16-1 Solutions
CHAPTER 16
SYNTHESIS OF FINANCIAL REPORTING
Exercises and Problems: Answers and Solutions
16.1 (Identifying accounting principles.)
a. FIFO cost flow assumption.
e. Weighted-average cost flow assumption.
f. Effective interest method.
j. Allowance method.
k. Fair value hedge.
Solutions 16-2
16-3 Solutions
16.1 continued.
16.2 (Identifying generally accepted accounting principles.)
a. Market value method of accounting for either marketable securities or
long-term investments in securities classified as available for sale.
c. Equity method of accounting for long-term investments.
Receipt of dividend from an investee.
f. Equity method of accounting for long-term investments.
Accrual of investor’s share of investee’s earnings.
Solutions 16-4
i. Capital lease method of accounting for long-term leases by lessee.
16-5 Solutions
16.2 continued.
k. Fair value method for derivative accounted for as a fair value hedge.
16.3 (Chicago Corporation; comprehensive review problem.)
a. Balance, December 31, 2008. …………………………………………. $ 100,000
b. LIFO FIFO
Beginning Inventory ………………………………. $ 1,500,000 $ 1,800,000
Purchases ……………………………………………. 5,300,000 5,300,000
Available for Sale ………………………………….. $ 6,800,000 $ 7,100,000
c. The quantity of inventory increased because the LIFO ending inventory is
d. None of the companies declared dividends during 2009 because the
e. Investment in Chicago Finance Corporation …………. 1,800,000
Investment in Rosenwald Company …………………….. 125,000
Solutions 16-6
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,800,000
+1,800,000
IncSt → RE
+125,000
+125,000
IncSt → RE
+75,000
+75,000
IncSt → RE
f. $4,000,000/40 = $100,000.
16.3 continued.
g. Cash ……………………………………………………………….. 400,000
Accumulated Depreciation …………………………………. 800,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+400,000
+200,000
IncSt → RE
+800,000
–1,000,000
h. Interest Expense …………………………..………………….. 288,000
Cash (= .06 X $4,000,000) …………………………….. 240,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–240,000
+48,000
–288,000
IncSt → RE
i. Effective interest rate X $3,600,000 = $288,000. The effective interest
rate at the time of issue of 8%.
j. Difference between book and taxable depreciation = $150,000/.30 =
k. Cash ……………………………………………………………….. 1,000,000
=
Liabilities
+
Shareholders’
(Class.)
Solutions 16-8
Because the patent is being amortized at the rate of $125,000 per year,
16-9 Solutions
16.3 continued.
m. If Chicago Corporation owns less than 20% of the common stock of
Hutchinson Company, it must use the market-value method. Chicago
Corporation would show the Investment in Hutchinson account at its
earnings of Hutchinson Company.
n. Capitalized Lease Obligation ($1,100,000 –
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–170,000
–80,000
–90,000
IncSt → RE
Amortization of Leased Property Rights ……………….. 150,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–150,000
–150,000
IncSt → RE
Total expense would be $240,000 (= $90,000 +
$150,000).
o. The income statement would show a $200,000 loss from the price
Solutions 16–10
16–11 Solutions
16.3 continued.
q.
Cash
√ 200,000
Operations
(1) 4,400,000 100,000 (3)
(11) 1,000,000 300,000 (4)
Investing
Financing
Accounts Payable Merchandise Inventory
√ 500,000 √ 1,500,000
Investments in Chicago
Prepayments Finance Corporation
Solutions 16–12
16–13 Solutions
16.3 q. continued.
Investment in Investment in
Rosenwald Corporation Hutchinson Corporation
Land Building
Merchandise and Equipment Property Rights under Lease
√ 7,300,000 √ 1,500,000
Accumulated Depreciation
and Amortization Patent
Goodwill Accounts Payable
Advances from Customers Salaries Payable
Income Taxes Payable Rent Received in Advance
Solutions 16–14
Other Current Liabilities Bonds Payable
16–15 Solutions
16.3 q. continued.
Equipment Mortgage Payable Capitalized Lease Obligation
1,300,000 √ 1,100,000 √
Deferred Tax Liability Convertible Preferred Stock
1,570,000 √ 2,000,000 √
Common Stock Additional Paid-in Capital
Retained Earnings Treasury Stock
16.4 (Tuck Corporation; comprehensive review problem.)
a. Balance in Marketable Equity Securities on December
31, 2008 …………………………………………………………………… $ 125,000
b. Cost of Marketable Equity Securities Sold ………………………… $ 35,000
Solutions 16–16
Sales Proceeds …………………………………………………………….. $ 27,000
c. Balance in Allowance Account on December 31, 2008 ……….. $ 128,800
16–17 Solutions
16.4 continued.
d. LIFO Difference FIFO
Beginning Inventory ………….. $ 1,257,261 $ 430,000 $ 1,687,261
e. Unrealized Holding Loss on Investments in
Investments in Securities …………………………... 5,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–5,000
–5,000
OCI →
AOCI
To recognize unrealized holding loss on investments in
securities.
f. Dividend revenue of $8,000. The unrealized loss of $5,000 (see Part
e.
)
g. Investment in Davis Corporation …………………………. 87,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+87,000
+87,000
IncSt → RE
To recognize share of Davis Corporation’s earnings in
2009; .40 X $217,500 = $87,000.
Cash ……………………………………………………………….. 24,000
Investment in Davis Corporation …………………….. 24,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+24,000
–24,000
To recognize dividend received from Davis Corpora-
Solutions 16–18
16–19 Solutions
16.4 g. continued.
Investment in Davis Corporation …………………………. 20,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+20,000
–20,000
To record additional investment in Davis Corporation.
h. Cash ……………………………………………………………….. 7,000
Accumulated Depreciation …………………………………. 19,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+7,000
+3,000
IncSt → RE
+19,000
–23,000
i. Present Value of Lease Payment Due at Signing at Janu–
ary 2, 1997 ……………………………………………………………….. $ 10,000
j. Balance in Rental Fees Received in Advance on December
31, 2008 …………………………………………………………………… $ 46,000
k. Balance in Estimated Warranty Liability on December
Solutions 16–20