ORIE 350
Fall 2007
Homework #2
Due September 11, 2007
1.
Sonora Capital Inc. is preparing year-end adjusting journal entries.
On November 1,
2006, Sonora paid for a 6-month insurance policy in effect from November 1, 2006
until April 31, 2007 with a check for $1,200.
The company found itself with more
office space than it needed, so it rented out a portion of its office building to a start up
company, iPops.
Due to the risky nature of this business, iPops was required to pay
the entire year’s rent in advance.
iPops paid for 12 months of rent on December 1,
2006 for the period December 1, 2006 to November 30, 2007 with a check for
$18,000.
a.
Provide the adjusting journal entry that Sonora Capital must make for the
insurance policy at their fiscal year end, December 31, 2006.
Dr
Cr
Dec. 31, 2006
Insurance Expense
400
Prepaid Insurance
400
b.
Provide the adjusting journal entry that Sonora Capital must make for the office
space rental at their fiscal year end, December 31, 2006.
Dr
Cr
Dec. 31, 2006
Advances from Tenants
1,500
Rent Revenue
1,500
(2.17, Office Depot; asset recognition and valuation.)
a.
Prepaid Rent (current asset), $125,000; Security Deposit (noncurrent
asset), $130,000.
b.
Leasehold Improvements (noncurrent asset), $36,500 (= $10,000 +
$6,500 + $20,000). These expenditures prepare the rented facility for
its intended use as a retail store.
c.
Equipment or Fixtures (noncurrent asset), $31,400 [= .98
X
$30,000) +
$1,200 + $800]. The latter two expenditures prepare the display
counters for their intended use.
d.
Accounting does not recognize an asset for the future services of
employees.
e.
Accounting does not recognize any portion of expenditures on
advertising as assets because any future benefits of the advertising are
too uncertain.
f.
Merchandise Inventory (current asset) $145,600 [= (.98
X
$120,000) +
$40,000 – $12,000]. One might argue that Office Depot should reduce
3-1
Solutions
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the acquisition cost of the $28,000 (= $40,000 – $12,000) of
merchandise that it has not yet paid for by the 2 percent discount. It is
possible, however, that cash discounts are not available on this
merchandise. If Office Depot takes advantage of any discounts when it
pays for this merchandise, it will reduce the acquisition cost at that
time.
(2.19, Kansas City Royals, Inc.; liability recognition and valuation.)
a.
Accounting normally does not recognize a liability for mutually
unexecuted contracts. When the player renders services, a liability
arises.
b.
Advances from Customers (current liability), $2,700,000.
c.
Bonds Payable (noncurrent liability), $8,400,000. It is also fine to put
$8,000,000, which would be the case if one used a separate
Unamortized Bond Premium contra-liability account (this book does
not, but it is fairly common practice).
d.
Utilities Payable (current liability), $3,400.

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- Fall '07
- CALLISTER
- Balance Sheet, ........., Generally Accepted Accounting Principles
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