Tut 1
Tut 2
E5.2 (LO 1, 2) (Simple and Compound Interest Computations) Sue Ang invests HK$30,000 at 8%
annual interest, leaving the money invested without withdrawing any of the interest for 8 years. At the
end of the 8 years, Sue withdraws the accumulated amount of money.
Instructions
a. Compute the amount Sue would withdraw assuming the investment earns simple interest.
b. Compute the amount Sue would withdraw assuming the investment earns interest compounded
annually.
c. Compute the amount Sue would withdraw assuming the investment earns interest compounded
semiannually.
E5.3 (LO 2, 3, 4) (Computation of Future Values and Present Values) Using the appropriate interest
table, answer each of the following questions. (Each case is independent of the others.)
a. What is the future value of €9,000 at the end of 5 periods at 8% compounded interest?
b. What is the present value of €9,000 due 8 periods hence, discounted at 6%?
c. What is the future value of 15 periodic payments of €9,000 each made at the end of each period and
compounded at 10%?
d. What is the present value of €9,000 to be received at the end of each of 20 periods, discounted at 5%
compound interest?
E5.12 (LO 4) (Analysis of Alternatives) Brubaker Inc., a manufacturer of high-sugar, low- sodium, low-
cholesterol TV dinners, would like to increase its market share in the state of New South
Wales, Australia. In order to do so, Brubaker has decided to locate a new factory in Sydney. Brubaker will
either buy or lease a site, depending upon which is more advantageous. The site location committee has
narrowed down the available sites to the following three buildings.
Building A: Purchase for a cash price of A$610,000, useful life 25 years.
Building B: Lease for 25 years with annual lease payments of A$70,000 being made at the beginning of
the year.
Building C: Purchase for A$650,000 cash. This building is larger than needed; however, the excess space
can be sublet for 25 years at a net annual rental of A$6,000. Rental payments will be received at the end
of each year. Brubaker Inc. has no objection to being a landlord.
Instructions
In which building would you recommend that Brubaker Inc. locate, assuming a 12% cost of funds?
E5.13 (LO 5) (Computation of Bond Liability) Messier SA manufactures cycling equipment. Recently,
the vice president of operations of the company requested the construction of a new plant to meet the
increasing demand for the company’s bikes. After a careful evaluation of the request, the board of
directors has decided to raise funds for the new plant by issuing €3,000,000 of 11% term company bonds
on March 1, 2025, due on March 1, 2040, with interest payable each March 1 and September 1.
At the time of issuance, the market interest rate for similar financial instruments is 10%.
Instructions
As the controller of the company, determine the selling price of the bonds.
P5.3 (LO 2, 4) (Analysis of Alternatives) Assume that Koh ShopMart has decided to surface and
maintain for 10 years a vacant lot next to one of its stores to serve as a parking lot for customers.
Management is considering the following bids involving two different qualities of surfacing for a parking
area of 12,000 square yards (amounts in thousands).
Bid A: A surface that costs W5.75 per square yard to install. This surface will have to be replaced at
the end of 5 years. The annual maintenance cost on this surface is estimated at 25 cents per square
yard for each year except the last year of its service. The replacement surface will be similar to the initial
surface.
Bid B: A surface that costs W10.50 per square yard to install. This surface has a probable useful life of 10
years and will require annual maintenance in each year except the last year, at an estimated cost of 9
cents per square yard.
Instructions
Prepare computations showing which bid should be accepted by Koh ShopMart. You may assume that the
cost of capital is 9%, that the annual maintenance expenditures are incurred at the end of each year, and
that prices are not expected to change during the next 10 years.
Tut 3
E13.7 (LO 1) r (Determine Proper Amounts in Account Balances) Presented below are three
independent situations.
Instructions
a. McEntire Co. sold $2,500,000 of 11%, 10-year bonds at 106.231 to yield 10% on January 1, 2025. The
bonds were dated January 1, 2025, and pay interest on July 1 and January 1. Determine the amount of
interest expense to be reported on July 1, 2025, and December 31, 2025.
b. Cheriel Inc. issued $600,000 of 9%, 10-year bonds on June 30, 2025, for $562,500. This price provided
a yield of 10% on the bonds. Interest is payable semiannually on December 31 and June 30.
Determine the amount of interest expense to record if financial statements are issued on
October 31, 2025.
c. On October 1, 2025, Chinook Company sold 12% bonds having a maturity value of $800,000 for
$853,382 plus accrued interest, which provides the bondholders with a 10% yield. The bonds are dated
January 1, 2025, and mature January 1, 2030, with interest payable December 31 of each year. Prepare
the journal entries at the date of the bond issuance and for the first interest payment.
E13.8 (LO 1) k (Entries and Questions for Bond Transactions) On June 30, 2024, Macias SA issued
R$5,000,000 face value of 13%, 20-year bonds at R$5,376,150 to yield 12%. The bonds pay semiannual
interest on June 30 and December 31.
Instructions
a. Prepare the journal entries to record the following transactions.
1. The issuance of the bonds on June 30, 2024.
2. The payment of interest and the amortization of the premium on December 31, 2024.
3. The payment of interest and the amortization of the premium on June 30, 2025.
4. The payment of interest and the amortization of the premium on December 31, 2025.
b. Show the proper statement of financial position presentation for the liability for bonds payable on
the December 31, 2025, statement of financial position.
c. Provide the answers to the following questions.
1. What amount of interest expense is reported for 2025?
2. Determine the total cost of borrowing over the life of the bond.
E13.11 (LO 2) (Entries for Zero-Interest-Bearing Notes) On January 1, 2025, McLean AG makes the
two following acquisitions.
1. Purchases land having a fair value of €300,000 by issuing a 5-year, zero-interest-bearing promissory
note in the face amount of €505,518.
2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of €400,000
(interest payable annually). The company has to pay 11% interest for funds from its bank.
Instructions
a. Record the two journal entries that should be recorded by McLean AG for the two purchases on
January 1, 2025.
b. Record the interest at the end of the first year on both notes.
E13.15 (LO 1, 3) (Entries for Retirement and Issuance of Bonds) On June 30, 2017, Mendenhal plc
issued 8% bonds with a par value of £600,000 due in 20 years. They were issued at 82.8414 to yield 10%
and were callable at 104 at any date after June 30, 2025. Because of lower interest rates and a significant
change in the company’s credit rating, it was decided to call the entire issue on June 30, 2026, and to issue
new bonds. New 6% bonds were sold in the amount of £800,000 at 112.5513 to yield 5%; they mature in
20 years. Interest payment dates are December 31 and June 30 for both old and new bonds.
Instructions
a. Prepare journal entries to record the retirement of the old issue and the sale of the new issue on June
30, 2026. Unamortized discount is £78,979.
b. Prepare the entry required on December 31, 2026, to record the payment of the first 6 months’ interest
and the amortization of premium on the bonds.
Tut 4&5
E20.1 (LO 2) (Lessee Entries, No Residual Value) DU Journeys enters into an agreement with Traveler
plc to lease a car on December 31, 2024. The following information relates to this agreement.
1. The term of the non-cancelable lease is 3 years with no renewal or bargain purchase option. The
remaining economic life of the car is 3 years, and it is expected to have no residual value at the end
of the lease term.
2. The fair value of the car was £15,000 at commencement of the lease.
3. Annual payments are made on December 31 at the end of each year of the lease, beginning December
31, 2025. The first payment is £5,552.82, with each payment increasing by a constant rate of 5% from the
previous payment (i.e., the second payment will be £5,830.46, and the third and final payment will be
£6,121.98).
4. DU Journeys’ incremental borrowing rate is 8%. The rate implicit in the lease is unknown.
5. DU Journeys uses straight-line depreciation for all similar cars.
Instructions
• Prepare DU Journeys’ journal entries for 2024, 2025, and 2026.
• Assume that, instead of a constant rate of increase, the annual lease payments will increase accord ing
to a price index. At its current level, the price index stipulates that the first rental payment should be
£5,820. What would be the impact on the journal entries made by DU Journeys at commencement of the
lease, as well as for subsequent years?
E20.2 (LO 2) (Lessee Entries, Lease with Unguaranteed Residual Value) On December 31, 2024,
Burke Corporation signed a 5-year, non-cancelable lease for a machine. The terms of the lease called for
Burke to make annual payments of $8,668 at the beginning of each year, starting December 31, 2024. The
machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. The machine
reverts back to the lessor at the end of the lease term. Burke uses the straight-line method of depreciation
for all of its plant assets. Burke’s incremental borrowing rate is 5%, and the lessor’s implicit rate is
unknown.
Instructions
a. Compute the present value of the lease payments.
b. Prepare all necessary journal entries for Burke for this lease through December 31, 2025.
E20.3 (LO 2) (Lessee Computations and Entries, Lease with Guaranteed Residual Value)
Delaney AG leases an automobile with a fair value of €10,000 from Simon Motors, on the following terms.
1. Non-cancelable term of 50 months.
2. Rental of €200 per month (at the beginning of each month). (The present value at 0.5% per month is
€8,873.)
3. Delaney guarantees a residual value of €1,180 (the present value at 0.5% per month is €920). Delaney
expects the probable residual value to be €1,180 at the end of the lease term.
4. Estimated economic life of the automobile is 60 months.
5. Delaney’s incremental borrowing rate is 6% a year (0.5% a month). Simon’s implicit rate is unknown.
Instructions
a. What is the present value of the lease payments to determine the lease liability?
b. Record the lease on Delaney’s books at the date of commencement.
c. Record the first month’s lease payment (at commencement of the lease).
d. Record the second month’s lease payment.
e. Record the first month’s depreciation on Delaney’s books (assume straight-line).
f. Suppose that instead of €1,180, Delaney expects the residual value to be only €500 (the guaranteed
amount is still €1,180). How does the calculation of the present value of the lease payments change from
part (b)?
E20.6 (LO 3) (Lessor Entries, Sales-Type Lease with Option to Purchase) Castle Leasing Company
signs a lease agreement on January 1, 2025, to lease electronic equipment to Jan Way Company. The term
of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following
information relates to this agreement.
1. Jan Way has the option to purchase the equipment for $16,000 upon termination of the lease. It is not
reasonably certain that Jan Way will exercise this option.
2. The equipment has a cost of $120,000 and fair value of $160,000 to Castle Leasing. The useful
economic life is 2 years, with a residual value of $16,000.
3. Castle Leasing desires to earn a return of 5% on its investment.
4. Collectibility of the payments by Castle Leasing is probable.
Instructions
a. Prepare the journal entries on the books of Castle Leasing to reflect the payments received under the
lease and to recognize income for the years 2025 and 2026.
b. Assuming that Jan Way exercises its option to purchase the equipment on December 31, 2026, prepare
the journal entry to record the sale on Castle Leasing’s books.
E20.12 (LO 2, 3, 4) (Lessee-Lessor Entries, Sales-Type Lease with Bargain Purchase Option)
On January 1, 2025, Bensen Company leased equipment to Flynn Corporation. The following information
pertains to this lease.
1. The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to
purchase the equipment for $1,000, while the expected residual value at the end of the lease is $5,000.
2. Equal rental payments are due on January 1 of each year, beginning in 2025.
3. The fair value of the equipment on January 1, 2025, is $150,000, and its cost is $120,000.
4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight- line
basis.
5. Bensen set the annual rental to ensure a 5% rate of return. Flynn’s incremental borrowing rate is 6%,
and the implicit rate of the lessor is unknown.
6. Collectibility of lease payments by the lessor is probable.
Instructions
(Both the lessor and the lessee’s accounting periods end on December 31.)
a. Discuss the nature of this lease for Bensen.
b. Calculate the amount of the annual rental payment.
c. Prepare all the necessary journal entries for Bensen for 2025.
d. Suppose the collectibility of the lease payments was not probable for Bensen. Prepare all necessary
journal entries for the company in 2025.
e. Prepare all the necessary journal entries for Flynn for 2025.
f. Discuss the effect on the journal entry for Flynn at lease commencement, assuming initial direct costs of
$2,000 are incurred by Flynn to negotiate the lease.
Tut 6
E16.1 (LO 1, 2) (Investment Classifications) For the following investments, identify whether they are:
1. Debt investments—held-for-collection.
2. Debt investments—held-for-collection and selling.
3. Debt investments—trading.
4. Trading equity investments.
5. Non-trading equity investments.
Each case is independent of the other.
a. A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the
value increases, which is expected next month, it will be sold.
b. 10% of the outstanding shares of Farm-Co are purchased. The company is planning on eventually
getting a total of 30% of its outstanding shares.
c. Ten-year bonds were purchased this year. The bonds mature at the first of next year, and the company
plans to sell the bonds if interest rates fall.
d. Bonds that will mature in 5 years are purchased. The company has a strategy to hold them to collect
interest payments and principal of the bonds at maturity.
e. A bond that matures in 10 years was purchased. The company is investing money set aside for an
expansion project planned 10 years from now.
f. Ordinary shares in a distributor are purchased to meet a regulatory requirement for doing business in
the distributor’s region. The investment will be held indefinitely.
E16.5 (LO 1) (Debt Investments) On January 1, 2025, Morgan Company acquires $300,000 of Nicklaus,
Inc., 9% bonds at a price of $278,384. The interest is payable each December 31, and the bonds mature
December 31, 2027. The investment will provide Morgan Company a 12% yield. The bonds are classified
as held-for-collection.
Instructions
a. Prepare a 3-year schedule of interest revenue and bond discount amortization. (Round nearest cent.)
b. Prepare the journal entry for the interest receipt of December 31, 2026, and the discount amortization.
E16.9 (LO 4) (Comprehensive Income Disclosure) Assume the same information as E16.6 and that
Steffi Graf SA reports net income in 2025 of €120,000 and in 2026 of €140,000. Total holding gains
(including any realized holding gain or loss) equal €40,000 in 2026.
Instructions
a. Prepare a statement of comprehensive income for 2025, starting with net income.
b. Prepare a statement of comprehensive income for 2026, starting with net income.
Tut 7
E17.1 (LO 1) (Fundamentals of Revenue Recognition) Presented below are five different situations.
Provide an answer to each of these questions.
1. The Kawaski Jeep dealership sells both new and used Jeeps. Some of the Jeeps are used for demon-
stration purposes; after 6 months, these Jeeps are then sold as used vehicles. Should Kawaski Jeep record
these sales of used Jeeps as revenue or as a gain?
2. One of the main indicators of whether control has passed to the customer is whether revenue has been
earned. Is this statement correct?
3. One of the five steps in determining whether revenue should be recognized is whether the sale has been
realized. Do you agree?
4. One of the criteria that contracts must meet to apply the revenue standard is that collectibility of the
sales price must be reasonably possible. Is this correct?
5. Many believe the distinction between revenue and gains is important in the financial statements.
Given that both revenues and gains increase net income, why is the distinction important?
E17.4 (LO 2) (Determine Transaction Price) Jupiter Company sells goods to Danone Inc. by ac- cepting
a note receivable on January 2, 2025. The goods have a sales price of $610,000 (cost of $500,000). The
terms are net 30. If Danone pays within 5 days, however, it receives a cash discount of $10,000. Past history
indicates that the cash discount will be taken. On January 28, 2025, Danone makes payment to Jupiter for
the full sales price.
Instructions
a. Prepare the journal entry or entries to record the sale and related cost of goods sold for Jupiter Company
on January 2, 2025, and the payment on January 28, 2025. Assume that Jupiter Company records the
January 2, 2025, transaction using the net method.
b. Prepare the journal entry or entries to record the sale and related cost of goods sold for Jupiter Company
on January 2, 2025, and the payment on January 28, 2025. Assume that Jupiter Company records the
January 2, 2025, transaction using the gross method.
E17.5 (LO 2) (Determine Transaction Price) Jeff Heun, president of Concrete Always, agrees to construct
a concrete cart path at Dakota Golf Club. Concrete Always enters into a contract with Dakota to construct
the path for $200,000. In addition, as part of the contract, a performance bonus of $40,000 will be paid
based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-
upon date. The performance bonus decreases by $10,000 per week for every week beyond the agreed-
upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as
part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the
performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs, that there is
55% probability that he will complete the project on time, a 30% probability that he will be 1 week late,
and a 15% probability that he will be 2 weeks late.
Instructions
a. Determine the transaction price that Concrete Always should compute for this agreement.
b. Assume that Jeff Heun has reviewed his work schedule and decided that it makes sense to complete this
project on time. Assuming that he now believes that the probability for completing the project on time is
90% (otherwise it will be finished 1 week late), determine the transaction price.
E17.10 (LO 2) (Allocate Transaction Price) Geraths Windows manufactures and sells custom storm
windows for three-season porches. Geraths also provides installation service for the windows.
The installation process does not involve changes in the windows, so this service can be performed by
other vendors. Geraths enters into the following contract on July 1, 2025, with a local homeowner. The
customer purchases windows for a price of $2,400 and chooses Geraths to do the installation. Geraths
charges the same price for the windows whether it does the installation, or not. The installation service is
estimated to have a standalone selling price of $600. The customer pays Geraths $2,000 (which equals the
standalone selling price of the windows, at a cost of $1,100) upon delivery and the remaining balance upon
installation of the windows. The windows are delivered on September 1, 2025, Geraths completes
installation on October 15, 2025, and the customer pays the balance due.
Instructions
Prepare the journal entries for Geraths in 2025. (Round amounts to nearest dollar.)
E17.11 (LO 2) (Allocate Transaction Price) Refer to the revenue arrangement in E17.10.
Instructions
Repeat the requirements, assuming that (a) Geraths estimates the standalone selling price of the
installation based on an estimated cost of $400 plus a margin of 20% on installation cost, and that (b) given
the uncertainty of finding skilled labor, Geraths is unable to develop a reliable estimate for the standalone
selling price of the installation. (Round amounts to nearest dollar.)
E17.26 (LO 3) (Warranty Arrangement) On January 2, 2025, Grando Company sells production
equipment to Fargo Inc. for $50,000. Grando includes a 2-year assurance warranty with the sale of all its
equipment. The customer receives and pays for the equipment on January 2, 2025. During 2025, Grando
incurs costs related to warranties of $900. At December 31, 2025, Grando estimates that $650 of warranty
costs will be incurred in the second year of the warranty.
Instructions
a. Prepare the journal entry or entries to record this transaction during 2025 (assuming financial
statements are prepared on December 31, 2025). (Ignore cost of goods sold.)
b. Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an
extended warranty (service-type warranty) for an additional 2 years (2027–2028) for $800.
Tut 8
E18.2 (LO 1) (Two Differences, No Beginning Deferred Taxes, Tracked Through 2 Years) The
following information is available for McKee plc for 2025.
1. Excess of tax depreciation over book depreciation, £40,000. This £40,000 difference will reverse
equally over the years 2026–2029.
2. Deferral, for book purposes, of £25,000 of rent received in advance. The rent will be recorded as
revenue in 2026.
3. Pretax financial income, £350,000. There are no deferred taxes at the beginning of 2025.
4. Tax rate for all years, 40%.
Instructions
a. Compute taxable income for 2025.
b. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2025.
c. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2026, assuming taxable income of £325,000.
E18.3 (LO 1, 2) (One Temporary Difference, Future Taxable Amounts, One Rate, Beginning
Deferred Taxes) Brennan Corporation began 2025 with a $90,000 balance in the Deferred Tax Liability
account. At the end of 2025, the related cumulative temporary difference amounts to $350,000, and it will
reverse evenly over the next 2 years. Pretax accounting income for 2025 is $525,000, the tax rate for all
years is 40%, and taxable income for 2025 is $400,000.
Instructions
a. Compute income taxes payable for 2025.
b. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2025.
c. Prepare the income tax expense section of the income statement for 2025, beginning with the line
“Income before income taxes.”
E18.4 (LO 1, 2) (Three Differences, Compute Taxable Income, Entry for Taxes) Havaci SpA reports
pretax financial income of €80,000 for 2025. The following items cause taxable income to be different
than pretax financial income.
1. Depreciation on the tax return is greater than depreciation on the income statement by €16,000.
2. Rent collected on the tax return is greater than rent revenue reported on the income statement by
€27,000.
3. Fines for pollution appear as an expense of €11,000 on the income statement. Havaci’s tax rate is 30%
for all years, and the company expects to report taxable income in all future years. There are no deferred
taxes at the beginning of 2025.
Instructions
a. Compute taxable income and income taxes payable for 2025.
b. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2025.
c. Prepare the income tax expense section of the income statement for 2025, beginning with the line
“Income before income taxes.”
d. Compute the effective income tax rate for 2025.
E18.5 (LO 1, 2) (Two Temporary Differences, One Rate, Beginning Deferred Taxes) The following
facts relate to Alschuler plc.
1. Deferred tax liability, January 1, 2025, £40,000.
2. Deferred tax asset, January 1, 2025, £0.
3. Taxable income for 2025, £115,000.
4. Pretax financial income for 2025, £200,000.
5. Cumulative temporary difference at December 31, 2025, giving rise to future taxable amounts,
£220,000.
6. Cumulative temporary difference at December 31, 2025, giving rise to future deductible amounts,
£35,000.
7. Tax rate for all years, 40%.
8. The company is expected to operate profitably in the future.
Instructions
a. Compute income taxes payable for 2025.
b. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2025.
c. Prepare the income tax expense section of the income statement for 2025, beginning with the line
“Income before income taxes.”
Tut 9
Additional information:
1. Accounts receivable decreased R$310,000 during the year.
2. Prepaid expenses increased R$170,000 during the year.
3. Accounts payable to suppliers of merchandise decreased R$275,000 during the year.
4. Accrued expenses payable decreased R$120,000 during the year.
5. Administrative expenses include depreciation expense of R$60,000.
Instructions
Prepare the operating activities section of the statement of cash flows for the year ended December 31,
2025, for Rodriquez SA, using the indirect method.
E22.4 (LO 3) (Preparation of Operating Activities Section—Direct Method) Data for the
Rodriquez SA are presented in E22.3.
Instructions
Prepare the operating activities section of the statement of cash flows using the direct method.
Instructions
Prepare a statement of cash flows using the indirect method.
E22.12 (LO 3) (SCF—Direct Method) Data for Fairchild SA are presented in E22.11.
Instructions
Prepare a statement of cash flows using the direct method.
Tut 10