ACC423 P13-9 P20-4 E21-7 P22-6
P13-9 (Premium Entries and Financial Statement Presentation) Sycamore Candy Company offers
a CD single as a premium for every five candy bar wrappers presented by customers together with
$2.50. The candy bars are sold by the company to distributors for 30 cents each. The purchase price of
each CD to the company is $2.25; in addition it costs 50 cents to mail each CD. The results of the premium plan for the years 2010 and 2011 are as follows. (All purchases and sales are for cash.)
2010 2011
CDs purchased 250,000 330,000
Candy bars sold 2,895,400 2,743,600
Wrappers redeemed 1,200,000 1,500,000
2010 wrappers expected to be redeemed in 2011 290,000
2011 wrappers expected to be redeemed in 2012 350,000
Instructions
(a) Prepare the journal entries that should be made in 2010 and 2011 to record the transactions related
to the premium plan of the Sycamore Candy Company.
(b) Indicate the account names, amounts, and classifications of the items related to the premium plan
that would appear on the balance sheet and the income statement at the end of 2010 and 2011.
P20-4 (Pension Expense, Journal Entries for 2 Years) Gordon Company sponsors a defined benefit
pension plan. The following information related to the pension plan is available for 2010 and 2011.
2010 2011
Plan assets (fair value), December 31 $699,000 $849,000
Projected benefit obligation, January 1 700,000 800,000
Pension asset/liability, January 1 140,000 Cr. ?
Prior service cost, January 1 250,000 240,000
Service cost 60,000 90,000
Actual and expected return on plan assets 24,000 30,000
Amortization of prior service cost 10,000 12,000
Contributions (funding) 115,000 120,000
Accumulated benefit obligation, December 31 500,000 550,000
Interest/settlement rate 9% 9%
Instructions
(a) Compute pension expense for 2010 and 2011.
(b) Prepare the journal entries to record the pension expense and the company’s funding of the pension
plan for both years.
E21-7 (Lessee-Lessor Entries, Sales-Type Lease) On January 1, 2011, Palmer Company leased equipment to Woods Corporation. The following information pertains to this lease.
1. The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to
the lessor at the termination of the lease.
2. Equal rental payments are due on January 1 of each year, beginning in 2011.
3. The fair value of the equipment on January 1, 2011, is $200,000, and its cost is $150,000.
4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $10,000.
Woods depreciates all of its equipment on a straight-line basis.
5. Palmer sets the annual rental to ensure an 11% rate of return. Woods’s incremental borrowing rate
is 12%, and the implicit rate of the lessor is unknown.
6. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround
the amount of costs yet to be incurred by the lessor.
Instructions
(Both the lessor and the lessee’s accounting period ends on December 31.)
(a) Discuss the nature of this lease to Palmer and Woods.
(b) Calculate the amount of the annual rental payment.
(c) Prepare all the necessary journal entries for Woods for 2011.
(d) Prepare all the necessary journal entries for Palmer for 2011.
P22-6 (Accounting Change and Error Analysis) On December 31, 2010, before the books were closed, the management and accountants of Madrasa Inc. made the following determinations about three depreciable assets.
1. Depreciable asset A was purchased January 2, 2007. It originally cost $540,000 and, for depreciation
purposes, the straight-line method was originally chosen. The asset was originally expected to be
useful for 10 years and have a zero salvage value. In 2010, the decision was made to change the
depreciation method from straight-line to sum-of-the-years’-digits, and the estimates relating to
useful life and salvage value remained unchanged.
2. Depreciable asset B was purchased January 3, 2006. It originally cost $180,000 and, for depreciation
purposes, the straight-line method was chosen. The asset was originally expected to be useful for
15 years and have a zero salvage value. In 2010, the decision was made to shorten the total life of
this asset to 9 years and to estimate the salvage value at $3,000.
3. Depreciable asset C was purchased January 5, 2006. The asset’s original cost was $160,000, and this
amount was entirely expensed in 2006. This particular asset has a 10-year useful life and no salvage
value. The straight-line method was chosen for depreciation purposes.
Additional data:
1. Income in 2010 before depreciation expense amounted to $400,000.
2. Depreciation expense on assets other than A, B, and C totaled $55,000 in 2010.
3. Income in 2009 was reported at $370,000.
4. Ignore all income tax effects.
5. 100,000 shares of common stock were outstanding in 2009 and 2010.
Instructions
(a) Prepare all necessary entries in 2010 to record these determinations.
(b) Prepare comparative retained earnings statements for Madrasa Inc. for 2009 and 2010. The company
had retained earnings of $200,000 at December 31, 2008.
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