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ORIE_350_Homework__2_fall_2007_answers - ORIE 350 Fall 2007...

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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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