P1. On 1/1/2016 ABC bought a truck for $70,000 and estimated its useful and residual value at the end of its useful be 5 years and $5,000, respectively. To record the purchase of the truck, the company debited an expense account of $70,000 and credited cash account. ABC uses straight line depreciation for its trucks. ABC found and corrected this error in 2018. The effective income tax rate of ABC is 40%.
Instruction: prepare any necessary entries for 1) error corrections and 2) depreciation in 2016.
P2. ABC purchased a machine at $500,000 on January 1, 2016. The useful life and the salvage value of the machine were estimated to be 6 years and $50,000, respectively. The machine had been depreciated in 2016 and 2017 using the sum of year digit method. But during 2018, ABC determined, based on additional information, that the machine has an estimated useful life of 4 years from the date of acquisition with a salvage value of $100,000. Income tax rate is 30%.
Instruction: prepare any necessary journal entries for the estimate changes and depreciation in 2018.
P3. During 2018, ABC changed from the straight-line method to an accelerated cost recovery (ACR) method for depreciation of its equipment. Income tax rate is 30%. The following calculations present depreciation on both bases.
2016 2017 2018 2019
ACR $ 40,000 30,000 20,000 10,000
Straight-line $ 25,000 25,000 25,000 25,000
Instruction: prepare any necessary journal entries for the principle change and depreciation in 2018.
P4. On January 1, 2018, ABC Co. sold a building to WILDCAT Co. for $1,200,000 and immediately leased the machinery back at the sales price. The following information pertains to the transaction:
1) The term of non-cancellable lease is 18 years, while the estimated economic life of the machinery is 20 years.
2) The building was carried on ABC’s book at a value of $300,000 (cost= $700,000 and accumulated depreciation = $400,000)
3) The incremental borrowing rate of ABC is 14% but ABC is aware that WILDCAT’s implicit rate is 10%.
4) Collectability of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
5) Estimated residual value after 18 years of the lease term is $100,000 which ABC guarantees to WILDCAT.
6) Both ABC Co. and WILDCAT Co. use the straight-line depreciation method for the machinery.
7) Equal annual payments are due at the end of each year in the lease term.
Instructions:
1) Discuss the nature of the lease agreement for both the lessee and the lessor.
2) Compute the annual rent.
3) Prepare any necessary journal entries for the lessee in 2018 to record the sale, the lease agreement, lease payments, accruals and deferrals, if any.
4) Prepare any journal entries for the lessee in 2019 regarding the sales-lease back.
5) Prepare any necessary journal entries for the lessor in 2018 to record the purchase, the lease agreement, receipts of lease payments, accruals and deferrals, if any.
6) Prepare any journal entries for the lessor in 2019 regarding the sales-lease back.
P5. The following data pertain to bank transactions of ABC Company during September:
– The company’s bank statement showed a balance of $59,000 on September 30.
– The balance per book is as of September 30 was $54,000.
– Deposits in transit: $5,000.
– Outstanding checks: $6,000.
– The bank collected a note for the company amounted $4,800 in
which $4,700 was principal and $100 was interest. The bank
deposited $4,600 to the company account after charging $200
collection fee.
– The bank service charge for the month: $100.
– Included in the bank statement was a check from a customer in the
amount of $500 which was marked NSF by the bank.
Instructions:
1. Prepare a Bank Reconciliation for the company on September 30.
2. Prepare any necessary journal entries for ABC for its bank reconciliation.
P6. ABC Company sold a merchandise costing $70,000 for $100,000 on credit to Beer Company on 4/1/2018. To expedite the cash payment, ABC offered a cash discount of 2/15, n/30.
Instructions: prepare any necessary journal entries for the following transactions for the seller & the buyer using the net method.
1) The credit sale on 4/1/2018.
2) A receipt of the full payment if it is paid on 4/14/2018.
3) A receipt of the full payment if it is paid on 4/24/2018.
P7. ABC transferred $100,000 of accounts receivable with recourses to BOA factoring service for $90,000 on 8/20/2018. The payment due of the accounts receivable is 9/20/2018.
Instructions: prepare any necessary journal entries for the transactions on 8/20/2018 and 9/20/2018 assuming that the full amounts be paid on time at the due date and
1) The transfer was considered as a sale of accounts receivable,
2) The transfer was considered as loan secured by accounts receivable.
