Intermediate Accounting Ii Question Paper

Intermediate Accounting Ii

Institution: Kabarak University question papers

Exam Year:2008

INSTRUCTIONS:
i. This paper contains four questions.
ii. Answer question ONE and any other TWO questions.
iii. Show all the necessary workings.
QUESTION ONE (Compulsory) (20 marks)
a) State and explain any four types of liabilities clearly showing how they should be
recorded and determined in the books of accounts (8 marks)
b) State how the following items would be recorded in the final accounts.
i) Bank overdraft
ii) Bonds maturing in three months
iii) Potential payments to shareholders of an acquired company depending on
future results
iv) customers accounts with credit balances. (5 marks)
c) Reyes Company estimates its annual warranty expense at 2% of annual net sales.
The following data relates to the year 2005
Net sales 2005

$4,000,000 Warranty liability ledger account December 31st 2004$ 60,000 cr
Warranty payments during 2005

$50,000 dr Calculate the balance in warranty ledger account after estimated warranty payments for year 2005 is recorded. (7 marks) QUESTION TWO (25 Marks) a) Explain four methods of extinguishing a long term bond liabilities (8 marks) b) Differentiate between the following terms as used in accounting bonds i) Serial bonds and sinking fund bonds (2 marks) ii) deep discount bonds and bonds issued at a premium (2 marks) c) On 1st July 1999, Prism Corporation, a calendar-year corporation issued bonds with the following characteristics: i)$ 50,000 total face value
ii) 12 percent stated rate
iii) 16 percent yield rate
iv) Interest dates are 1st July and 1st of January
v) Maturity date is 1st July 2004
vi)

$1,000 of bond issue costs was incurred Required: Amortization of bond discount or premium (13 marks) QUESTION THREE (25 Marks) a) Differentiate between the following terms as used in leases i) Lease agreement and hire purchase ii) Sale and lease back and leveraged lease. iii) Implicit interest rate and the incremental borrowing rate. (9 marks) b) On December 31, 2001. Orr Company leased equipment (which had a cost of$
11,500 and a faire value of

$14,000) to LSE Inc., for four years on the following terms: i) LSE agreed to make four annual rental payments of$ 4,000 (excluding
executor costs) starting on January 1, year 2001. The economic life of the
equipment is six years with an unguaranteed residual value of

$2,500; LSE uses the straight-line method of depreciation. ii) LSE agreed to absorb all maintenance costs, insurance and property taxes;$
800 of initial direct costs was incurred by Orr.
iii) LSE was required to return the equipment to ORR at the end of the lease
term, December 31, 2005.
iv) Orr’s, implicit interest rate on January 1, 2001, for this transaction was
10% a year. LSE had an incremental borrowing rate of 12% a year on
December 31, 2001, and could not learn Orr’s implicit interest rate.
Required
Record the lease on the books of the lessee. (16 marks)
QUESTION FOUR (25 marks)
On January 2, 1998, Fleury Corporation was chartered in the state of Delaware. The
corporation was authorized to issue 100,000 shares of

$5 par value common stock, and 10,000 shares of$ 100 par value, cumulative, and nonparticipating preferred stock. During
1998 the firm completed the following transactions:
Jan 8 Accepted subscriptions for 40,000 shares of common stock at

$12 per share. Down payment on the subscribed stock totaled$ 150,000.
Jan. 30 Issued 4,000 shares of preferred stock in exchange for the following asses:
machinery with a fair value market value of

$35,000, a factory with a fair market value of$ 110,000, and land with an appraisal market value of

$295,000. Apr. 25 Collected the balance of the subscription receivable and issued the shares except for one subscriber for 1,000 shares and was not able to pay the balance. Jun. 30 Purchased 2,200 shares of common stock at$ 18 per share. Use the cost method
to account for treasury stock.
Sept.20 Sold the 2,200 shares of treasury stock at

$21 per share. Sept. 26 Re issued all the shares forfeited at$ 10 each. The shares were fully subscribed
and paid for.
Dec.31 Closed the income summary to retained earnings. The income for the period was
$88,000.
Required:
a) Prepare the journal entries to record the above transactions up to closing the books
on December 31, 1998. (15 marks)
b) Prepare the stockholders’ equity section of the balance sheet to Fleury Corporation
for December 31, 1998. (10 marks)

Intermediate Accounting Ii Question Paper

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