Exam 3 Problems Flashcards
On January 1, 2025, Lowery Company purchased, as an investment, 5% bonds, having a maturity value of $150,000, for $138,400. The bonds provide the bondholders with a 7% yield. They are dated January 1, 2025, and mature January 1, 2035, with interest receivable June 30 and December 31 of each year. Lowery Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.
a) Prepare the schedule of interest revenue and bond amortization from January 1, 2025 through December 31, 2027. Round to whole dollars.
b) Prepare the journal entry at the date of the bond purchase.
c) Prepare the journal entry to record the interest received and the amortization for June 30, 2025.
d) Prepare the journal entry to record the interest received and the amortization for December 31, 2027.
b)
D - Investments: 138,400
C - Cash: 138,400
c)
D - Cash: 3,750
D - Investments: 1,094
C - Interest Revenue: 4,844
d)
D - Cash: 3,750
D - Investments: 1,299
C - Interest Revenue: 5,049
On January 1, 2025, Lowery Company purchased, as an investment, 5% bonds, having a maturity value of $150,000, for $138,400. The bonds provide the bondholders with a 7% yield. They are dated January 1, 2025, and mature January 1, 2035, with interest receivable June 30 and December 31 of each year. Lowery Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the avaliable-for-sale category. The fair value of the bonds at December 31 of each year-end is as follows:
2025: 145,000
2026: 143,000
2027: 157,000
Prepare the journal entries for the recognition of fair value on:
a) January 1, 2025
b) December 31, 2025
c) December 31, 2026
d) December 31, 2027
2025: 145,000 - 140,626 = 4,374
2026: 143,000 - 143,011 = 11
2027: 157,000 - 145,565 = 11,435
a)
D - Investments: 138,400
C - Cash: 138,400
b)
D - Fair Value Adjustment: 4,374
C - Unrealized Holding Gain/Loss - Equity: 4,374
c)
D - Unrealized Holding Gain/Loss - Equity: 4,385
C - Fair Value Adjustment: 4,385
d)
11 + 11,435 = 11,446
D - Fair Value Adjustment: 11,446
C - Unrealized Holding Gain/Loss - Equity: 11,446
Gardenia Company acquired 5% of the 750,000 shares of common stock of Wildflower Company at a total cost of $5.00 per share on July 1, 2025. On October 31, Wildflower Company declared and paid a $3,000 cash dividend. On December 31, Wildflower Company stock had a market price of $6.50 per share and the company reported net income of $950,000 for the year. The securities are classified as avaliable-for-sale. Prepare all journal entries for 2025.
7/1:
D - Investments (37,500 x 5): 187,500
C - Cash: 187,500
10/31:
D - Cash: 150
C - Dividend Revenue (3,000 x 5%): 150
12/31:
(6.50 - 5) x 37,500 = 56,250
D - Fair Value Adjustment: 56,250
C - Unrealized Holding Gain/Loss - Equity: 56,250
On January 1, 2025, Evans Company purchased 40% of Carroll Corporation’s 500,000 outstanding shares of common stock at a cost of 8% per share. On July 15, Carroll declared and paid a cash dividend of $1.50 per share. On December 31, Carroll reported a net income of $2,500,000 for the year and the market price of its common stock was $12 per share. The securities are classified as trading. Prepare all journal entries for 2025.
40% = Large
40% x 500,000 = 200,000 shares
1/1:
D - Investments (200,000 x 8): 1,600,000
C - Cash: 1,600,000
7/15:
D - Cash: 300,000
C - Investments (200,000 x 1.50): 300,000
12/31:
D - Investments: 1,000,000
C - Investment Income (2,500,000 x 40%): 1,000,000
Golden Doors manufacturers and sells custom folding doors for patios. Golden also provides delivery and installation service for the doors. Delivery can be provided by other vendors. The installation process does not involve changes in the doors, so this service can also be provided by other vendors.
Golden offers a contract to Barker Country Club, which is comprised of 4 custom folding doors plus delivery and installation for a price of $25,000 each. On a standalone basis, the folding doors sell for $22,500 (cost $12,000), and Golden estimates that the fair value of the delivery is $1,000 and installation service (based on cost-plus estimation) is $2,500. The contract was signed on March 21, 2025. The Country Club agreed to pay the contract price in cash in full at time of delivery on April 10, 2025. The installation of the doors was completed on April 30, 2025.
a) Would Golden record a journal entry on March 31, 2025?
b) How many performance obligations does Golden Have? Explain.
c) Show the calculations for the allocation of the transaction price to the performance obligation(s).
d) Prepare the journal entries for the dates shown.
a) No entry. Neither party has performed under the contract.
b) Three: Doors, Delivery, Installation. Total price is $25,000.
c)
Doors: (22,500 / 26,000) x 25,000 = 21,635
Delivery: (1,000 / 26,000) x 25,000 = 961
Installation: (2,500 / 26,000) x 25,000 = 2,404
21,635 + 961 + 2,404 = $25,000
d)
4/10:
D - Cash: 100,000
C - Sales (4 x 21,635): 86,540
C - Delivery Revenue (961 x 4): 3,844
C - Unearned Revenue (2,404 x 4): 9,616
4/30:
D - Unearned Revenue: 9,616
C - Installation Revenue: 9,616
The following information is given for Stuart Company:
- Tax rate for all years is 20%. Stuart’s first began operations on January 1, 2025.
- Stuart purchased a building on January 1, 2025, for $500,000. For financial statement purposes, the company is using straight-line depreciation with zero-salvage value and a 10 year estimated useful life. For tax purposes the equipment is depreciated using double declining balance with a 10 year estimated useful life.
- Stuart has a probable and estimable contingent liability in the end of 2026 of $50,000 as th result of a lawsuit. Stuart properly records this contingency in the financial statements for 2026. Stuart will, most likely, be required to pay the $50,000 at the completion of the lawsuit in 2027.
- Stuart records interest revenue on Clarksville Municipal Bonds of:
2025: 2,500
2026: 3,000
2027: 4,000 - Pre-tax financial income is:
2025: 900,000
2026: 1,400,000
2027: 1,925,000
a) Complete the schedule for depreciation.
b) Complete the schedule to determine Taxable Income for each year.
c) Prepare the journal entries for each year.
a)
Fin (2025, 2026, 2027): 500,000 / 10 = 50,000
Tax 2025: 2/10 x (500,000 - 0) = 100,000
Tax 2026: 2/10 x (500,000 - 100,000) = 80,000
Tax 2027: 2/10 x (500,000 - 180,000) = 64,000
2025: 50,000 - 100,000 = (50,000) x 20% = (10,000)
2026: 50,000 - 80,000 = (30,000) x 20% = (6,000)
2027: 50,000 - 64,000 = (14,000) x 20% = (2,800)
b) See image
c)
(multiply (b) by 20%)
2025:
D - Income Tax Expense: 179,500
C - Deferred Tax Liability: 10,000
C - Income Tax Payable: 169,500
2026:
D - Income Tax Expense: 279,400
D - Deferred Tax Asset: 10,000
C - Deferred Tax Liability: 6,000
C - Income Tax Payable: 283,400
2027:
D - Income Tax Expense: 384,200
C - Deferred Tax Asset: 10,000
C - Deferred Tax Liability: 2,800
C - Income Tax Payable: 371,400
