Intermediate Accounting II -

Intermediate Accounting IIACCT 356

Spring, 2011

W. David Albrecht, Ph.D., CPA

Associate Professor of Accounting

Offutt School of BusinessConcordia CollegeMoorhead, MN

Last update: April 28, 2011Word count: 91,575

© 2011 by W. David Albrecht. .


Spring, 2011Table of Contents

Instructor contact information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Course time and location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Prerequisites & position in the accounting program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Who should take this course . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1What Intermediate Accounting is all about . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Why you should take this course . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Approach to the course . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Professor’s goals for this course . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Foundational knowledge and application learning outcomes

and assessment for students . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Learning outcomes and assessment for holistic educationWhat each class is like . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Required materials (textbook & calculator) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Grading policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9How to study for this course . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Attendance policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Homework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Class discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Computers and e-mail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Accommodations for disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Religious holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Codes of conduct and academic policy statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Academic honesty for ACCT 356 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Schedule of approximate due dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Topical content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14About the professor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Papers and projects (part of course grade) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . start on 16Resources (to supplement textbook) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . start on 41Homework problems (essential for learning, not part of course grade) . . . . . . start on 118Solutions to homework problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . start on 181Exam previews . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . start on

© 2011 by W. David Albrecht. .

Professor : Dr . David AlbrechtAssociate Professor of Accounting

Office: 401A Old Main

Phone: 419-575-4513 (cell, call/text any time)218-299-3523

E-mail: [email protected]@cord.edu

Web: http://profalbrecht.wordpress.comHttp://accountingprofessor .wordpress.com

Classes: 256 12:50 TTh 101 Old Main356 10:30 TTh 225 Ivers356 4:30 TTh 225 Ivers

Off Hrs: 12:15-12:45 TTh2:35-4:25 TThContact me for other timesWalk-ins are always welcome


Spring, 2011

Prerequisites & position in the accounting program

The prerequisites of this course for undergraduate students are (1) passing Principles of

Accounting I (ACCT 155) or the equivalent,(2) passing Principles of Accounting II (ACCT 156), and

(3) passing Intermediate Accounting I (ACCT 355).

Undergraduate accounting students must take at least six accounting courses to

graduate with an accounting degree. If you plan on taking the CPA exam in

Minnesota or North Dakota, you can sit for it during the semester you are to reach

150 hours, or you can wait until after you complete 150 hours.

Who should take this course

All accounting majors. Every finance major. Possibly, everyone else.

Accounting can be

the key

to your future.

1© 2011 by W. David Albrecht. .

What to do?

What Intermediate Accounting is all about

Financial accounting refers to the financial statements (and the entire process involved in creating

the financial statements) published by a company for an audience of interested parties outside the

company. It is very important to our economy because many people, such as investors and lenders,

need information to help them make informed decisions. For example, an investor is a person with

excess money who wants additional income. The investor sometimes has the opportunity to buy stock

in a particular company. Many factors go into the investor's decision, such as:

- Is the person running the company capable?

- Is the manager someone I can trust?

- Can the business make money?

- How long before I can get my profits & money out of the investment?

- What are the chances of losing my investment?

A company prepares financial reports, financial accounting's product, to inform investors and

other interested parties about its financial performance. The four financial reports are the

income statement, balance sheet, statement of cash flows, and statement of

changes in stockholders equity. For example, the investor looks at the income

statement to see if the company has made a profit in the past. Past profitability

is a factor in predicting future profitability. The investor can look at the

balance sheet to see if the company owes others a lot of money. A small debt

load lessens the investment's risk. The statement of cash flows reveals the rates of dividend

payout in the past.

To help the investor, the manager hires a credible outsider (a Certified Public

Accountant) to check on the truthfulness of the financial statements. This may not

help the investor trust the manager, but it will enable the investor to trust the financial

statements. Financial reports don't directly evaluate the manager, but they can be

used by investors to help them form an opinion about the manager.


Why you should take this course

I believe that Intermediate Accounting I and Intermediate Accounting II are the most valuable

courses in the undergraduate accounting program, and possibly the most valuable courses you will ever

take. There are many reasons for this, however, I will focus on only four.

Taking Intermediate Accounting now is more important than ever because the

rules of financial accounting change all the time. Perhaps you knew something

about the financial accounting rules in place two years ago. Well, they have

changed so much that publishing houses are giving up on revising older texts that

teach accounting. They are commissioning authors to start from scratch in

explaining the current rules of accounting.

Second, American businesses are measured by the amount of profit they make. If ever you will

be in a position to evaluate a business–for investing in it, selling to it on credit, lending money to it,

auditing it–then you will need to know as much as you can about the primary evaluation criterion of

profit. If you don’t know about or understand profit, then any decision you will make would have to be

suspect–a gamble in part or in whole. Well, the measurement of profit is net income, and net income is

an accounting calculation. I don’t know that calculating net income is as difficult as calculating the

trajectory needed to take a space shuttle from launch pad to orbiting space station, but I think it is

arguable. Net income is the most important number that financial accounting produces and reports. In

the same way that the person guiding a space shuttle needs to know about trajectory, business people

need to know about accounting’s net income

Third, accounting is more than the calculation of net income. It is the language

of business! This language is composed of vocabulary (business and accounting

words), grammar (rules for constructing the equivalent of sentences and paragraphs)

and idiom (expression of a given language that cannot be understood from the

individual meanings of its elements). In the same way that you would need to know

Chinese if you were going to emigrate to China, you should know accounting if you are going

to work in business.

Finally, there are people who will try to dupe you

when they communicate to you in accounting. There are

subtle ways to influence the meaning of accounting

reports. There are dozens of recent stories of corporate

fraud, and the resulting coverup in which the financial

statements have been deliberately misstated. Enron, for

example, was a complex situation of infectious greed on

the part of corporate management. Once their coverup in

the financials was discovered, the company went

bankrupt, its auditor (Arthur Andersen) was forced out

of business and the financial markets of the world


crashed. WorldCom, another example, was a case of a company

whose unprecedented growth suddenly stopped. As it turned out, its

large, costly investments in additional capacity were unnecessary and

bankrupted the company. It hid its losses by a simple (but effective)

misstatement of the financials. Then, the truth came out.

In the past six years, there have been nearly 5,000 instances of

corporations restating their previous financials to correct an error. In

many cases, this has been the result of companies pushing the envelope of what is a reasonable

disclosure and auditors now finally forcing better accounting.

The public outcry following Enron and WorldCom motivated Congress to pass the Sarbanes-

Oxley Act of 2002, the most significant legislation pertaining to the financial markets since the

Securities Act of 1933 and the Securities Exchange Act of 1934. We are in a new age where

companies simply have to get the numbers right.

And if the companies don’t get the

numbers right? It is the responsibility of

auditors and users of financial information

to be able to dig into the financial

statements to discover what is really going

on!

Most of you hope to start a career in

accounting, say as a CPA or a company

accountant. Some of you are finance

majors who anticipate needing to know

about accounting in your future positions.

All of you need to understand the precise

composition of every financial statement

item. We will therefore cover each of the

financial statements in great detail.


Learning by doing is amoo-ving experience.

Approach to the course

Knowledge of generally accepted accounting principles is the foundation of this course.

Application of the rules and uses of accounting information cannot be understood until you have

mastered the knowledge.

Accounting can be taught from two distinct approaches: learner centered or content/teacher

centered. In a learner centered approach, students learn by doing. Content is only important to the

extent that students can do something with it after the course is long over. In the content/teacher

centered approach, students must learn what the professor knows–factual knowledge, concepts and

applications..

The content/teacher centered approach is the traditional approach used in most

college classrooms. In this approach the professor lectures (or at least is clearly in

charge), the students learn to know what the professor wants them to, and there are

tests of factual knowledge where students must show what they have memorized and

know. Frequently, discussion and homework are included as part of the course grade.

Professors are rated as good if they are organized, good speakers and friendly, and are

rated as excellent if they are mesmerizing. Students are supposed to remember the knowledge through

subsequent courses and into the real world, where they eventually will have to apply what is

remembered. The conclusion from more than one thousand research studies is clear. Most knowledge

that the professor wants students to know (i.e., memorize) will soon be forgotten (even if the teacher is

rated as good or excellent). How soon? Much will be lost even by the end of the course. There is a

rapid decline in retention to three months and by six months hardly anything is left. If the student

doesn’t put the knowledge to use quickly, 100% will be forgotten after one year.

The learner centered approach is in use when the course is

structured to allow the student opportunities to apply (in realistic

simulations) what is learned.

It has frequently been said that

students learn best by doing. It’s true.

If a teacher is able to show a student

what is possible to do with the

knowledge and concepts that have been taught, then that student is

changed for a life-time. Without being able to do something with

knowledge and concepts, the knowledge and concepts soon will be

completely forgotten.

How can students be shown how to do things with what they have

learned? First, students must be given a realistic context in which to

operate. The realistic context should simulate the after-school world as

much as possible. Second, in this realistic context, professors show

“One should beable to do whatone knows”

Milt Hakel, BGSU


students how to do things with what they have learned, and give them enough guidance and practice so

they can learn how to do these things. When the student starts applying knowledge, a statement like

“Oh that’s how it works. I see now,” is frequently heard. Class time is enhanced when students get an

opportunity to do something during each class. This approach is called learning by doing.

I use the learner centered approach. Don’t get me wrong, learning what to know is still a major

part of the course, but it isn’t the entirety.

Sometimes opportunities to learn by doing will take place in working a problem, either as

homework or work in class. There also will be a major project where the focus will be you putting your

knowledge to play in a simulated but realistic business setting. This will help you learn how to do it,

and at the same time you’ll learn the knowledge better.

From teacher-centered

to learner-centered


The professor’s goals for this course

After reading the preceding pages, you probably can figure them all out. Of course, I want you to

learn about accounting and financial statements. But you are not just learning about them–you are

learning to be an accountant and become a more capable human being. Here is my list of goals for this

offering of the course:

(1) To drill and train students in the form and structure of

all four financial statements.

(2) To train students in the basic policies (rules)

governing the preparation of financial accounting

reports. In other words, you will be taught more

generally accepted accounting principles, mostly related to the right side of the balance

sheet.

(3) To show how external parties can use financial accounting information.

(4) To give students an opportunity to apply accounting rules in at least one realistic situation.

(5) To give students an opportunity to think through the issues related to post-retirement

benefits and to issues related to the possible adoption of IFRS.

(6) To help students learn to become better accounting students.

Foundational knowledge and application learning outcomes and

assessment for students

After taking this course, you will be able to:

(1) Define and explain common accounting terminology without referring to the textbook, your

notes or an accounting dictionary. The professor assesses your ability to do this through

using vocabulary drills, working problems (formative), and knowledge oriented tests

(summative).

(2) Read, use and analyze accounting information

using debits and credits, all three types of journal

entries (transaction, adjusting, closing) and

accounts. The professor assesses your ability to

do this through working problems (formative), and

knowledge oriented tests and the simulation game

(summative).

(3) Prepare financial statements (with notes) for a

business with many types of activities. The professor assesses your ability to do this

through using homework problems (formative), and projects and knowledge oriented tests

(summative).

(4) Explain how each number on the right side of the balance sheet is computed, and what

information is needed for the computation. The professor assesses your ability to do this


Come prepared to get involved.

I know that!

through using vocabulary drills and homework problems (formative), and knowledge

oriented tests and projects (summative).

(5) Be able to “read” a set of financial statements for comprehension. The professor assesses

your ability to do this through using homework problems (formative), and projects and

knowledge oriented tests (summative).

(6) Be able to use accounting terminology in presentations and discussions. The professor

assess your ability to do this through using homework problems (formative), and projects

(summative).

(7) Visually skim through a set of financial statements and form an initial impression as to how

well the company is doing. The professor assesses your ability to do this through using

homework problems (formative), and projects and knowledge oriented tests (summative).

What each class is like

A fair portion of each class period is conducted in a

lecture/clarification format. This doesn’t sound too appealing,

but there is quite a bit of interaction. I have been working for 25

years on developing effective explanations on how to compute

the numbers required by generally accepted accounting

principles. Some of my explanations have spread to other schools.

I am best known for teaching pensions, but my explanation of errors

and leases have also gained some attention. It is to your advantage to

work with me during every class.

Unless every student can get involved, little or no learning will take place. I’ll frequently interact

with various students while we go through the material. During this interactive portion, I usually ask

several types of questions, including: “What is this?” “How

is this done?” “Why is it done?” “What’s next.” “What if

we did this?” “Define this.” “Can you relate this to other

concepts or principles we’ve talked about?” “Can you

reconcile this accounting with the underlying economic

event?” Can you explain how this accounting principle

could be applied to this different issue?”

I never bring a calculator to class. I rely on all students to compute the numbers for examples and

homework. I’ll lay out a problem in class, and students work it, step-by-step with me in the lead. Or, it

might be that I’ll stop and let everyone in the class do a problem on his/her own. I encourage students

to work together in class, check answers with neighbors, and help others until everyone has it figured

out. I think students should be able to talk with each other during class, as well as text each other.

I rely on students to present problem solutions on the board and to walk the class through the

solution.


Periodically, I’ll bring to class financial statements from real companies. Perhaps they will be for

a few companies in the same industry. Through analysis and interpretation, we should be able to see

which one is doing the best job in one respect or another. Perhaps the financial statements will be for

one company over time. Through analysis and interpretation we should be able to describe the stories

being told.

I’m sure you will get your money’s worth if you regularly come to class.

Required materials

Intermediate Accounting, 17th edition., by Earl K. Stice, Fred Skousen and

James Stice

Calculator capable of performing present and future value computations.

Grading

Letter grades will be assigned according to relative class standing (in other words, students that

score better on tests and projects will receive better grades). Rest assured that the goal is a fair

assessment of student knowledge and understanding. When all is said and done, grade assignments

remain the result of the professor's professional judgment.

The grade of "A" requires excellent performance on tests and projects. Exam scores are perfect

or nearly perfect. "B" means very good. Students really know their stuff, but make small errors. "C"

stands for competent. Students sometimes really know their stuff, and other times make errors because

they are only familiar with the material. Students who don't get it very well receive a "D." A grade of

"F" is for those who don't get it at all.

Sanford Pinkster has an interesting way of explaining the difference in grades:An A+ is a touchdown that got the crowd to its feet -- a forty-yard pass play or a seventy-yard run from

scrimmage. As color commentators like to put it, :so and so "took it to the house." Players like this get in

the game's highlight films. An A is a touchdown that generates loud cheers but not necessarily a standing

ovation. True, six points are six points but some touchdowns are simply more graceful than others ...

B grades are akin to field goals. The student got close but at the end had to settle for a good kick and three

points. Granted, teams can win games with field goals but not nearly as many as they can win with touchdowns ...

C students are the sort who can get a first down, even a couple of first downs, but in the end, they punt the ball. ... The most

positive thing one can say about C work is that field position is important and that a good punter can put the opposing team deep


in its own territory. Eventually field position can win games, but field goals and touchdowns win them more often and more

decisively.

D work might be likened to a team that cannot protect its quarterback and that thus suffers the big-time loss of yardage known as

"sacks." When a team loses ground, punting the ball usually puts it in great field position for one's opponents. D papers lug

around enough mechanical mistakes so that a teacher's red grading pencil gets a brisk workout. These can be equated to sacks,

and they have the same bad consequences as do sacks on the football field.

F work is obvious. It can come as an interception or a fumble but, either way, you've given up the ball. Period.

Your course grade will be assigned on the professor’s subjective evaluation of

your tests and papers. The course grade will integrate these items:

Exams (two during term & final) ~ 60%

Papers & projects ~ 40%

100%

Exams are scheduled to be taken at night. The primary reason for this is that it permits students

an unlimited amount of time for taking the test. Exams are problem-oriented, and can contain

problems, written response questions and case analysis. Exams are usually closed-book and

closed-notes. Calculators should always be used Approximately one week preceding the date of the

exam, each student will receive a copy of an exam preview (detailed description of content and format

of test) as well as a copy of a test from a previous semester.

Projects are designed to give you an opportunity to work a real-world problem in a realistic

setting. Projects for this course include:

(1) Spreadsheet projects dealing with loans.

(2) Realistic case project dealing with error correction and financial restatement.

(3) Writing a paper in which you take a position on some accounting issue and then persuade me that

they’ve taken the better position. Topics I’m considering are: Should the U.S. drop GAAP and

switch to IFRS? Should leased assets (and the corresponding financial obligation) be accounted

for differently than now? Should the U.S. retain the old rule for contingencies or switch to the

new rule?

(4) Tearing apart the financials for a company to figure out what is going on. In other words, a full

blown exercise in financial statement analysis.

(5) Accounting cycle practice set, based on topics covered in Intermediate Accounting II.

How to study for this course

I have written an article that could help you study for any college course, especially accounting courses.

It has been accessed several thousand times. I recommend you download it and read it.

http://profalbrecht.wordpress.com/2008/12/30/ace-your-accounting-classes-12-hints-to-maximize-your-potential/


Attendance policy

You should attend every class. However, I realize that interviews, work and family commitments

sometimes get in the way. If you miss a class, please make arrangements with another student for a

copy of their notes. If you know about an absence in advance, send a voice recorder of some type.

Finally, if you need to miss a class, send me an e-mail letting me know of your absence. There is no

penalty for missing a class. Please keep in mind that regular attendance is a requirement for retesting.

Assignments

Will be announced on a daily basis. I’ll make announcements far enough in

advance for you to have adequate time to work the problems.

Homework

Completion of homework problems is a nongraded requirement of the class. Homework

problems are assigned for most of the class periods. You will not have to hand in HW solutions on a

daily basis throughout the term. However, you will be expected to be current for discussion purposes.

If the class does not stay current on the HW assignments, then daily quizzes will be given. Solutions to

the HW problems are e-mailed or distributed in class. Many homework problems are worked

interactively in class.

In addition, you must maintain a notebook or collection of

your hand-written attempts to do the homework problems. This

notebook should contain a table of contents listing all homework

problems worked. By the date of the final exam for this course,

you must turn in your notebook/collection for inspection by Dr.

Albrecht. If your notebook does not contain your hand-written

solutions for at least 75% of all problems assigned, then your

course grade will be docked one letter.

Class discussion

Everyone is expected to speak up in class. If I do not get adequate participation from each

student, I will establish standards and a process to measure your participation.


Computers and e-mail

All students are required to regularly check their e-mail, whether it be

Concordia or a private e-mail . I recommend free e-mail accounts on the

Internet. Check your e-mail often, because I'm going to send out notes,

assignments, etc., by e-mail. I assume that by 24 hours after I send out an e-mail,

everyone has read it.

Accommodations for disability

In accordance with the Concordia policy, if a student has a documented disability and requires

accommodations to obtain equal access in this course, he or she should contact the instructor at the

beginning of the semester and make this need known. Students with disability must verify their

eligibility through the Counseling Center (218-299-3514).

I am committed to going the extra mile in making reasonable accommodations for a student’s

disability.

Religious Holidays

It is the policy of the College to make every reasonable effort allowing students to observe their

religious holidays without academic penalty. In such cases, it is the obligation of the student to provide

the instructor with reasonable notice of the dates of religious holidays on which he or she will be

absent. Absence from classes or examinations does not relieve the student of responsibility for

completing required work missed. Following the necessary notification, the student should consult

with the instructor to determine what appropriate alternative opportunity will be provided, allowing the

student to complete his or her academic responsibilities.

I am committed to going the extra mile to accommodate a student’s religious beliefs. If you have

decided to follow your religion’s prescription to observe a certain day or date, I guarantee that you will

not be penalized in this course.

Codes of Conduct and Academic Policy Statement

The instructor and students in this course will adhere to the College’s general Codes of Conduct

defined in the Student Handbook. It that students do not cheat, fabricate, plagiarize or facilitate

academic dishonesty. For details, refer to:

Student Handbook (http://www.cord.edu/Studentlife/StudentHandbook/AcademicPolicies/academicintegrity.php)


Academic honesty for ACCT 356

You are expected to adhere to Concordia College Academic Integrity

policy. At various times, the professor will describe activities that constitute

academic dishonesty. Violations will be dealt with according to policy. If you

are academically dishonest on an exam, the penalty is score of zero on the exam

and a grade of F for the course. If you are academically dishonest either the Real

Money simulation game or the project, the penalty is a score of zero. If there are

two or more violations by the same student on Real Money, then the penalty will

include a grade of F for the course.

Two well written paragraphs, “What constitutes plagiarism” and “How can you avoid plagiarism

can be found on-line at at http://www2.liu.edu/cwis/cwp/library/exhibits/plagstudent.htm

Schedule of approximate due datesTest one week 6

Test two week 11

Papers & course projects various dates


Topical content in ACCT 356

Review

Financial statements

Payroll & other current liabilities

Financial statement analysis

Long-term liabilities / Notes and Bonds

Installment loans, interest bearing notes, non-interest bearing notes

For all of above, amortization tables (ordinary & due), journal entries

Troubled debt restructuring

Debt covenants

Basic bonds, serial bonds, bonds issued between dates, early retirement / convertibles

Contingencies

Leases & lease obligations

Operating, capital

Both for lessor and lessee

Investments & OCI & minority interest

Comprehensive income

Fair value method, equity method

Consolidations

Equities & monetary for above

Pension obligations

Basic worksheet with CSC & PSC

Tables

Minimum liability, unrecognized gains/losses

Other post-retirement benefits

Preferred stock

Income taxes

Intra period tax allocation,

Interperiod tax allocation

Stockholders equity

Contributed capital, retained earnings, treasury stock, dividends

BEPS & DEPS

Accounting errors

Analysis

Correction

Accounting changes

American GAAP and IFRS

Derivatives


About the Professor

As an undergraduate student at the University of Iowa, I

majored in playing cards, foosball and pool (and political science).

As you can imagine, I didn’t make much progress toward getting

a good start in life. After working for a while at making pizzas

and then delivering mail, I saw the light and returned to school

at Iowa to learn something worthwhile–accounting and business.

Subsequently, in no particular order, I married, fathered two sons, received a

Ph.D. from Virginia Tech, and professed accounting at Andrews University, Virginia

Tech, North Carolina-Chapel Hill, and Bowling Green State University. In 2009 I

came to Concordia.

Helping students learn is very important to me. I have become a proponent of

the learning-centered approach. Creating the “learn accounting while playing

Monopoly” simulation game has earned me a reputation in accounting education.

Increasingly adapting the learning-centered approach to my classes has resulted in

much student acceptance.

I am actively involved in writing essays related to financial accounting and

accounting education. These essays appear on my blog at

http://profalbrecht.wordpress.com/. I have a national reputation as an accounting

theorist, and my blog essays are read by many.

In my spare time I have several activities to keep me busy. Professionally, I

read up to 100 articles per day about accounting from Internet newspapers and

magazines. I am also putting my approach for Acct 155 into a textbook. Outside of

the professional realm, I play bridge at several tournaments each year. I also view

about 300 films per year. Usually people gang up against me in Monopoly and Boggle.

In addition, I am always open to receiving your movie recommendations, favorite

cartoons or jokes, and challenging sudoku puzzles.


Make every assignmenta work of art.

Papers and projectsACCT 356

Table of Contents

Persuasive paper on leases . . . . . . . . . . . . . . . . . . 17

Spreadsheet assignment #1 . . . . . . . . . . . . . . . . . . 19

Spreadsheet assignment #2 . . . . . . . . . . . . . . . . . . 21

Case on restatements . . . . . . . . . . . . . . . . . . . . . . 23

Comprehensive project . . . . . . . . . . . . . . . . . . . . . 29


Persuasive Paper on Lease AccountingACCT 356

The FASB and the IASB are both studying the accounting for leases. Currently both bodies allow

both operating leases and capital leases for lessees, and for lessors. Both bodies wonder if (1) lessees

should be required to account for all leases as capital leases, and (2) lessors should be required to

account for all leases as capital leases

The objectives of this assignment are two fold. The first part is for you to take a position, and

justify it, on whether or not you think lessee accounting should be changed to capitalization of

all leases. The second part is for you to take a position, and justify it, on whether or not you

think lessor accounting should be changed to capitalization of all leases.

In any persuasive paper, you should both analyze the alternatives (strengths and weaknesses) and

evaluate (one is better than the other) to justify your opinion. But don’t lose track, this paper is about

your opinion and why your opinion is best.

Your paper can be any length, but I think that something in the 1,000 to 1,200 word range for

each part should be adequate (2,000 to 2,400 in total). One key to writing a good paper is to start with a

good introduction. An introduction should convince the reader that the remainder of the paper is

interesting and worth reading. A good introduction informs the reader of many things: what the paper

is about, what is the problem about which the author is taking a position (and why the problem is

significant), and what is the author’s position. Sometimes an introduction contains a brief statement as

to how the paper is organized.

I expect your paper to be well written. Proper grammar is to be used at all times. Sentences

should be constructed properly and make sense. Paragraphs should center around a point, contain

related sentences and be organized to advance your argument. Your paper should be organized so that

each paragraph leads logically to the next. As a general rule, no paragraph should consume an entire

page. There should be two or three paragraphs per page.

The first page of your paper should be a cover page with the title of your paper, your name, the

name of your student editor (or editors) and the date submitted to me. In the body of your paper, font

size should be 12 points. Line spacing should be between 1.3 and 2.0. All papers should contain

citations to at least four external works. Use the author date system of in-text citation, along with a

reference list at the end of the paper. You should use the Turabian Style Guide for Citations found at

www.liu.edu/cwis/cwp/library/workshop/cittur.htm

If you include tables or charts, label them as exhibit one, exhibit two, and so on. Please do not

put them at the end of the paper, but place them close to the in-text reference.

Eventually, your paper should be submitted in a word processing file, e-mailed to me


([email protected]) as an attachment to an e-mail. You should name your paper

Leases_Lastname_Firstname, where Lastname is your last name and Firstname is your first. For

example, John Smith would name his file GAAPorIFRS_Smith_John.doc.


Spreadsheet project 1Loans

Acct 356

Professor Albrecht purchased a house on September 1, 2003. The house cost $184,000. He made

a down payment of $40,000 and borrowed the rest in the form of a mortgage (real estate loan where real

estate is collateral until final repayment).

Professor Albrecht was quoted a fixed rate of 6.25% (doesn’t change during

life of mortgage) for a 30 year mortgage with no points (interest payment up front),

and 12 monthly payments per year. He accepted.

Required:

Part 1: Prepare an amortization table that will be useful in accounting for

this mortgage, assuming the mortgage was taken out September 1,

2003, and the first payment was due on October 1, 2003. Place

this amortization table on page A of the spreadsheet. In an e-mail, answer these questions,

“How much is the unpaid mortgage balance immediately after making the Feb 1, 2009 loan

payment?” and “How much is the 360th and final payment?”

Part 2: Professor Albrecht has been paying an extra $100 every month, starting with the first

payment. Prepare an amortization table that accounts for each additional $100 payment

made so far. Place this amortization table on page B of the spreadsheet. In the e-mail,

answer these questions, “How much is the unpaid mortgage balance immediately after he

makes his mortgage payment on Feb 1, 2009?” and If Professor Albrecht continues paying

an extra $100 every month, in what year and month will the mortgage be paid off?”

General Instructions

Refer to the instructional resource titled, Amortization tables on MS Excel, for instructions in creating

an amortization table using a spreadsheet program.

Your spreadsheet project will be graded, and the grade will be part of your course grade.

Send your spreadsheet to Professor Albrecht as an attached file to an e-mail. You should name your

spreadsheet A1_Lastname_Firstname.xls where Lastname is your last name and Firstname. For

example, John Smith would name his spreadsheet file A1_Smith_John.xls The assignment will

not be accepted on paper or on disk. This e-mail should contain your answers to the three

questions above. Your spreadsheet files should be saved in MS Excel 2003 format.

You may not work together with anyone (in any sort of way) on this project. You may not consult with

anyone in a lounge, you may not borrow a copy of a friend’s file to see how to work the problem

(nor may you loan a copy of your file to anyone else in class), you may not work alongside


anyone from class in a campus computer lab, you may not chat with said person while working in

the lab. You may not ask (or help) a classmate about creating a spreadsheet to answer handout

problems 23, 24 and 25. Aiding a classmate on this project, or receiving aid from anyone on this

project constitutes academic dishonesty. The penalty for academic dishonesty on this assignment

is a zero for the project and the grade of F for the course.

Cells A1..A3 of each page should include this information:

Name

Spreadsheet project 1

Date

Spreadsheets that are designed to be general purpose receive more credit than those that are very

specific. Formulas or equations are more general purpose than merely typing in numbers (except

in your input table).

Use proper formatting (currency amounts in either currency or comma formats, interest rates in percent

format). Currency amounts should be rounded and formatted to two places, percent should be

formatted to two places but not rounded. Rounding on the percent will create a significant error.


Spreadsheet project 2Loans

Acct 356

Professor Albrecht is trying to make a decision about

how to finance the purchase of a vacation cottage in

picturesque Accountingville, Michigan. He can afford a

down payment, but needs to borrow $98,000 to completely

fund the purchase.

The Finance4Suckers Mortgage company has two

financial products for Professor Albrecht, a fifteen year

6.55% mortgage loan and a twenty year 7.05% mortgage

loan. Both are “fixed rate” mortgages, meaning the rate

doesn’t change during the life of the mortgage, and both

require 12 monthly payments per year. The final payment

amount floats to the number needed to pay interest and the final amount of principal.

Required:

Part 1: Prepare a table of initial values for each mortgage loan. For guidance, refer to the

resource titled “Amortization Tables on MS Excel.”

Part 2: For each mortgage, prepare an amortization table that would be useful in accounting for

it, assuming the mortgage is taken out Feb 1, 2009, and the first payment is due on March

1, 2009. These amortization tables can be placed side by side on the same page or your

spreadsheet. Include a field in your spreadsheet where you show the total interest paid over

the life of each loan. This field can be placed in the table of initial values.

Part 3: In the e-mail in which you attach the spreadsheet file, answer these questions for each

mortgage. These answers should also be incorporated in you spreadsheet files.

(1) How much is an normal monthly payment?

(2) How much is the final payment?

(3) How much interest is paid over the life of the loan?

General Instructions:

Refer to the instructional resource titled, Amortization tables on MS Excel, for instructions in creating

an amortization table using a spreadsheet program.

Your spreadsheet project will be graded, and the grade will be part of your course grade.


Send your spreadsheet to Professor Albrecht as an attached file to an e-mail. You should name your

spreadsheet A2_Lastname_Firstname.xls where Lastname is your last name and Firstname. For

example, John Smith would name his spreadsheet file A2_Smith_John.xls The assignment will

not be accepted on paper or on disk. This e-mail should contain your answers to the three

questions above. Your spreadsheet files should be saved in MS Excel 2003 format.

You may not work together with anyone (in any sort of way) on this project. You may not consult with

anyone in a lounge, you may not borrow a copy of a friend’s file to see how to work the problem

(nor may you loan a copy of your file to anyone else in class), you may not work alongside

anyone from class in a campus computer lab, you may not chat with said person while working in

the lab. You may not ask (or help) a classmate about creating a spreadsheet to answer homework

or hypothetical problems. You should know how to do it by now, this assignment is to have you

do it. Aiding a classmate on this project, or receiving aid from anyone on this project constitutes

academic dishonesty. The penalty for academic dishonesty on this assignment is a zero for the

project and the grade of F for the course.

Cells A1..A3 of each page should include this information:

Name

Spreadsheet project 2

Date

Spreadsheets that are designed to be general purpose receive more credit than those that are very

specific. Formulas or equations are more general purpose than merely typing in numbers (except

in your input table).

Use proper formatting (currency amounts in either currency or comma formats, interest rates in percent

format). Currency amounts should be rounded and formatted to two places, percent should be

formatted to two places but not rounded. Rounding on the percent will create a significant error.


Case on RestatementsAcct 356

For a hypothetical company–Operating Leases, Unlimited (OLU)–financial data has been provided for

the past four years, culminating with the 2010 financials issued on December 31, 2010.

OLU only owns a small portion of the equipment it uses, the rest it leases from

other companies. During recent years, OLU has treated all leases as operating

leases because it is accepted industry practice (everyone else does it this way,

so why not us?). The SEC has announced that it is cracking down on lessee

companies that improperly treat capital leases as operating leases. The CEO has

decided that the financial statements must be restated to correct for the error,

and it must be done as soon as possible.

The company has three rentals at the current time, all of which are being treated

as operating leases and all of which should have been treated as capital leases.

OLUleased some equipment on January 2, 2008. The lessor company structured the lease payments to

recoup the equipment's fair market value of $40,000 plus initial direct costs of $2,620. The estimated

salvage value is 3,000, none of which is guaranteed. The lease payments are structured by the lessor to

incorporate an 8% rate of return, and OLU is aware of this rate. The lease is for nine years, and the first

annual payment was due at the very start of the lease (January 2, 2008). The lease payments are in the

amount of $6,095 per year. At the inception of the lease, OLU had an incremental borrowing rate of

8.5%.

OLU leased some more equipment on July 2, 2009. The lessor company structured the semi-annual

lease payments to recoup the equipment's fair market value of $64,400 plus initial direct costs of

$2,350. The estimated salvage value is 7,000, half of which is guaranteed. The lease payments are

structured by the lessor to incorporate a 9% rate of return, and OLU is aware of this rate. The lease is

for four years, and the first of eight semi-annual payment was due at the very start of the lease (July 2,

2009). The lease payments are in the amount of $8,970 per six-month period. At the inception of this

lease, OLU had an incremental borrowing rate of 9.0%.

OLU leased yet some more equipment on January 2, 2010. The lessor company structured the lease

payments to recoup the equipment's fair market value of $35,000 plus initial direct costs of $3,100. The

estimated salvage value is 5,000, and only one-fifth is guaranteed. The lease payments are structured by

the lessor to incorporate a 9% rate of return, and OLU is aware of this rate. The lease is for seven years,

and the first annual payment was due at the very start of the lease (January 2, 2010). The lease

payments are in the amount of $6,446 per year. At the inception of this lease, OLU had an incremental

borrowing rate of 8.5%.

Should depreciation be appropriate, straight line depreciation is to be used with one-half year taken in


the year of acquisition.

The 2010 financials were published on a timely basis in the company's annual report to shareholders

and the 10-K. It is believed that OLU as an incremental borrowing rate of 8.5% as of December 31,

2010.

It is imperative, the CEO says, to get the financials restated to correct the error.

Required: Restate the original financial statements (attached) so that the effects of the errors are

removed. Also, submit a write-up detailing what corrections were made and why. Finally,

comment on what impact the restatement has on the financial condition of the company. Be sure

to look at changes to (1) the ratio of operating income to sales revenue (income statement), (3)

debt ratio of total liabilities divided by total assets (balance sheet), and (3) re-classifications of

cash flow (statement of cash flows).

Miscellaneous:

You may work on this case individually or with one other person. If working with another

person, both receive the same grade.

Other than the person with whom you are coauthoring, you are not allowed to consult with any

other person. There is to be no sharing of hints, answers, check figures, files, documents,

etc.

Your work should be presented in a word-processing file, or in a word-processing file and a

spreadsheet file. You should name your wordprocessing file

Restatement_Lastname_Firstname.xxx, where Lastname is your last name and Firstname.

For example, John Smith would name his wordprocessing file

Restatement_Smith_John.xxx. If you send me a spreadsheet file, it should be named

Restatement_Lastname_Firstname.xxx.

Submit electronically to [email protected]


Operating Leases, UnlimitedStatements of Financial Position

for December 31

2007 2008 2009 2010Cash 15,341 18,262 31,608 27,959Market Securities 5,450 11,061 25,233 13,183Accts Receivable 36,247 34,168 36,359 54,461Inventory 56,450 59,273 62,237 65,349

Total 113,488 122,764 155,437 160,952

Investments (AFS) 0 9,000 18,000 6,777

Land 53,100 63,100 68,100 68,100Building 83,500 83,500 83,500 113,500Equipment 10,000 10,000 10,000 10,000(Accum deprec) (19,320) (25,270) (31,220) (37,170)

Total 127,280 131,330 130,380 154,430

Total Assets 240,768 263,094 303,817 322,159

2007 2008 2009 2010Accts Payable 13,643 10,238 12,311 13,763Wages Payable 5,960 6,471 6,665 6,865Interest Payable 0 0 0 0Unearned Revenue 3,491 7,861 10,007 7,498

Total Liab 23,094 24,570 28,983 28,126

Common Stock 84,660 84,660 90,660 114,660Retained Earnings 133,014 151,864 181,174 187,596Comprehensive Inc 0 2,000 3,000 (8,223)

Total SHE 217,674 238,524 274,834 294,033

Total Liab & SHE 240,768 263,094 303,817 322,159


Operating Leases, UnlimitedStatements of Income

for the years ended December 31

2008 2009 2010Sales Revenue 364,820 421,302 481,432Cost of Sales 167,817 202,225 226,273Gross Margin 197,003 219,077 255,159

Wages 64,710 66,651 68,651SGA 83,909 88,473 125,172Rent 6,095 15,065 30,481Depreciation 5,950 5,950 5,950

Total 160,664 176,139 230,254

Operating Income 36,339 42,938 24,905

Interest Expense 0 0 0Gains 3,511 2,522 0Losses 0 (2,150) (11,483)

3,511 372 (11,483)Net Income 39,850 43,310 13,422

Shares of common stock 21,165 22,665 28,665Earnings per share 1.88 1.91 0.47


Operating Leases, UnlimitedStatements of Cash Flows


2008 2009 2010Cash Flows – Operating Activities

From advance sales 26,000 27,450 21,360From cash sales 135,243 176,921 231,290From collections on AR 210,026 216,886 208,171To suppliers (174,045) (203,116) (227,933)To employees (64,199) (66,457) (68,451)For SG&A payments (83,909) (88,473) (125,172)For rentals (6,095) (15,065) (30,481)For interest 0 0 0

Total 43,021 48,146 8,784

Cash Flows – Investing ActivitiesPurchase of Trading Securities (5,200) (15,000) 0Purchase of AFS Securities (7,000) (8,000) 0Purchase of Land (10,000) (5,000) 0Purchase of Building 0 0 (30,000)Purchase of Equipment 0 0 0Sale of Trading Securities 3,100 1,200 567Sale of AFS Securities 0 0 0Sale of Land 0 0 0Sale of Building 0 0 0Sale of Equipment 0 0 0

Total (19,100) (26,800) (29,433)

Cash Flows – Financing ActivitiesFrom sale of stock 0 6,000 24,000From lenders 0 0 0For purchase/retirement of stock 0 0 0For repayment of lenders 0 0 0For payment of dividends (21,000) (14,000) (7,000)

Total (21,000) (8,000) 17,000

Net Change in Cash 2,921 13,346 (3,649)Beginning Cash 15,341 18,262 31,608

Ending Cash 18,262 31,608 27,959

Transactions not requiring cash none none none


Operating Leases, UnlimitedStatements of Change in Stockholders Equity


2008 2009 2010Beginning Common Stock 84,660 84,660 90,660New Common Stock Issued 0 6,000 24,000

Ending Common Stock 84,660 90,660 114,660

Beginning Retained Earnings 133,014 151,864 181,174Net Income 39,850 43,310 13,422Dividends (21,000) (14,000) (7,000)

Ending Retained Earnings 151,864 181,174 187,596

Beginning Accum Other Comprehensive Income 0 2,000 3,000Other Comprehensive Income for year 2,000 1,000 (11,223)

Ending Accum Other Comprehensive Income 2,000 3,000 (8,223)


Comprehensive ProjectAccounting Cycle

Acct 356

The Widget Company is a small company with only a few employees. Its line of business is topurchase several items from a line of widgets and resale them to other companies. The Company ownsone small shop with two rooms, one for sales and office work, and one for product receiving andshipping. The company is owned by a group of investors and it is organized as a corporation.

Widget Company uses a straight-forward financial accounting information system. Of course, accrualaccounting is used. Other generally accepted accounting principles used are the $-Value LIFO ofvaluing product inventory, FIFO for valuing supplies, the straight-line depreciation method formatching the cost of long-term assets to periods of use (half year of depreciation in in year ofacquisition and disposition), and earnings per share. Widget’s fiscal year extends from January 1through December 31.

Additional information

Accounts receivable is recorded at gross. The Allowance for doubtful accounts is computed at 2% ofending accounts receivable. The Office supplies inventory is valued according to FIFO.

The Product inventory balance of 62,754 on December 31, 2010 is based on the following information:$-Value LIFO index at January 1, 2006 1.0000$-Value LIFO index at December 31, 2006 1.0425$-Value LIFO index at December 31, 2007 1.0750$-Value LIFO index at December 31, 2008 1.0675$-Value LIFO index at December 31, 2009 1.1400$-Value LIFO index at December 31, 2010 1.1825

Ending inventory valued at FIFO $72,000Ending inventory valued at base $60,888

Base layer $35,2002006 layer at base $19,2502009 layer at base $3,0002010 layer at base $3,438

Ending inventory at $-Value Lifo $62,754

Prepaid insurance is for a six-month policy that expires on April 30, 2011.

The sole Building was purchased in early 2003 for $550,000. At that time, the useful life was expectedto be 25 years, and the eventual salvage value was expected to be $0. After a half year of depreciationin 2003, seven years of straight-line depreciation have been recorded at $22,000 per year.

Equipment is recorded using straight-line depreciation.


Accounts payable is comprised of $28,000 owed to various artisans for credit purchases, and $1,000 ofaccrued utilities.

Wages: A healthcare deduction from employee paychecks is computed at 5% of gross wages. TheWidget Company contributes an additional 5% of gross wages (record under Fringe Benefit Expense).Federal income taxes average 9% and state income taxes average 4% of income taxable wages(deductions for healthcare are not taxable for federal or state income tax purposes). Stateunemployment taxes are 7% on the first $12,000 of yearly accumulated wages. Federal unemploymenttaxes are 6.2% (credit of 5.4% granted for state unemployment taxes) on the first $7,000 of yearlyaccumulated wages. For social security, the tax rate on employees is 4.2%, and on employers is 6.2%.The medicare tax rate is 1.45% on both employee and employer.

Prepayments and deposits are from customer deliveries that are to be made in 2011.

Note Payable: There are two loans outstanding. One is an interest-bearing note of $100,000, due onOctober 1, 2014. The annual interest rate is 10%, and semi-annual interest payments are made on April1 and October 1 of each year. Accrued interest of $2,500 is for three months.

The second is for a 9% installment loan, with annual installments of $44,584 is due on December31 of each year. The last scheduled payment was made. It’s amortization table is:

Cash Interest LoanDate Payment Expense Amort. BalanceJan 1, 2008 200,000Dec 31, 2008 44,584 18,000 26,584 173,416Dec 31, 2009 44,584 15,607 28,977 144,439Dec 31, 2010 44,584 13,000 31,584 112,855Dec 31, 2011 44,584 10,157 34,427 78,428Dec 31, 2012 44,584 7,059 37.525 40,903Dec 31, 2013 44,584 3,681 40,903 0

Common stock issued and outstanding (December 31, 2010) consists of 47,000 shares of $1 par value.


Trial Balance (post closing ) December 31, 2010

Here is a trial balance prepared on December 31, 2010. It includes all accounts that you are to use.Closing entries can be made using an income summary account, or you can omit the income summaryaccount and make closing entries directly to retained earnings.

Debit CreditCash 210,326Accounts receivable 34,512Allowance for uncollectible accounts 690Office supplies inventory 2,000Product inventory 62,754Prepaid insurance 3,000Land 75,000Building 550,000Accumulated depreciation–building 165,000Equipment Group 316,000Accumulated depreciation–equipment 126,400

Accounts payable 29,000Wages payable 30,000Federal income taxes payable 3,420State income taxes payable 1,520Social security payable 4,960Medicare payable 1,160State unemployment tax payable 350Federal unemployment tax payable 16Health care payable 4,000Prepayments & deposits 17,500Interest payable 2,500Note payable 212,855

Common stock 47,000Additional paid in capital 24,000Retained earnings 583,221Dividends 0Income summary 0 0

Sales revenue 0Cost of goods sold expense 0Utilities expense 0Wages expense 0Payroll taxes expense 0Fringe benefits expense 0Bad debt expense 0Supplies expense 0Insurance expense 0Depreciation expense 0Gain on sale 0Loss on sale 0Interest expense 0

1,253,592 1,253,592


Transactions to account for during 2011

Jan 1 Reversing entries made where appropriate.

Jan 1 Purchased on credit and received $160,000 of product inventory.Jan 1 Purchased on credit and received $5,000 of office supplies inventory.Jan 5 Made all payments related to 4th quarter payroll.Jan 10 Paid $1,000 utility bill for 4th quarter.

Mar 31 Sold product inventory for $320,000 on credit and shipped to customers.Mar 31 Made payments to suppliers $for 125,000.Mar 31 Receipts on account and prepayments from customers total $290,000. AR of $1,800

written off.

Apr 1 Purchased on credit and received $185,000 of product inventory.Apr 1 Purchased on credit and received $3,000 of office supplies inventory.Apr 1 Made $5,000 interest payment on first loan.Apr 1 Paid dividends of 13,000Apr 5 Made all payments related to 1st quarter payroll. Gross wages of $65,000, income

taxes wages of $61,750, social security wages of $65,000, medicare wages of$65,000, state unemployment wages of $52,000, federal unemployment wages of$49,000.

Apr 10 Paid $1,200 utility bill for 1st quarter.

May 1 Sold 80,500 shares of common stock for $140,000May 1 Purchased $5,000 insurance policy for May 1 to October 31.

June 30 Sold product inventory for $280 000 on credit and shipped to customers.June 30 Made payments to suppliers $for 130,000.June 30 Receipts on account and prepayments from customers total $310,000. AR of $1,700

written off.

July 1 Purchased on credit and received $165,000 of product inventory.July 1 Purchased on credit and received $11,000 of office supplies inventory.July 1 Sold equipment with original historical cost of $20,000 for $3,000. Its depreciation

table is:

Equipment #315Date purchased May 1, 2007Purchase cost $20,000Salvage value $0

Year Depreciation expense Accumulated depreciation Book value2007 2,000 2,000 18,0002008 4,000 6,000 14,0002009 4,000 10,000 10,0002010 4,000 14,000 6,000


2011 4,000 18,000 2,0002012 2,000 20,000 0

July 1 Purchased equipment (5 year useful life and 0 salvage value) for $80,000. This willbe identified as Equipment #512

July 5 Made all payments related to 2nd quarter payroll. Gross wages of $70,000, incometaxes wages of $66,500, social security wages of $70,000, medicare wages of$70,000, state unemployment wages of $37,000, federal unemployment wages of$11,000.

July 10 Paid $800 utility bill for 2nd quarter.

Sep 30 Receipts on account and prepayments from customers total $270,000. AR of $1,600written off.

Sep 30 Sold product inventory for $487,000 on credit and shipped to customers.Sep 30 Made payments to suppliers $for 135,000.

Oct 1 Made $5,000 interest payment on first loan.Oct 1 Purchased on credit and received $110,000 of product inventory.Oct 1 Purchased on credit and received $5000 of office supplies inventory.Oct 1 Paid dividends of 10,000Oct 5 Made all payments related to 3rd quarter payroll. Gross wages of $60,000, income

taxes wages of $57,000, social security wages of $60,000, medicare wages of$60,000, state unemployment wages of $17,000, federal unemployment wages of$5,000.

Oct 10 Paid 1,100 utility bill for 3rd quarter.Oct 25 Purchased land for 60,000

Nov 1 Purchased $6,000 insurance policy November 1 to April 30.

Dec 31 Sold product inventory for $430,000 on credit and shipped to customers.Dec 31 Receipts on account and prepayments from customers total $330,000. AR of $1,500

written off.Dec 31 Made payments to suppliers $for 125,000.Dec 31 Made $44,584 installment payment on second loan.

Dec 31 Accrued for 4th quarter payroll. Gross wages of $70,000, income taxes wages of$66,500, social security wages of $70,000, medicare wages of $70,000, stateunemployment wages of $9,000, federal unemployment wages of $0.

Dec 31 Ending product inventory of $85,000 valued at FIFO. Index value for $-Value LIFOon December 31, 2011, is 1.2333.

Dec 31 Office supplies on hand, 500.Dec 31 Record accrued interest for loans.Dec 31 Record accrued utilities of 1,900.Dec 31 Record time passage on insurance policy.Dec 31 Record adjustment for uncollectible accounts.Dec 31 Prepayments still owed to customers amount to $18,000.


Dec 31 Record depreciation for building.Dec 31 Depreciation for equipment (not including #512 or #315) is $45,200.

Required:Your assignment is to set up a journal and general ledger to account for transactions during 2011.The journal for each year can be a plain sheet of paper where journal entries are neatly recordedfor transactions, adjustments and closing. The general ledger can be comprised of a set of T-accounts.

To assist your preparation of financial statements, you should generate post-transaction(unadjusted), pre-closing (adjusted) and post-closing trial balances for each year.

Finally, you should also create a set of financial statements (balance sheet, income statement,statement of cash flows and notes to the statements) for 2011. The balance sheet should alsohave a comparative for 2010.

You should have notes to the financial statements as necessary but as a minimum should includesignificant accounting policies, current assets, depreciable assets, and long-term debt.

You should document all work.

You are expected to work on this entirely on your own. Discussing anything about this project is

considered cheating. Do not share workpapers, answers, final copy or project, or hints.


Documents

Intermediate Accounting II -