Q1. On January 1, 2017, XYZ Company, purchased new equipment to produces widgets.
Cost of equipment - $1,260,000
Estimated useful life in years - 5
Estimated salvage value - 60,000
Estimated widgets to be produced in first year - 12,000
Due to demand, production of widgets will decrease by 1,000 units/year until the equipment is completely depreciated. - 1,000
The following depreciation methods may be used:
(1) Straight-line
(2) Double-declining balance
(3) Sum-of-years'-digits
(4) Units-of-output
Required:
1) Compute depreciation using the following methods:
a) Straight line
b) Double declining balance
c) Sum of the Years digits, and
d) Units of Production.
2) Select the depreciation method that would result in the highest net income on an Income Statement dated: For the 3-years ending 12/31/19.
Highlight your answer.
a) Straight line
b) Double declining balance
c) Sum of the years digits
d) Units of production
3) Using the depreciation method selected in #2 above, prepare T-Accounts for Depreciation Expense, Accumulated Depreciation, and Income Summary. Include the ending balance of all T-Accounts assuming closing entries are made at the end of each year.
Depreciation Expense
Accumulated Depreciation
Income Summary
4) Prepare a written note to a client explaining why you chose the depreciation selected in #2 above.
Q2. DEF, Inc. sells widgets with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within the first six months after purchase. Hint: this problem may require FASB Codification research.
Required:
a) DEF, Inc. estimates that if defects were detected in all products sold, repair costs would range from:
Low end of range $2,000,000 Minor repairs
High end of range $4,000,000 Major repairs
Assume no particular outcome within the range of $2 to $4 million is better than another. Prepare the required journal entry.
b) Using the same facts from part a) above, assume DEF, Inc. performs an analysis on the historical data of returns and estimates (based on historical data) finding that:
Estimated to be:
Goods sold with no defects 75% of all goods sold
Goods sold with minor defects 20% of all goods sold
Goods sold with major defects 5% of all goods sold
Prepare the required journal entry.
Q3. To raise money for a capital improvement to its national headquarters, JMP Inc. issued $2,000,000 in bonds on January 1, 2017. Hint: you may use time value of money tables to solve this problem.
Assume the following:
Amount of Bonds Issued $2,000,000
Face of Bond $1,000
Maturity date 20 years
Contract rate of interest 5%
Interest payments Semi annual
Required:
a) How many bonds were issued?
b) Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds were issued at face.
c) Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds: Were issued at: 98
d) Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds were issued at: Were issued at: 104
e) Explain different approaches to amortizing bond discount and premium.
f) Identify the amortization method preferred by FASB and explain why it's preferred.
g) Assume 5 years have passed since the bonds were originally issued and they are now trading in the secondary market. How much would a seller be willing to sell for and a buyer be willing to pay for the bonds originally issued assuming the following:
Face amount of bonds sold: $100,000
Market rate of interest on investments of similar risk: 4%
h) Describe the relationship between the contract and market rate of interest with respect to how a differential between market and contract rates affects the selling price of bonds.