Other Journal Entries:

1. Remittance of cheque as installment on current year tax liability

Income tax expense
Cash

2. Declare and payed divideds

Dividends declared
Dividends payable

Dividends payable
Cash

3. XYZ give cash as a deposit on asset and deposit is to be returned after asset is returned
Cash
Returnable deposit liability

Interest Bearing Notes Payable: e.g. $50,000, 12-month, 8% note on account on Sept.1
Cash 50,000
Notes payable 50,000

Interest expense 1,000

Interest payable 1,000

Interest expense 3,000

Interest payable 1,000
Notes payable 50,000
Cash 54,000

Non-Interest Bearing Notes Payable: $75,000 from the bank signing 12-month, no interest $81,000 note on Sept 1.
Cash 75,000
Notes payable 75,000

Interest expense 1,500

Notes payable 1,500

Interest expense 4,500

Notes payable 4,500

Notes payable 81,000

Cash 81,000

Warranties - Expense Approach: XYZ sold 150 colour lasers in 2011 for $4,000 each, including a one-year warrenty.
Maintenance on each machine during the warranty period averages $300. Actual warranty costs incurred in 2011 were
$17,000.

Cash (4,000 x 150) 600,000

Sales 600,000

Warranty expense 17,000

Cash, inventory, Accrued payroll 17,000

Warrenty expense (45-17) 28,000

Estimated liability under warranty 28,000

Warranties - Revenue Approach: XYZ sold equipment for $20,000 on January 2, 2011. Included with the equipment
is a warranty for 2 years. Warranty estimated to have stand-along value of $1,200. $423 actual costs were incurred in
2011.
Cash 20,000
Sales 18,800
Unearned warranty revenue 1,200

Unearned warranty revenue 600

Warranty revenue 600

Warranty control expense 423

Account payable/Accrued payroll 423

GST: Smith sells supplies to Jones for $1,000 and both a 7% provincial and 5% GST is charged on this account.
Smith
A/R 1,120
Sales 1,000
Sales tax payable 70
GST payable 50

Jones
Supplies expense 1,070
GST recoverable 50
A/P 1,120

Premium entries: XYZ Corp. includes one coupon in each box of soap powder that it packs, and 10 coupons are
redeemable for a premium (kitchen utensil). In 2011, 8,800 premiums were purchased at $0.90 each and sold 120,000
boxes of soap powder at $3.30 per box. In total, 44,000 coupons were presented for redemption in 2011. It is estimated
that 60% of the coupons were eventually be presented for redemption.

Inventory of premiums (8,800 x 0.90) 7,920

Cash 7,920

Cash (120,000 x 3.30) 396,000

Sales 396,000

Premium expense 3,960

Inventory of premiums 3,960
[(44,000 / 10) x 0.90]

Premium expense 2,520

Estimated liability for premium 2,520
[(120,000 x 60%) - 44,000] / 10 x 0.90

Balance sheet:
Current assets:
Inventory of Premiums (7,920 - 3,960) 3,960

Current liabilities:
Estimated liability for premiums 2,520

Income statement:
Sales 396,000
Less: Premium expense (6,480)

Bonuses: Assume a corporate income tax rate of 40% during the 3 years. The profit before deductions for bonus and
income taxes was $250,000 in 2011, $308,000 in 2012, $350,000 in 2013 and $400,000 in 2014. The president's bonus
of 12% is deductible for tax purposes in each year and is to be calculated as follows:

(a) In 2011, the bonus is to be based on profit before deductions for bonus and income tax
Bonus = 0.12 (250,000)
= $30,000
Taxes = 0.40 ($250,000 - $30,000)
= $88,000

(b) In 2012, the bonus is to be based on profit after deduction of bonus but before deduction of income tax
B= 0.12 ($308,000 - B)
= $33,000
T= 0.40 ($308,000 - $33,000)
= $110,000

(c) In 2012, the bonus is to be based on profit before deduction of bonus but after deduction of income tax
B= 0.12 (350,000 - T)
T= 0.40 (350,000 - B)
B = $26,470.59
T = $129,411.76

(d) In 2013, the bonus is to be based on profit after deductions for the bonus and income tax
B=0.12 x {400,000 - B - [(400,000 - B x 0.40]}
B= $13,527

Liabilities: Hamilton Airlines is faced with two situations that need to be resolved before the financial statements for
the company's year ended December 31, 2011, can be issued:

(1) Airline is sued for injury caused to a child as a result of alleged negligence
Loss from Accident
Liability for accident

(2) Passengers were injured upon landing when the plane skidded off the runway, with no insurance carried
Loss from uninsured accident
Liability for uninsured accident

Bonds - Effective Interest (Premium): Forman issued $800,000 of 10%, 20 year bonds on Jan 1, 2011, at 102. Interest
is payable semi-annually on July 1 and Jan 1. Forman uses effective interest method of amortization for a bond
premium or discount. Assume an effective yield of 9.75%.

(a) Issuance of the bonds

Cash (800,000 x 102%) 816,000
Bonds payable 816,000

(b) Payment of interest and related amortization on July 1, 2011

Bond interest expense 39,780
Bonds payable 220
Cash 40,000
$39,780 = 816,000 x 9.75% x 1/2
$40,000 = 800,000 x 10% x 6/12

(c) Accrual of interest and related amortization on Dec 31, 2011

Bond interest expense 39,769

Bonds payable 231
Interest payable 40,000
$39,769 = $815,780 x 9.75% x 1/2

Amortization Schedules: Minor Inc. sells 10% bonds having a maturity value of $3 million for $2,783,724. The bonds
are dated January 1, 2011, and mature on January 1, 2016. Interest is payable annually on January 1.

Straight line
Year Int. Payable (C) Int. Exp. (D) Bonds Pay. (C) Carrying Amount
Jan 1, 2011 2,783,724
Dec 31, 2011 $300,000 343,255.20 43,255.20 2,826,979.20

Effective Rate
Year Int. Payable (C) Int. Exp. (D) Bonds Pay. (C) Carrying Amount
Jan 1, 2011 2,783,724
Dec 31, 2011 $300,000 334,046.88* 34,046.88 2,817,770.88
Dec 31, 2012 300,000 338,132.51 38,132.51 2,855,903.39
* 334,046.88 = 2,783,724 x 12%

MUST FIND EFFECTIVE RATE:

PV = 2,783,724
I=? = 12%
N=5
PMT = (300,000)
FV = (3,000,000)

Entry for Retirement of Bond: On Jan 2, 2006, Bru Corp, following PE GAAP, issued $1.5 million of 10% bonds at
97 due on December 31, 2015. Legal and other costs of $110,000 were incurred in connection with the issue. Bru has
adopted a policy of capitalizing and amortizing the legal and other costs incurred by including them with the bond
recorded at the date of issuance. Interest on the bonds is payable annually each Dec 31. $110,000 issuance costs are
deffered and amortized on a straight-line basis over 10 year term. Discount on the bonds is amortized on straight line
for 10 years. The bonds are callable at 102 and on Jan 2, 2011, the company called a face amount of $850,000 of the
bonds and retired them.

(a) Calculate the amount of loss that the company needs to recognize as a result of retiring the bonds in 2011. Prepare
journal entries to record retirement.

Reacquisition price (850,000 x 102%) 867,000

Less: net carrying amount of bonds redeemed:
Par value 850,000
 Unamortized discount (43,915)
806,085
Loss on redemption $ 60,915

Calculation of unamortized discount:

Original amount of discount (850k x 3%) 25,500
Bond issuance costs (110k x (850/1,500)) 62,333
Amount to be amortized over 10 years 87,833

Amount of discount amortized: 87,833/10 - $8,783 per year

$8783 x 5 remaining years = $43,915

January 2, 2011
Bonds payable 806,085
Loss on redemption of bonds 60,915
Cash 867,000

Impairments: On Dec 31, 2010, ABC borrowed $81,241 from XYZ, signing a $125,000 5-year, non-interest bearning
note. Note was issued to yield 9% interest. During 2011, ABC experience financial difficulty. At Dec 31, 2011, XYZ
determined it was probable that it would receive only $93,750 at maturity. The market rate of interest is now 11%.

(a) Prepare entry to record issuance of the loan by XYZ on Dec 31, 20110.

Note receivable 81,241

Cash 81,241

(b) Prepare entry to record the impairment of the loan on Dec 31, 2011 by XYZ.
Computation of impairment loss:
Carrying amount of investment (12/31/2011) 88,553
Less: present value of 93,750 due in 4 years at 9% 66,415
Loss due to impairment 22,138

Bad debt expense 22,138

Allowance for doubtful accounts 22,138

(c) Prepare entry to record the impairment of the loan on Dec 31, 2011 by ABC.
No entry because it legally owes $125,000

Term modification (Debtor's Entries): On Dec 31, 2011, XYZ enters into debt restructuring agreement with ABC.
XYZ agrees to restructure a $2-million, 12% N/R issued at par by the following modficiations:
(1) reducing principal obligation from $2 million to $1.9 million
(2) Extend maturity date from Dec 31, 2011 to Dec 31, 2014
(3) Reduce interest rate from 12% to 10%
ABC pays interest at the end of the year. On Jan 1, 2015, ABC pays $1.9 to XYZ in cash.

(a) Should ABC record a gain?

PV of old notes payable = $2 million
PV of new notes payable = ($1,900,000 @ n=3, i=12) + ($190,000 @ n=3, i=12)
= $1,808,730
Since PV of future cash flows of new debt is not greater than 10% of PV of old debt, no gain is recorded by ABC.

(b) Calculate rate of interest that ABC should use to calculate its interest expense in future periods.
PV= $2,000,000; N=3, PMT= (190,000), FV=(1,900,000)
I= 7.9592%
(c) Prepare interest payment entry for ABC on Dec 31, 2013.
Year Cash Int. Effective Int. Decrease in Carrying amount Carrying Amount
12/31/2011 2,000,000
12/31/2012 190,000 159,184 30,816 1,969,184
190,000=1,900,000 x 10% (same for all years)
159,184=2,000,000 x 7.9592%

Note payable 33,269

Interest expense 156,731
Cash 190,000

(d) What entry should ABC make on Jan 1, 2015?

Note payable 1,900,000
Cash 1,900,000

Term modification (Creditor's Entries): On Dec 31, 2011, XYZ enters into debt restructuring agreement with ABC.
XYZ agrees to restructure a $2-million, 12% N/R issued at par by the following modficiations:
(1) reducing principal obligation from $2 million to $1.9 million
(2) Extend maturity date from Dec 31, 2011 to Dec 31, 2014
(3) Reduce interest rate from 12% to 10%
ABC pays interest at the end of the year. On Jan 1, 2015, ABC pays $1.9 to XYZ in cash.

(a) What interest rate should XYZ use to calculate the loss on the restructuring?
XYZ should use the historical rate of 12% to calculate the loss.

(b) Calculate the loss that XYZ suffers. Prepare the journal entry.
Pre-structuring carrying amount of note 2,000,000
Present value of restructured cash flows1,808,730
Loss on debt structuring 191,270

I=12%; N=3; PMT=(190,000); FV=(1,900,000)

PV=$1,808,730

Bad debt expense 191,270

Allowance for doubtful accounts 191,270

(c) Prepare amortization schedule for XYZ after restructuring.

Year Cash Int. Effective Int. Increase in Carrying amount Carrying Amount
12/31/2011 1,808,730
12/31/2012 190,000 217,047 27,047 1,835,777
190,000=1,900,000 x 10% (same for all years)
217,047=1,808,730 x 12%

(d) Prepare the interest receipt entry for XYZ on Dec 31, 2013.
Cash 190,000
Allowance for doubtful accounts 30,293
Interest revenue 220,293

(e) What entry should XYZ make on Jan 1, 2015?

Cash 1,900,000
Allowance for doubtful accounts 100,000
Notes receivable 2,000,000
Settlement (Debtor's Entries): On Dec 31, 2011, XYZ enters into debt restructuring agreement with ABC. XYZ
agrees to restructure a $2-million, 12% N/R issued at par by the following modficiations:
(1) reducing principal obligation from $2 million to $1.6 million
(2) Extend maturity date from Dec 31, 2011 to Dec 31, 2014
(3) Reduce interest rate from 12% to 10%
ABC pays interest at the end of the year. On Jan 1, 2015, ABC pays $1.9 to XYZ in cash.

(a) Can ABC record a gain under this modification? If yes, record journal entry.
PV of old notes payable = $2 million
PV of new notes payable = ($1,600,000 @ n=3, i=12) + ($160,000 @ n=3, i=12)
= $1,523,141
Since PV of future cash flows of new debt is greater than 10% of PV of old debt, a gain is recorded by ABC.

Notes payable 2,000,000

Gain 400,000
Notes payable 1,600,000

(c) Prepare the amortization schedule for ABC after debt restructuring
Year Cash Int. Effective Int. Increase in Carrying amount Carrying Amount
12/31/2011 1,600,000
12/31/2012 160,000 160,000 - 1,600,000
Under terms of settlement with XYZ, the new rate of interest to be applies is 10%

(d) Prepare interest payment entries for ABC on Dec 31, 2012/13/14
Interest expense 160,000
Cash 160,000

(e) What entry should ABC make on Jan 1, 2015?

Notes payable 1,600,000
Cash 1,600,000

Settlement (Creditor's Entries): On Dec 31, 2011, XYZ enters into debt restructuring agreement with ABC. XYZ
agrees to restructure a $2-million, 12% N/R issued at par by the following modficiations:
(1) reducing principal obligation from $2 million to $1.6 million
(2) Extend maturity date from Dec 31, 2011 to Dec 31, 2014
(3) Reduce interest rate from 12% to 10%
ABC pays interest at the end of the year. On Jan 1, 2015, ABC pays $1.9 to XYZ in cash.

(a) What interest rate should XYZ use to calculate the loss on restructuring?
Historical effective interest rate, which is 12%.

(b) Calculate the loss that XYZ will suffer. Prepare jounal entry.
Pre-structuring carrying amount of note 2,000,000
Present value of restructured cash flows1,523,141
Loss on debt structuring 476,859

Bad debt expense 476,859

Allowance for doubtful accounts 476,859

(c) Prepare amortization schedule for XYZ after restructuring. Prepare interest receipt entry for XYZ on Dec 31,
2012/13/14
Year Cash Int. Effective Int. Increase in Carrying amount Carrying Amount
12/31/2011 1,523,141
12/31/2012 160,000 182,777 22,777 1,545,918
160,000 = 1,600,000 x 10%
182,777 = 1,523,141 x 12%
Cash 160,000
Allowance for doubtful accounts 22,777
Interest revenue 182,777

(e) What entry should XYZ make on Jan 1, 2015?

Cash 1,600,000
Allowance for doubtful accounts 400,000
Note receivable 2,000,000
Settlement of Debt: ABC owes XYZ $200,000 plus $18,000 of accrued interest. Debt is 10-year, 10 % note. During
2011, ABC's business deteriorated. One Dec 31, 2011, XYZ agrees to accept an old machine and cancel the entire debt.
The machine has a cost of $390,000, accumulated depreciation of $221,000, and fair value of $180,000. XYZ plans to
dispose of the machine for $6,500.

(a) Prepare journal entries for ABC and XYZ to record this debt settlement.