

DiscountonNotePayable

535.73

2026

Jan.

1

NotePayable

5,000

Cash

5,000

4.

Thepresentvalueoftheinterestandprincipalpaymentsis$27,118($2,400×2.4018+$30,000×0.7118).

AmortizationSchedule

Date

InterestExpense

CashPayment

($30,000×8%)

DiscountAmortization

LoanBalance

BeginningBalance

$27,118

December31,2023

$3,254

$2,400

$854

27,972

December31,2024

$3,357

2,400

957

28,929

December31,2025

$3,471

2,400

1,071

30,000

InterestExpense=12%×LoanBalance

Theentriestorecordthisnotewouldbeasfollows.

2023

Jan.

1

FixedAssets

27,118

DiscountonNotePayable

2,882

NotePayable

30,000

2023

Dec.

31

FinancialExpenses-InterestExpenses

3,254

DiscountonNotePayable

854

Cash

2,400

2024

Dec.

31

FinancialExpenses-InterestExpenses

3,357

DiscountonNotePayable

957

Cash

2,400

2025

Dec.

31

FinancialExpenses-InterestExpenses

3,471

DiscountonNotePayable

1,071

Cash

2,400

2026

Jan.

1

NotePayable

30,000

Cash

30,000

Problem5-10

1

Cash

4,434,676

DiscountonBonds

565,324

BondsPayable

5,000,000

2

FinancialExpenses-BondInterestExpenses

200,000

Cash

200,000

3

FinancialExpenses-BondInterestExpenses

200,000

Cash

200,000

5000000′8%′(6÷12)=200000

4

FinancialExpenses-BondInterestExpenses

113,065

DiscountonBonds

113,065

Amortizeddiscountforthefirstyearonthe$5,000,000,8%,5-yearbonds.

$565,324÷5years=$113,065

Annualinterestpaid

$400,000

Plusdiscountamortized

113,065

Interestexpenseforfirstyear

$513,065

Chapter6Stockholders’Equity

AnswerstoMultipleChoiceQuestions

1.C

2.C

3.C

4.C

5.C

6.D

7.D

8.A

9.D

10.B

11.D

12.C

13.B

14.C

15.C

AnswerstoDiscussionQuestions

1. a.Eachpartnerisindividuallyliabletocreditorsforthedebtsincurredbythepartnership.Thus,ifapartnershipisn