Final - Solutions

Final - Solutions - FINANCIAL ACCOUNTING 1 SOLUTIONS TO...

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FINANCIAL ACCOUNTING 1 SOLUTIONS TO SAMPLE FINAL EXAM PROBLEMS Question 1 (a) 1. It was not possible to determine the machine’s fair value directly, so the sales price of the machine is reported at the note’s September 30, 2007 fair value. The note’s September 30, 2007 fair value equals the present value at the date of the two instalments discounted at the buyer’s September 30, 2007 market rate of interest from their due dates of September 30, 2008 and September 30, 2009. 2. Dragon City reports 2007 interest revenue determined by multiplying the note’s carrying amount at September 30, 2007, by the buyer’s market rate of interest at the date of issue, times three-twelfths. Dragon City should recognize that there is an interest factor implicit in the note, and this interest is earned with the passage of time. Therefore, interest revenue for 2007 should include three month’s revenue. The rate used should be the market rate established by the original present value, and this is applied to the carrying amount of the note. (b) To report the discounting of the note receivable with recourse, Dragon City should decrease notes receivable by the carrying amount of the discounted note, increase cash by the amount received, and report the difference as a loss or gain as part of income from continuing operations. The contingent liability with respect to a possible customer default should be disclosed in the notes to the financial statements. (c) Dragon City should decrease cash, and increase its notes (accounts) receivable past due for all payments caused by the note’s dishonour. The notes (accounts) receivable past due should be written down to its estimated recoverable amount (or an allowance for uncollectibles established), and a loss on uncollectible notes should be recorded for the difference. SOLUTIONS TO SAMPLE FINAL EXAM PROBLEMS
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Question 2. (a) Petro Construction’s Books (1) Equipment 160,000 Acc Depreciation — Equipment 86,000 Loss on Exchange of Plant Assets 13,000 ($55,000 – $68,000) Equipment 154,000 Cash 105,000 Carbon Manufacturing’s Books (2) Cash 105,000 Equipment Inventory 55,000 Sales 160,000 Cost of Sales 145,000 Equipment Inventory 145,000 (b) Petro Construction’s Books (1) Equipment 160,000 Acc Depreciation — Equipment 86,000 Loss on Exchange of Plant Assets 13,000 Equipment 154,000 Cash 105,000 (2) Carbon Manufacturing should record the same entry as in part (a) above. No gain should be deferred because we are assuming that Petro Construction is a customer. If the emphasis by Carbon Manufacturing is an attempt to acquire inventory for resale to customers rather than on marketing inventory to obtain revenue from customers, then the gain should be deferred. Such does not appear to be the case in this problem. (c) Petro Construction’s Books
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Final - Solutions - FINANCIAL ACCOUNTING 1 SOLUTIONS TO...

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