1. P13.

14
BÀI LÀM
In this exercise, we'll use two possible scenarios to calculate the amount that will be listed
on the balance sheet as of December 31, 2021.
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Requirement 1:
Let's discuss first what is a warranty.
Upon the purchase of a product, the seller provides the consumer with a warranty that
has a time frame within which it may be used. As a commitment given by a seller to a
buyer to make good on a failure in quantity, quality, or performance of a product, this
warranty is a current liability on the side of the seller.
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Presented below are the sales revenue, warranty expenditures and the percentage of the
estimated warranty costs during 2019,2020, and 2021.
YearSales Rev.Warranty exp.Est. Warranty (%)2019$800,000$6,5002%20201,100,00017,2
003%20211,200,00062,0005%Year201920202021Sales Rev.$800,0001,100,0001,200,000
Warranty exp.$6,50017,20062,000Est. Warranty (%)2%3%5%
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Since we will be computing the warranty liability on December 31, 2021. The total
estimated warranty costs based on percentage is shown below:
Estimated warrant costs in percentage=2%+3%+5%=10%Estimated warrant costs in perce
ntage=2%+3%+5%=10%
As a result, we will use 10% as the expected warranty cost percentage when calculating
the total estimated warranty cost.
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Let's compute now the estimated warranty cost for each year based on the percentage
we have just computed.
201920202021Sales Revenue$800,000$1,100,000$1,200,000× Est. warranty cost in %10%
10%10%Total estimated warranty costs$80,000‾‾$110,000‾‾$120,000‾‾Sales Revenue×
Est. warranty cost in %Total estimated warranty costs2019$800,00010%$80,000
2020$1,100,00010%$110,0002021$1,200,00010%$120,000
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Now, let's compute the total estimated warranty cost:
Est. warranty cost- 2019$80,000Est. warranty cost- 2020110,000Est. warranty cost- 20211
20,000Total estimated warranty cost$310,000‾‾Est. warranty cost- 2019Est. warranty cos
t- 2020Est. warranty cost- 2021Total estimated warranty cost
$80,000110,000120,000$310,000
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Next is the computation of the warranty expenditures
Warranty expenditure - 2019$6,500Warranty expenditure - 202017,200Warranty expendi
ture - 202162,000Total warranty expenditures$85,700‾‾Warranty expenditure - 2019Wa
rranty expenditure - 2020Warranty expenditure - 2021Total warranty expenditures
$6,50017,20062,000$85,700
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After determining the total estimated warranty costs and total warranty expenditures, we
can calculate the warranty liability by subtracting the warranty expenditures from the
estimated warranty costs.
Estimated warranty cost$310,000Less: Warranty expenditures85,700Warranty liability$2
24,300‾‾Estimated warranty costLess: Warranty expendituresWarranty liability
$310,00085,700$224,300
Therefore, the warranty liability that should be reported on December 31, 2021
is $224,300.
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Requirement 2:
Before we proceed with answering the question, let's discuss first what are premiums.
Companies provide premiums to their customers in the form of rebates, discounts,
loyalty points, coupons, and other incentives to increase sales. Companies that provide
these estimate the amount to be recognized as a liability at the end of the accounting
period
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Let's have a quick discussion of the scenario given in the problem.
On December 31, 2020, the company has a $9,000 liability for unredeemed coupons. For
previous experiences, 40% of the coupons were redeemed. In 2021, coupons worth up
to $30,000 were distributed, and the merchandise to be redeemed is worth $8,000.
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Let us first compute the liability for coupons incurred during 2021. Since $30,000 in
coupons were issued, and the estimated percentage of coupons redeemed is 40%, the
additional coupons incurred in 2021 is:
Liability for coupons during 2021=$30,000×40%=$12,000Liability for coupons during 2021
=$30,000×40%=$12,000
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There was a $9,000 balance of liability at the start of 2021 from 2020, and $8,000
merchandise was distributed in exchange for coupons redeemed during 2021. With these
data, we can compute now the libaility.
Unredeemed coupons, beg. bal$9,000Liability for coupons during 202112,000Less: Coupo
n redeemed8,000Liability for coupons$13,000‾‾Unredeemed coupons, beg. balLiability fo
r coupons during 2021Less: Coupon redeemedLiability for coupons
$9,00012,0008,000$13,000
Therefore, the liability in reletion to coupons that should be reported in the balance sheet
as of December 31,2021 is $13,000.

2. Information Related to Various Bond Issues) Karen Austin Inc. has issued three types of
debt on January 1, 2020, the start of the company’s fiscal year.
a. $10 million, 10-year, 15% unsecured bonds, interest payable quarterly. Bonds were
priced to yield 12%.
b. $25 million par of 10-year, zero-coupon bonds at a price to yield 12% per year.
c. $20 million, 10-year, 10% mortgage bonds, interest payable annually to yield 12%.
Instructions
Prepare a schedule that identifies the following items for each bond:
(1) maturity value,
(2) number of interest periods over life of bond,
(3) stated rate per each interest period,
(4) effective-interest rate per each interest period,
(5) payment amount per period, and
(6) present value of bonds at date of issue.
BÀI LÀM
Step 1: Meanings of Bonds
Bonds refer to a type of investment security where an investor provides money or loan to
the company for a particular period and, in return, gets the fixed interest rate (coupon)
and the principal amount at the maturity date.
Step 2: Preparing a Schedule for 15% unsecured bonds, zero-coupon bonds, and 10%
mortgage bonds.

Sr. no. Particular 15% Unsecured Zero-coupon 10% Mortgage

Bonds Bonds Bonds

1 Maturity value $10,000,000 $25,000,000 $20,000,000

2 Number of 40 10 10
interests

periods

3 Stated rate per (15%/4) 3.75 % 0 10%

period

4 Effective rate (12%/4) 3% 12% 12%

per period

5 Payment $375,000 0 $2,000,000

amount per
period

6 Present value $11,733,639 $8,049,250 $17,739,840

Working notes:
Calculation of payments amount per bond for 15% unsecured bond.

Payments amount per period =Maturity value×Bond rate×Interest payable quaterly

=$10,000,000×15%×14=$375,000

Calculation of payments amount per bond for 10% mortgage bond.

Payments amount per period=Maturity value×Bond rate

=$20,000,000×10%=$2,000,000

Calculation of Present value for 15% unsecured bond

Present value of an annuity of $375,000 discounted at 3% per period for

$8,668,039
40 periods ($375,000×23.11477)

Present value of $10,000,000 discounted at 3% per period for 40 periods

3,065,600
at 3% per periods for 40 periods ($10,000,000×0.30656)

$11,733,639

Calculation of Present value for a zero-coupon bond

Present value of $25,000,000 discounted at 12% per period for 10 periods at 12% for 10
periods ($25,000,000×0.32197)
= $8,049,250

Calculation of Present value for a 10% mortgage bond

Present value of an annuity of $2,000,000 discounted at 12% per for 10

$11,300,440
periods ($2,000,000×5.65022)

Present value of $20,000,000 discounted at 12% per period for 10

6,439,400
years ($20,000,000×0.32197)

$17,739,840

3. Peter Company sold the following bond on January 1, 2023: $100.000; 4% bonds due
on 01/01/2028 with payments semiannually on January 1 and July 1.
The current market rate of interest on the date of sale was 6%.
Assume the sales price was $91,470
Required:
1. Use the effective interest rate method of amortization to prepare the Schedule of Bond
Discount Amortization and explain number on the Schedule of Bond Discount
Amortization
2. Prepare the journal entry at the date of the bond issuance and the interest payment
and the amortization for 2023.
Answer:

Carrying
Cash Interest Discount Amount
Date Paid Expense Amortized of Bonds
1/1/2023 $91.470
7/1/2023 $2.000 $2.744 $744 $92.214
1/1/2024 $2.000 $2.766 $766 $92.980
7/1/2024 $2.000 $2.789 $789 $93.770
1/1/2025 $2.000 $2.813 $813 $94.583
7/1/2025 $2.000 $2.837 $837 $95.420
1/1/2026 $2.000 $2.863 $863 $96.283
7/1/2026 $2.000 $2.888 $888 $97.171
1/1/2027 $2.000 $2.915 $915 $98.087
7/1/2027 $2.000 $2.943 $943 $99.029
1/1/2028 $2.000 $2.971 $971 $100.000

Journal entry at the date of the bond issuance and the interest payment and the
amortization for 2023.

4. During Year 1, Min Company incurred costs to develop and produce a routine, low –
risk computer software product, as described below:
Completion of detail program design: $12,000
Costs incurred for coding and testing to establish technological feasibility: $12,000.
Other coding costs after establishment of technological feasibility: $24,000
Other testing costs after establishment of technological feasibility: $19,000
Costs of producing product masters for training materials: $13,000
Duplication of computer software and training materials from product masters (1,000
units): $22,000
Packaging product (500 units) :$8,000
Instructions
1. In Min’s December 31, Year 1, balance sheet, what amount should be reported in
inventory?
2. In Min’s December 31, Year 1, balance sheet, what amount should be capitalized as
software cost subject to amortization?
BÀI LÀM
During Year 1, Microcomp Corp. incurred costs to develop and produce a routine, low-
risk computer software product, as described below. Completion of detail program
design $13,000 Costs incurred for coding and testing to establish technological
feasibility $10,000 Other coding costs after establishment of technological feasibility
$24,000 Other testing costs after establishment of technological feasibility $20,000
Costs of producing product masters for training materials $15,000 Duplication of
computer software and training materials from product masters (1,000 units) $25,000
Packaging product (500 units) $9,000 In Microcomp's December 31, Year 1, balance
sheet, what amount should be capitalized as software cost subject to amortization?

B. $34,000

Only the last two costs in the list are inventoried. The software development is complete
when the product masters are produced.

The duplication costs ($25,000) and packaging costs ($9,000) are debited to inventory for
a total of $34,000. These are costs necessary to bring the asset into salable condition. This
cost is expensed when product is sold.

All the costs listed above the last two are aimed at developing the software. These costs
are not debited to inventory. There is no product in which to inventory these costs until
the development is complete.

C. $59,000

Only software development costs incurred after the point of technological

feasibility is reached are capitalized as an intangible and amortized.

Technological feasibility is the point at which the firm makes the decision to
continue the product development with the expectation that a workable product is
possible. Costs of duplication and packaging are all product costs and, although
capitalized, are debited to inventory rather than to software development costs.

The capitalized software costs for this firm are:

Other coding costs after establishment of technological feasibility $24,000

Other testing costs after establishment of technological feasibility 20,000
Costs of producing product masters for training materials 15,000
Total amount subject to amortization $59,000

5. On June 2, Year 1,Ton Company issued $500,000 of 10%, 10 year bonds at par. Interest
is payable seminannually on June 1 and December 1. Bond issue costs were $9,000 and
Ton uses the straight-line method of amortizing bond issue costs. On June 2, Year 6, Tony
retired half of the bonds at 98. What is the net carrying amount that Ton should use in
computing the gain or loss on retirement of debt?
BÀI LÀM
Choice "A" is correct. The amount used to compute a gain or loss on bond retirement is
the carrying amount of the bond and the pro rata portion of the bond issue cost.
Original carrying amount $ 500,000
Bond issue cost ($9,000 x 5/10) (4,500)
Net carrying amount 6/2/Year 6 495,500
Portion retired x 50%
Amount used to compute gain/loss $ 247,750

6.On January 1, 2023, Aumont Company sold 12% bonds having a maturity value of
$500,000 for $537,907.37, which provides the bondholders with a 10% yield. The bonds
are dated January 1, 2023, and mature January 1, 2028, with interest payable December
31 of each year. Aumont Company allocates interest and unamortized discount or
premium on the effective interest basis.
Instructions
(Round answers to the nearest cent.)
a. Prepare the journal entry at the date of the bond issuance.
b. Prepare a schedule of interest expense and bond amortization for 2023–2025.
c. Prepare the journal entry to record the interest payment and the amortization for
2023,2024, 2025.
BÀI LÀM
Bước 1
For this exercise, our aim is to compute and present entries for bond transactions of
Aumount Company.
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2/15
Let's have a short recap regarding notes payable and its presentation to the financial
statements.
What is bonds payable? And, how would we know if it is associated with a discount on
bonds or premium on bonds?
Bonds are essentially financial instruments that are issued to borrow money.
Furthermore, it is a liability account on the balance sheet. It could be either a current or
non-current liability depending on the maturity of the bonds.
Bonds payable is said to be in discount when the cash received is lesser than the bonds
issued. On the other hand, it is said to be at premium when the cash received is greater
than the bonds issued.
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Let us first list down the given information to further analyze the problem and solve as
required.
Aumount Company has the following for its bonds:
Particulars Given
Issued bonds $500,000
Cash received $537,907.37
Nominal rate 12%
Effective-interest rate 10%
Aside from that, the bonds' interest is payable every December 31. Since the cash
received is greater than the bonds issued, the bonds payable will be recorded with a
premium on bonds payable. Another factor that would lead us to that approach is that
the effective-interest rate is lesser than nominal rate.
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A. Entry at the date of bond issuance
The entry for the issuance of the bonds will be as follows:
Date Particulars Debit ($) Credit ($)
January 1, 2020 Cash 537,907.37
Bonds payable 500,000
Premium on bonds payable 37,907.37
to record bonds issuance
This entry presents a receipt of cash amounting to $537,907.37. Correspondingly, the
issuance of bonds payable of $500,000 versus the receipt of cash mentioned, resulted in a
premium on bonds payable in the amount of $37,907.37.
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B. Schedule of interest expense and bond amortization for 2020-2022.
To come up with the amortization schedule, listed below are the particulars we need to
compute and the formula necessary to come up with the amounts:
Particulars Formulas
Cash Paid Principal amount ×× Nominal rate ×× Time
Interest expense Cash paid ×× Effective rate ×× Time
Premium amortization Cash paid - Interest expense
Carrying amount Previous year carrying amount - Premium amortization
We will apply the formula stated per particulars to develop the amortization table
illustrated below.
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The amortization schedule using effective-interest rate of Aumount Company from years
2020-2022 is as follows:
Date Cash paid Interest expense Premium amortization Carrying amount
01-Jan-20 537,907.37
31-Dec-20 60,000.00 53,790.74 6,209.26 531,698.11
31-Dec-21 60,000.00 53,169.81 6,830.19 524,867.92
31-Dec-22 60,000.00 52,486.79 7,513.21 517,354.71
This illustrates that the interest expense of the company as of December 31, 2022 is
$53,168.81 and the premium amortization of $6,830.19.
The carrying amount of the bonds payable as of December 31, 2022 is $524,867.92.
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C. Record the interest payment and amortization for 2020.
Firstly, let us show how we derived the amount for 2020.
The computation for the interest payment using the nominal rate is as follows:
Interest= Principal×Nominal Rate×Time=$500,000×0.12×1212=$60,000Interest= Principal
×Nominal Rate×Time=$500,000×0.12×1212=$60,000
On this formula, we substituted the bonds issued and the nominal interest rate. The
period is annual from January 1 to December 31. Therefore, the interest paid for 12%
interest of $500,000 bonds amounted to $60,000.
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Let us compute the interest expense.
The computation for the interest expense using the effective interest rate is as follows:
Interest= Principal×Effective Rate×Time=$537,907.37×0.10×1212=$53,790.74Interest= Pri
ncipal×Effective Rate×Time=$537,907.37×0.10×1212=$53,790.74
On this formula, we substituted the cash received and the effective interest rate. The
period is annual from January 1 to December 31. Therefore, the interest expense of an
effective rate of 10%, amounted to $53,790.74.
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The difference of the interest expense versus the interest paid will be recorded as
amortized premium on bonds payable. The below are the list of accounts and amounts to
be recorded:
Accounts Amounts
Interest paid $60,000
Interest expense $53,790.74
Premium on bonds payable $6,209.26
The difference between the interest paid and the interest expense resulted to an
amortized premium on bonds payable amounted to $6,209.26.
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The journal entry for the payment is as follows:
Date Particulars Debit ($) Credit ($)
December 31, 2020 Interest expense 53,790.74
Premium on bonds payable 6,209.26
Cash 60,000
to record payment of the interest expense
Again, the difference of the interest expense versus the interest paid will be recorded as
premium on bonds payable. This resulted to decrease in the amount of the premium on
bonds payable recorded upon issuance of the bonds.
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D. Record the interest payment and amortization for 2022.
Firstly, let us show how we derived the amount for 2022.
The computation for the interest payment using the nominal rate is as follows:
Interest= Principal×Nominal Rate×Time=$500,000×0.12×1212=$60,000Interest= Principal
×Nominal Rate×Time=$500,000×0.12×1212=$60,000
On this formula, we substituted the bonds issued and the nominal interest rate. The
period is annual from January 1 to December 31. Therefore, the interest paid for 12%
interest of $500,000 bonds amounted to $60,000.
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Let us compute the interest expense.
The computation for the interest expense using the effective interest rate is as follows:
Interest= Principal×Effective Rate×Time=($537,907.37 - $6,209.26 - $6,830.19)×0.10×1212
=$52,486.79Interest= Principal×Effective Rate×Time=($537,907.37 - $6,209.26 - $6,830.19
)×0.10×1212=$52,486.79
On this formula, we substituted the cash received and the effective interest rate. The
period is annual from January 1 to December 31. Therefore, the interest expense of an
effective rate of 10%, amounted to $52,486.79.
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The difference of the interest expense versus the interest paid will be recorded as
amortized premium on bonds payable. The below are the list of accounts and amounts to
be recorded:
Accounts Amounts
Interest paid $60,000
Interest expense $52,486.79
Premium on bonds payable $7,513.21
The difference between the interest paid and the interest expense resulted to an
amortized premium on bonds payable amounted to $7,513.21.
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The journal entry for the payment is as follows:
Date Particulars Debit ($) Credit ($)
December 31, 2022 Interest expense 52,486.79
Premium on bonds payable 7,513.21
Cash 60,000
to record payment of the interest expense
Again, the difference of the interest expense versus the interest paid will be recorded as
premium on bonds payable. This resulted to decrease in the amount of the premium on
bonds payable recorded upon issuance of the bonds.

7. On January 2, Pan Co acquired Shen Co in a business combination that resulted in

recognition of goodwill of $300,000 having an expected benefit period of 10 years. Shen is
treated as a reporting unit, and the entire amount of the recognized goodwill is assigned
to it. During the first quarter of the year. Shen spent an additional $50,000 on
expenditures designed to maintain goodwill. Due to these expenditures, at December 31,
Shen estimated that the benefit period of goodwill was 40 years.In its consolideted
December 31 balance sheet, what amount should Pan report as goodwill?
Bài Làm
Goodwill: 300,000
Expense: 50,000

8. Can Company is a calendar year entity with a complex capital structure. Can reported a
loss on discontinued operations (net of tax) of $1,200,000 in the first quarter when ít
income before the loss was $1,000,000
The average market price of Carolina’s common stock for the first quarter was $25, the
shares outstanding at the beginning of the period equaled 300,000 and 12,000 shares
were issued on March 1.
At the begining of the quarter, Can had outstanding $2,000,000 of 5% convertible bonds,
with each $1,000 bond convertible into 10 shares of common stock. No bonds were
converted.
At the begining of the quarter, Can also had out standing 120,000 shares of preferred
stock paying a dividend of $0,1 per share at the end of each quarter and convertible to
common stock on a one-to-one basis. Holder of 60,000 shares of preferred stock
exercised their conversion privilege on February 1.
Throughout the first quater, warants to buy 50,000 shares of Can’s common stock for $28
per share were outstanding but unexercised. Can’s tax rate was 30%.
Require:
1. Compute basic earnings per share for net income or loss.
2. Compute the weight-average number of shares used to calculate dilutive earning per
share amounts for the first quarter.
3. Compute dilutive earning per share for net income or loss.
4. Compute the effect of assumed conversions on the numerator of the dilutive earning
per share fraction.
Answer
1. The weighted – average of shares used in the BEPS denominator is 300,000+12,000
*1/3 + 60,000*2/3 = 344,000.
The numerator equals income before loss on discountinued operation minus preferred
dividends of
(120,000 preferred shares -60,000 preferred shares converted)X $0.1
=$ 6,000
The numerator equals
= $1,000,000 -$6,000 -1,200,000
= $(206,000)
BEPS = $(206,000)/344,000 = $(0.6)
2. The incremental shares from assumed conversion of warrants is zezo because they are
dilutive. The $25 market price is less than the $28 exercise price.
The assumed conversion of all the preferred shares at the begining of the quater results
in 80,000 incremental shares. ( 120,000X1/3 + 60,000 X2/3)
The assumed conversion of all the bonds at the begining of the quater results in 20,000
incremental shares = $2,000,000:$1,000 per bond *10 common shares per bond.
The weight-average number of shares used to calculate dilutive earning per share
amounts for the first quarter = 344,000 + 0 +80,000 +20,000 = 444,000
4. If all of the convertible preferred shares are assumed to be converted on January,
$6,000 of dividends will not paid.
If the bonds are assumed to be converted on January 1, interest (2,000,000 X 5%/4) X (1-
0.3) = $17,500 will not paid.
The effect of assumed conversions on the numerator of the dilutive earning per share
fraction = 6,000 + 17,500 = $23,500.
3. The numerator equals the income available to common shareholders, plus the effect
of the assumed conversions, minus the loss on discountinued operations. The
denominator equals the weighted-average of shares outstanding plus the dilutive
potential common shares.
The control number for determining whether potential common shares are dilutive of
antidilutive is $1,000,000 income before loss – (120,000 preferred shares – 60,0000
preferred shares converted) X 0,1 = $994,000
So the dilutive earnings per share is ($1,000,000-6,000+$23,500-$1,200,000)/444,000 =
$(0,41).