7/31/2019 Case 8-1 Norman Corp, Patrick Analysis

1/2

Submitted by: Patrick R. Hariramani

Question # 1

1. First before an expense or any entry should be recognized it must be feasible to estimate at least t

minimum amount of gain or loss. In this problem there can be no estimate given because it may win or lo

So no amount is recorded and there was no expense yet incurred. The best way to record the suit is

disclosing in a note to the financial statements.

2. This problem is different from number 1 because there is an estimate on how much it will lose. The $50,0

should be shown as an expense rather debiting it directly to Retained Earnings. It should be recorded as

Law suit loss $50,000

Low suit Liability $50,000

Lawsuit Loss will be recorded in Income Statement under Non-operating Expenses while Lawsuit Liability

be recorded in Balance Sheet under Liabilities

3. Based on conservatism concept, only $44,000 is recognized as the plant maintenance expenses. The ex

$16,000 should not be recorded to a reserve account as noncurrent liability. It should be deducted from t

allocated expenses (thus, increases income and retained earnings).The expense charge should be $44,0

The additional $16,000 should be reduced from non-current liabilities (in Balance Sheet). Then, the sa

amount should be added into the Net Income (in Income Statement) and Retained Earnings (in Bala

Sheet).

4. When there are discount arose during bond issuing, the discount should be recognized as Bond Discou

instead of Other Deferred Charges as Deferred Charges account is used to record bond issuance cost such

printing, legal and accounting costs. The journal entries are as follow

Cash Bond $80,000

Bond Discount 20,000Cash Bond Payable $100,000

In the Non-current Liabilities Bonds Payable should have a less of Bonds Discount.

5. This transaction was handled correctly.

6. This problem talks about the $500 is it will be capitalized or be expensed. If it will be expensed will it

included as a non-operating item or not. It should be recognized as:

Deferred Charges (IS) $500

Charges Payable (BS) $500

7. This car is a capital lease, since one criterion that requires capital lease treatment is transfer of title to t

lease at the end of the lease. Thus, the $35,000 value of the car should have been capitalized as an asset

January 2, 2010 and a $35,000 credit for capital lease obligations made. The entry is:

Car Capital Lease $35,000

Capital Lease Obligation $35,000

7/31/2019 Case 8-1 Norman Corp, Patrick Analysis

2/2

Assuming the straight line method, 1/5 of the asset amount which is $7,000 should be charged

depreciation expense for 2010. The depreciation is based on the cars life not of the lease agreement.

Question # 2

In item #4 we assumed that the $100,000 bond with a 5% rate involves a 15 year-end annual interest payments

$5,000 (100,000*.05). The payments is assumed to be annual, at year end. In appendix B the value of 8% for

years is 8.559. so the present value of $5,000 is $42,795, for interest payments $100,000*.315 which is $31,500

total it will be $74,295; since the investors paid $80,000 the yield rate is less than 8%.

As for the correctness of the $748 first year bond discount amortization, the calculation follows:

Since the bond proceeds were $80,000 and the true yield is 7.23% per year. 7.23% came from the inter

table that I have. Then for Year 1 net interest should be $80,000*.0723 =$5784. But the stated interest paymen

$5,000, thus the $784 interest expense is amortization of the bond discount.

Question # 3

The interest rate is determined by finding the value in Appendix B equal to $35,000 divided by the annual payme

of $13,581 for a period of 3 years. (35,000/13,581 = 2.577). The interest rate is 8%. Amortization Schedule:

Year Beg. Bal. Payment Interest Principal Reduction

1 35,000 13,581 2,800 10,781

2 24,219 13,581 1,938 11,643

3 2,576 13,581 1,006 12,575