Question: On January 2, 2014, Jones Company purchases

> Katherine Irving, controller of Lotan Corp., is aware of a pronouncement on accounting changes. After reading the pronouncement, she is confused about what action should be taken on the following items related to Lotan Corp. for the year 2014. 1. In 2014

> Part A: This year, Gumowski Company has each of the following items in its income statement. 1. Gross profits on installment sales. 2. Revenues on long-term construction contracts. 3. Estimated costs of product warranty contracts. 4. Premiums on officers

> In 2013, Chirac Enterprises issued, at par, 60 $1,000, 8% bonds, each convertible into 100 shares of common stock. Chirac had revenues of $17,500 and expenses other than interest and taxes of $8,400 for 2014. (Assume that the tax rate is 40%.) Throughout

> During 2014, Nilsen Company started a construction job with a contract price of $1,600,000. The job was completed in 2016. The following information is available. Instructions (a) Compute the amount of gross profit to be recognized each year, assuming th

> On July 1, 2014, Roberts Corporation issued $3,000,000 of 9% bonds payable in 20 years. The bonds include detachable warrants giving the bondholder the right to purchase for $30 one share of $1 par value common stock at any time during the next 10 years.

> Organic Growth Company is presently testing a number of new agricultural seeds that it has recently harvested. To stimulate interest, it has decided to grant to five of its largest customers the unconditional right of return to these products if not full

> Many business organizations have been concerned withproviding for the retirement of employees since the late 1800s. During recent decades, a marked increasein this concern has resulted in the establishment of private pension plans in most large companies

> Basler Corporation, which began business on January 1, 2014, appropriately uses the installment-sales method of accounting. The following data were obtained for the years 2014 and 2015. Instructions (a) Compute the balance in the deferred gross profit ac

> Sarazan Company issues a 4-year, 7.5% fixed-rate interest only, non pre payable $1,000,000 note payable on December 31, 2013. It decides to change the interest rate from a fixed rate to variable rate and enters into a swap agreement with M&S Corp. The sw

> On December 31, 2010, Beckford Company issues 150,000 stock appreciation rights to its officers entitling them to receive cash for the difference between the market price of its stock and a pre-established price of $10. The fair value of the SARs is esti

> As part of the year-end audit, you are discussing the disclosure checklist with your client. The checklist identifies the items that must be disclosed in a set of IFRS financial statements. The client is surprised by the disclosure item related to accoun

> What is the indirect effect of a change in accounting policy? Briefly describe the approach to reporting the indirect effects of a change in accounting policy under IFRS.

> The following are three independent, unrelated sets of facts relating to accounting changes. Situation 1: Sanford Company is in the process of having its first audit. The company has used the cash basis of accounting for revenue recognition. Sanford pres

> On January 1, 2014, Perriman Company sold equipment for cash and leased it back. As seller-lessee, Perriman retained the right to substantially all of the remaining use of the equipment. The term of the lease is 8 years. There is a gain on the sale porti

> Whittier Construction Co. had followed the practice of expensing all materials assigned to a construction job without recognizing any salvage inventory. On December 31, 2014, it was determined that salvage inventory should be valued at $52,000. Of this a

> Jaycie Phelps Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2013. The purchase price was $1,200,000 for 50,000 shares. Kulikowski Inc. declared and paid an $0.85 per share cash dividend on June 30 and on Dec

> The asset-liability approach for recording deferred income taxes is an integral part of generally accepted accounting principles. Instructions (a) Indicate whether each of the following independent situations should be treated as a temporary difference o

> Van Hatten Industries has three operating divisions—Depp Construction Division, DeMent Publishing Division, and Ankiel Securities Division. Each division maintains its own accounting system and method of revenue recognition. Depp Construction Division D

> At the end of the current year, Joshua Co. has a defined benefit obligation of $335,000 and pension plan assets with a fair value of $345,000. The amount of the vested benefits for the plan is $225,000. Joshua has a liability gain of $8,300 (beginning ac

> Samuels Co. appropriately uses the installment-sales method of accounting. On December 31, 2016, the books show balances as follows. Instructions (a) Prepare the adjusting entry or entries required on December 31, 2016 to recognize 2016 realized gross pr

> Morlan Corporation is preparing its December 31, 2014, financial statements. Two events that occurred between December 31, 2014, and March 10, 2015, when the statements were authorized for issue, are described below. 1. A liability, estimated at $160,000

> On January 2, 2014, Parton Company issues a 5-year, $10,000,000 note at LIBOR, with interest paid annually. The variable rate is reset at the end of each year. The LIBOR rate for the first year is 5.8%. Parton Company decides it prefers fixed-rate financ

> At December 31, 2013, the available-for-sale equity portfolio for Steffi Graf, Inc. is as follows. On January 20, 2014, Steffi Graf, Inc. sold security A for $15,100. The sale proceeds are net of brokerage fees. Instructions (a) Prepare the adjusting ent

> Howat Corporation earned $360,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of $15 per share during the period. Also outstanding were 15,000 warrants that could

> Snider Corporation, a publicly traded company, is preparing the interim financial data which it will issue to its shareholders at the end of the first quarter of the 2014–2015 fiscal year. Snider’s financial accounting

> Ludwick Steel Company as lessee signed a lease agreement for equipment for 5 years, beginning December 31, 2014. Annual rental payments of $40,000 are to be made at the beginning of each lease year (December 31). The taxes, insurance, and the maintenance

> Brockman Guitar Company is in the business of manufacturing top quality, steel-string folk guitars. In recent years, the company has experienced working capital problems resulting from the procurement of factory equipment, the unanticipated buildup of re

> Why is it necessary to convert accrual-based net income to a cash basis when preparing a statement of cash flows?

> McElroy Company has the following portfolio of investment securities at September 30, 2014, its last reporting date.  On October 10, 2014, the Horton shares were sold at a price of $54 per share. In addition, 3,000 shares of Patriot common stock were ac

> Various types of accounting changes can affect the financial statements of a business enterprise differently. Assume that the following list describes changes that have a material effect on the financial statements for the current year of your business e

> Baden Corporation entered into a lease agreement for 10 photocopy machines for its corporate headquarters. The lease agreement qualifies as an operating lease in all terms except there is a bargain-purchase option. After the 5-year lease term, the corpor

> Mantle Inc. sells merchandise for cash and also on the installment plan. Entries to record cost of goods sold are made at the end of each year. Repossessions of merchandise (sold in 2014) were made in 2015 and were recorded correctly as follows. Part of

> Dexter Company appropriately uses the asset liability method to record deferred income taxes. Dexter reports depreciation expense for certain machinery purchased this year using the modified accelerated cost recovery system (MACRS) for income tax purpose

> Coffin Corporation appropriately uses the installment-sales method of accounting to recognize income in its financial statements. The following information is available for 2014 and 2015. Instructions (a) Compute the amount of realized gross profit recog

> Identify the lease classifications for lessors and the criteria that must be met for each classification.

> Dingel Corporation has contracted with you to prepare a statement of cash flows. The controller has provided the following information. Additional data related to 2014 are as follows. 1. Equipment that had cost $11,000 and was 30% depreciated at time of

> On January 2, 2014, MacCloud Co. issued a 4-year, $100,000 note at 6% fixed interest, interest payable semiannually. MacCloud now wants to change the note to a variable-rate note. As a result, on January 2, 2014, MacCloud Co. enters into an interest rate

> Winsor Inc. recently purchased Holiday Corp., a large midwestern home painting corporation. One of the terms of the merger was that if Holiday’s income for 2014 was $110,000 or more, 10,000 additional shares would be issued to Holiday’s stockholders in 2

> Derrick Company issues 4,000 shares of restricted stock to its CFO, Dane Yaping, on January 1, 2014. The stock has a fair value of $120,000 on this date. The service period related to this restricted stock is 4 years. Vesting occurs if Yaping stays with

> The accounting staff of Holder Inc. has prepared the following postretirement benefit worksheet. Unfortunately, several entries in the worksheet are not decipherable. The company has asked your assistance in completing the worksheet and completing the ac

> Nadal Inc. has two temporary differences at the end of 2013. The first difference stems from installment sales, and the second one results from the accrual of a loss contingency. Nadal’s accounting department has developed a schedule of

> Of what use is the statement of cash flows?

> Rick Kleckner Corporation recorded a finance lease at $300,000 on January 1, 2014. The interest rate is 12%. Kleckner Corporation made the first lease payment of $53,920 on January 1, 2014. The lease requires eight annual payments. The equipment has a us

> Bill Novak is working on an audit of an IFRS client. In his review of the client’s interim reports, he notes that the reports are prepared on a discrete basis. That is, each interim report is viewed as a distinct period. Is this acceptable under IFRS? If

> GAAP requires the statement of cash flows be presented when financial statements are prepared. Instructions (a) Explain the purposes of the statement of cash flows. (b) List and describe the three categories of activities that must be reported in the sta

> The actuary for the pension plan of Gustafson Inc. calculated the following net gains and losses. Other information about the company’s pension obligation and plan assets is as follows. Gustafson Inc. has a stable labor force of 400 emp

> Mathys Inc. has recently hired a new independent auditor, Karen Ogleby, who says she wants “to get everything straightened out.” Consequently, she has proposed the following accounting changes in connection with Mathys Inc.’s 2014 financial statements. 1

> Albertsen Corporation is considering proposals for either leasing or purchasing aircraft. The proposed lease agreement involves a twin-engine turboprop Viking that has a fair value of $1,000,000. This plane would be leased for a period of 10 years beginn

> Berstler Construction Company began operations in 2014. Construction activity for the first year is shown below. All contracts are with different customers, and any work remaining at December 31, 2014, is expected to be completed in 2015. Instructions Pr

> Venzuela Company’s net income for 2014 is $50,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2013, each exercisable for one share at $6. None has been exercised, and 10,000 shares of common were outstanding dur

> Charles Austin of the controller’s office of Thompson Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending December 31, 2015. Austin has compiled the information listed

> On March 5, 2015, you were hired by Hemingway Inc., a closely held company, as a staff member of its newly created internal auditing department. While reviewing the company’s records for 2013 and 2014, you discover that no adjustments h

> On January 1, 2014, Lennon Industries had stock outstanding as follows. To acquire the net assets of three smaller companies, Lennon authorized the issuance of an additional 160,000 common shares. The acquisitions took place as shown below. On May 14, 20

> Each of the following items must be considered in preparing a statement of cash flows for Cruz Fashions Inc. for the year ended December 31, 2014. 1. Fixed assets that had cost $20,000 61⁄2 years before and were being depreciated on a 10-year basis, with

> Pretax financial income for Lake Inc. is $300,000, and its taxable income is $100,000 for 2015. Its only temporary difference at the end of the period relates to a $70,000 difference due to excess depreciation for tax purposes. If the tax rate is 40% for

> Describe the current convergence efforts of the FASB and IASB in the area of accounting for taxes.

> On January 3, 2013, Martin Company purchased for $500,000 cash a 10% interest in Renner Corp. On that date, the net assets of Renner had a book value of $3,700,000. The excess of cost over the underlying equity in net assets is attributable to undervalue

> LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 500 ounces of gold in October 2014, for jewelry that will be shipped for the holiday shopping season. However, if the price of gold increases, LEW

> The following article appeared in the Wall Street Journal. Washington—The Securities and Exchange Commission staff issued guidelines for companies grappling with the problem of dividing up their business into industry segments for their annual reports. A

> Part 1: Capital leases and operating leases are the two classifications of leases described in FASB pronouncements from the standpoint of the lessee. Instructions (a) Describe how a capital lease would be accounted for by the lessee both at the inception

> Gordon Company sponsors a defined benefit pension plan. The following information related to the pension plan is available for 2014 and 2015. Instructions (a) Compute pension expense for 2014 and 2015. (b) Prepare the journal entries to record the pensio

> The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/Marksand-Spencer-Annual-report-and-financial-statements-2012.pdf. Instr

> Wise Company began operations at the beginning of 2015. The following information pertains to this company. 1. Pretax financial income for 2015 is $100,000. 2. The tax rate enacted for 2015 and future years is 40%. 3. Differences between the 2015 income

> Yanmei Construction Company began operations January 1, 2014. During the year, Yanmei Construction entered into a contract with Lundquist Corp. to construct a manufacturing facility. At that time, Yanmei estimated that it would take 5 years to complete t

> On January 1, 2014, Millay Inc. paid $700,000 for 10,000 shares of Genso Company’s voting common stock, which was a 10% interest in Genso. At that date, the net assets of Genso totaled $6,000,000. The fair values of all of Genso’s identifiable assets and

> Presented below is selected information related to the financial instruments of Dawson Company at December 31, 2014. This is Dawson Company’s first year of operations. Instructions (a) Dawson elects to use the fair value option whenever

> On January 1, 2014, Crocker Company issued 10-year, $2,000,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 15 shares of Crocker common stock. Crocker’s net income in 2014 was $300,000, and its tax rate was 40%. The company had 100,

> Goring Dairy leases its milking equipment from King Finance Company under the following lease terms. 1. The lease term is 10 years, noncancelable, and requires equal rental payments of $30,300 due at the beginning of each year starting January 1, 2014. 2

> What are interim reports? Why is a complete set of financial statements often not provided with interim data? What are the accounting problems related to the presentation of interim data?

> Turner, Inc. began work on a $7,000,000 contract in 2014 to construct an office building. During 2014, Turner, Inc. incurred costs of $1,700,000, billed its customers for $1,200,000, and collected $960,000. At December 31, 2014, the estimated future cost

> Use the information from IFRS17-10 but assume the shares were purchased to meet a non-trading regulatory requirement. In IFRS17-10 Fairbanks Corporation purchased 400 ordinary shares of Sherman Inc. as a trading investment for $13,200. During the year,

> Discuss how a change to the LIFO method of inventory valuation is handled when it is impracticable to determine previous LIFO inventory amounts.

> Selected transactions of TV Land Company are presented below. 1. A television set costing $540 is sold to Jack Matre on November 1, 2014, for $900. Matre makes a down payment of $300 and agrees to pay $30 on the first of each month for 20 months thereaft

> Teresa Ramirez and Lenny Traylor are examining the following statement of cash flows for Pacific Clothing Store’s first year of operations. Teresa claims that Pacific’s statement of cash flows is an excellent portrayal

> Pacific Crossburgers Inc. charges an initial franchise fee of $70,000. Upon the signing of the agreement, a payment of $28,000 is due. Thereafter, three annual payments of $14,000 are required. The credit rating of the franchisee is such that it would ha

> Following are selected statement of financial position accounts of Sander Bros. Corp. at December 31, 2014 and 2013, and the increases or decreases in each account from 2013 to 2014. Also presented is selected income statement information for the year en

> Fairbanks Corporation purchased 400 ordinary shares of Sherman Inc. as a trading investment for $13,200. During the year, Sherman paid a cash dividend of $3.25 per share. At year-end, Sherman shares were selling for $34.50 per share. Prepare Fairbanks’ j

> The following statement is an excerpt from the FASB pronouncement related to interim reporting. Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of suc

> What are the two basic methods of accounting for long-term construction contracts? Indicate the circumstances that determine when one or the other of these methods should be used.

> Carow Corporation purchased, as a held-for-collection investment, $60,000 of the 8%, 5-year bonds of Harrison, Inc. for $65,118, which provides a 6% return. The bonds pay interest semiannually. Prepare Carow’s journal entries for (a) The purchase of the

> Ramirez Company has a held-for-collection investment in the 6%, 20-year bonds of Soto Company. The investment was originally purchased for $1,200,000 in 2013. Early in 2014, Ramirez recorded an impairment of $300,000 on the Soto investment, due to Soto’s

> What is service cost, and what is the basis of its measurement?

> Amigos Burrito Inc. sells franchises to independent operators throughout the northwestern part of the United States. The contract with the franchisee includes the following provisions. 1. The franchisee is charged an initial fee of $120,000. Of this amo

> Use the information for Rick Kleckner Corporation from IFRS21-7. Assume that at December 31, 2014, Kleckner made an adjusting entry to accrue interest expense of $29,530 on the lease. Prepare Kleckner’s January 1, 2015, journal entry to record the second

> Midwest Health Club (MHC) offers one-year memberships. Membership fees are due in full at the beginning of the individual membership period. As an incentive to new customers, MHC advertised that any customers not satisfied for any reason could receive a

> The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/Marks-and-Spencer-Annual-report-and-financial-statements-2012.pdf. Inst

> Norman Co., a fast-growing golf equipment company, uses GAAP. It is considering the issuance of convertible bonds. The bonds mature in 10 years, have a face value of $400,000, and pay interest annually at a rate of 4%. The equity component of the bond is

> Widjaja Company is accounting for a long term construction contract using the percentage-of-completion method. It is a 4-year contract that is currently in its second year. The latest estimates of total contract costs indicate that the contract will be c

> Which types of investments are valued at amortized cost? Explain the rationale for this accounting.

> Briefly describe some of the similarities and differences between GAAP and IFRS with respect to reporting accounting changes.

> You have been asked by a client to review the records of Roberts Company, a small manufacturer of precision tools and machines. Your client is interested in buying the business, and arrangements have been made for you to review the accounting records. Yo

> Richardson Company is contemplating the establishment of a share-based compensation plan to provide long-run incentives for its top management. However, members of the compensation committee of the board of directors have voiced some concerns about adopt

> Outline the accounting procedures involved in applying the operating method by a lessor.

> The comparative balance sheets for Hinckley Corporation show the following information. Additional data related to 2014 are as follows. 1. Equipment that had cost $11,000 and was 40% depreciated at time of disposal was sold for $2,500. 2. $10,000 of the

> On January 1, 2014, Lesley Benjamin signed an agreement to operate as a franchisee of Campbell Inc. for an initial franchise fee of $50,000. The amount of $10,000 was paid when the agreement was signed, and the balance is payable in five annual payments

> The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/Marksand-Spencer-Annual-report-and-financial-statements-2012.pdf. Instr

> Cutting Edge is a monthly magazine that has been on the market for 18 months. It currently has a circulation of 1.4 million copies. Negotiations are underway to obtain a bank loan in order to update the magazine’s facilities. They are producing close to

> Assume that Sarazan Company has a share-option plan for top management. Each share option represents the right to purchase a $1 par value ordinary share in the future at a price equal to the fair value of the shares at the date of the grant. Sarazan has

> Jennings Inc. reported the following pretax income (loss) and related tax rates during the years 2010–2016. Pretax financial income (loss) and taxable income (loss) were the same for all years since Jennings began business. The tax rate

> Griseta & Dubel Inc. was formed early this year to sell merchandise credits to merchants who distribute the credits free to their customers. For example, customers can earn additional credits based on the dollars they spend with a merchant (e.g., air