ORIE_350_Homework__2_fall_2007_answers - ORIE 350 Fall 2007...

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

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.