Examination card № 23

on the discipline “Financial Accounting II”

for the 3rd year students

What are the essential characteristics of liabilities for purposes of financial reporting?
Northwest Paperboard Company, a paper and allied products manufacturer, was seeking to gain a foothold in Canada. Toward that end, the company bought 40% of the outstanding common shares of Vancouver Timber and Milling, Inc., on January 2, 2013, for $400 million. At the date of purchase, the book value of Vancouver’s net assets was $775 million. The book values and fair values for all balance sheet items were the same except for inventory and plant facilities. The fair value exceeded book value by $5 million for the inventory and by $20 million for the plant facilities. The estimated useful life of the plant facilities is 16 years. All inventory acquired was sold during 2013. Vancouver reported net income of $140 million for the year ended December 31, 2013. Vancouver paid a cash dividend of $30 million.

Required:

Prepare all appropriate journal entries related to the investment during 2013.
What amount should Northwest report as its income from its investment in Vancouver for the year ended December 31, 2013?
What amount should Northwest report in its balance sheet as its investment in Vancouver?

Esquire Company needs to acquire a molding machine to be used in its manufacturing process. Two types of machines that would be appropriate are presently on the market. The company has determined the following: Machine A could be purchased for $48,000. It will last 10 years with annual maintenance costs of $1,000 per year. After 10 years the machine can be sold for $5,000.

Machine B could be purchased for $40,000. It also will last 10 years and will require maintenance costs of $4,000 in year three, $5,000 in year six, and $6,000 in year eight. After 10 years, the machine will have no salvage value. Required: Determine which machine Esquire should purchase. Assume an interest rate of 8% properly reflects the time value of money in this situation and that maintenance costs are paid at the end of each year. Ignore income tax considerations.

Lecturer A. Kaldarova ______________________

Confirmed at the meeting of the department of "Socio-Economic Disciplines"

Minute №____ from ____ of 2015.

The dean of the faculty "International Educational Programs"

Ronald Voogdt _____________

^{name signature}

Examination card № 24

on the discipline “Financial Accounting II”

for the 3rd year students

What is a deferred annuity?
On January 1, 2013, Madison Products issued $40 million of 6%, 10-year convertible bonds at a net price of $40.8 million. Madison recently issued similar, but nonconvertible, bonds at 99 (that is, 99% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Madison’s no par common stock. Madison records interest by the straight-line method. On June 1, 2015, Madison notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2015. By June 30 all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Madison paid the semiannual interest and issued the requisite number of shares for the bonds being converted.

Required:

1. Prepare the journal entry for the issuance of the bonds by Madison.

2. Prepare the journal entry for the June 30, 2013, interest payment.

3. Prepare the journal entries for the June 30, 2015, interest payment by Madison and the conversion of the

bonds (book value method).

Universal Leasing leases electronic equipment to a variety of businesses. The company’s primary service is providing alternate financing by acquiring equipment and leasing it to customers under long-term direct financing leases. Universal earns interest under these arrangements at a 10% annual rate. The company leased an electronic typesetting machine it purchased for $30,900 to a local publisher, Desktop Inc., on December 31, 2012. The lease contract specified annual payments of $8,000 beginning January 1, 2013 , the inception of the lease, and each December 31 through 2014 (three-year lease term). The publisher had the option to purchase the machine on December 30, 2015, the end of the lease term, for $12,000 when it was expected to have a residual value of $16,000.

Required:

1. Show how Universal calculated the $8,000 annual lease payments for this direct financing lease.

2. Prepare an amortization schedule that describes the pattern of interest revenue for Universal Leasing over the lease term.

3. Prepare the appropriate entries for Universal Leasing from the inception of the lease through the end of the Lease term.