Bonobo’s Balloons Inc. purchased the $60,000 par value bonds of Gnomes R Us on January 1, 2020. The coupon rate is 8% and the bonds mature in 5 years. The market rate of interest is 12%. The bonds pay interest semi-annually every June 30 and December 31. The bonds were purchased for $51,167.90 and were classified as available-for-sale. Bonobo’s Balloons uses the effective-interest rate method to amortize bond discounts and premiums. At December 31, 2020, the market value of the bonds was $65,000. Bonobo’s Balloons sold the bonds on January 1, 2021, for $65,000.

Instructions

1. Compute the carrying value of the investment at December 31, 2020.

2. Compute the amount of interest revenue earned on this investment at June 30, 2020.

3. Compute the amount of unrealized gain or loss recognized on December 31, 2020. In which financial statement should this amount be reported?

4. Compute the amount of gain or loss recognized on the sale of the investment at January 1, 2021. In which financial statement should this amount be reported?

5. If this investment was instead classified as held-to-maturity, how would this have affected the amount of unrealized gain or loss on December 31, 2020, and how would this have affected its reporting?

Tamarisk Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes.

The tax rates listed were all enacted by the beginning of 2018.

a) Prepare the journal entries for the years 2018–2021 to record income tax expense (benefit) and income taxes payable (refundable) and the tax effects of the loss carryforward, assuming that at the end of 2020 the benefits of the loss carryforward are judged more likely than not to be realized in the future.

b) Assuming that at the end of 2020 the benefits of the loss carryforward are judged more likely than not to be realized in the future, prepare the income tax section of the 2020 income statement, beginning with the line “Operating loss before income taxes.”

c) Prepare the journal entries for 2020 and 2021, assuming that based on the weight of available evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward will not be realized.

d) Assuming that based on the weight of available evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward will not be realized, prepare the income tax section of the 2020 income statement, beginning with the line “Operating loss before income taxes.”

Splish Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes.

The tax rates listed were all enacted by the beginning of 2018.

1. Prepare the journal entries for the years 2018–2021 to record income tax expense (benefit) and income taxes payable (refundable) and the tax effects of the loss carryforward, assuming that at the end of 2020 the benefits of the loss carryforward are judged more likely than not to be realized in the future

2. Assuming that at the end of 2020 the benefits of the loss carryforward are judged more likely than not to be realized in the future, prepare the income tax section of the 2020 income statement, beginning with the line “Operating loss before income taxes.”

3. Prepare the journal entries for 2020 and 2021, assuming that based on the weight of available evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward will not be realized.

4. Assuming that based on the weight of available evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward will not be realized, prepare the income tax section of the 2020 income statement, beginning with the line “Operating loss before income taxes.”

1. The following questions refer to options on SNAP (Ticker: SNAP), which closed today at $22.59/share.  Below are a table of closing prices on SNAP options on 8/31/2020:

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Strike              Expiration                   Calls                Puts________

20                    October, 2020                        $3.30               $0.71

21                    October, 2020                        $2.61               $1.04

22                    October, 2020                        $2.04               $1.44

23                    October, 2020                        $1.55               $1.95

24                    October, 2020                        $1.15               $2.54

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1. Which of these options are in-the-money?
2. Suppose you think that the price is unlikely to remain above $23 during the next month so you write a call with a strike of $23.  Create a table of values of your call position as a function of the price of SNAP at the expiration of the option position.  Use share prices in intervals of $0.25 in the range from $20 to $25.
3. What if instead of the call you purchased a put with a strike of $23.  Create a similar table of values as in (b).  
4. Plot the values depicted in your tables from parts (b) and (c)
5. Suppose instead that you are bullish on SNAP stock and decide to buy calls with a strike of $22.  Give a table of values of your spread as a function of the underlying stock of SNAP at the expiration date of the option, and finally, plot the payout as a function of the underlying stock price at expiration.

Complete the following worksheet for Appliance Repair for the year ended 30 June 2020.

Additional information to complete the worksheet:

1. The equipment of $67,500 was purchased on 1 March 2020. The straight-line depreciation method is used with a useful life of 3 years and a scrap value of $2,700. No depreciation is ever recorded.
2. The $75,000 bank loan was borrowed on 1 May 2020. It is an interest only loan. The interest rate is 0.8% per month. No interest is ever paid or recorded.
3. The supplies on hand at 30 June 2020 were $650.
4. The prepaid insurance balance represents the annual premium paid on 1 April 2020.
5. $2,500 of unearned revenue has been earned by 30 June 2020.

   	trial balance (unadjusted)		adjustments		trial balance(adjusted)		Incomestatement
   account title	debit	credit	debit	credit	debit	credit	debit	credit
   cash at bank	37,500
   account payable	127,500
   prepaid insurance	1,800
   suppliers	900
   equipment	67,500
   accumulated depreciation -equipmeny
   accounts payable		2,700
   unearned revenue		3,150
   interest payable
   bank loan (due in 2028)		75,000
   capital		49,950
   service revenue		157,500
   wages expense	52,500
   supplies expense	600
   depreciation expense - equipment
   insurance expense
   interest expense
   	288,300	288,300

DeZurik Corp. had the following stockholders’ equity section in its June 30, 2020, balance sheet (in thousands, except share and per share amounts):

The transactions affecting the stockholders’ equity accounts of DeZurik Corp. for the year ended June 30, 2020, are summarized here:

160,000 shares of common stock were issued at $21.25 per share.

40,000 shares of treasury (common) stock were sold for $21 per share.

Net income for the year was $1,480 (in thousands).

The fiscal 2020 preferred dividends were paid in full. Assume that all 64,000 shares were outstanding throughout the year ended June 30, 2020.

A cash dividend of $0.30 per share was declared and paid to common stockholders. Assume that transactions 1 and 2 occurred before the dividend was declared.

The preferred stock was split 2 for 1 on June 30, 2020. (Note: This transaction had no effect on transaction 4.)

Required:

a-1. Record the effect of transactions 1–6 in journal entry format.

a-2. Calculate the dollar amounts that DeZurik Corp. would report for each stockholders’ equity caption on its June 30, 2020, balance sheet, after recording the effects of transactions 1–6. Also the treasury stock was purchased at $21.

b. Indicate how the stockholders’ equity caption details for DeZurik Corp. would change for the June 30, 2020, balance sheet, as compared to the disclosures for the 2019 balance sheet.

c. What was the average issue price of common stock shown on the June 30, 2020, balance sheet?

On April 1, 2020, Blossom Ltd. paid $150 for a call to buy 530 shares of NorthernTel at a strike price of $25 per share any time during the next six months. The market price of NorthernTel’s shares was $25 per share on April 1, 2020. On June 30, 2020, the market price for NorthernTel’s stock was $35 per share, and the fair value of the option was $8,200.

Prepare the journal entry to record the purchase of the call option on April 1, 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

eTextbook and Media

List of Accounts

Prepare the journal entry to recognize the change in the call option’s fair value as at June 30, 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

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List of Accounts

Prepare the journal entry that would be required if Blossom Ltd. exercised the call option and took delivery of the shares as soon as the market opened on July 1, 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Krewatch, Inc., is a vertically integrated manufacturer and retailer of golf clubs and accessories (gloves, shoes, bags, etc.). Krewatch maintains separate financial reporting systems for each of its facilities. The company experienced the following events in 2017:

1. After several years of production problems at the accessories manufacturing plant, Krewatch sold the plant to an investor group headed by a former manager at the plant.

2. Krewatch incurred restructuring costs of $12,562,990 when it eliminated a layer of middle management.

3. Krewatch extinguished $200 million in 30-year bonds issued 18 years ago. Krewatch recognized a gain on this transaction.

4. Krewatch changed its method of accounting for inventory from FIFO to the average cost method. Sufficient information was available to determine the effect of this change on prior years’ earnings numbers.

5. Due to technological advances in golf club manufacturing, management determined that production equipment would need to be upgraded more frequently than in the past. Consequently, the useful lives of equipment for depreciation purposes were reduced.

6. The company wrote off inventory that was not salable.

7. Equipment was sold at a loss.

Required:

For each event, (1) identify the appropriate reporting treatment from the following list (consider each event to be material), and (2) indicate whether it would be included in income from continuing operations, would appear on the income statement below that subtotal, or would require retrospective application.

a. Change in accounting estimate.

b. Change in accounting principle.

c. Discontinued operation.

d. Unusual or infrequently occurring item.

E6.14 (LO 5) (Computation of Pension Liability) Nerwin, Inc. is a furniture manufacturing company with 50 employees. Recently, after a long negotiation with the local labor union, the company decided to initiate a pension plan as a part of its compensation plan. The plan will start on January 1, 2020. Each employee covered by the plan is entitled to a pension payment each year after retirement. As required by accounting standards, the controller of the company needs to report the pension obligation (liability). On the basis of a discussion with the supervisor of the Personnel Department and an actuary from an insurance company, the controller develops the following information related to the pension plan.

The interest rate to be used is 8%.

Instructions

On the basis of the information above, determine the present value of the pension obligation (liability).

The time and cost required to manufacture its product R&D costs were $120,000. The process was patented. On July 1, 2016. Legal costs and fees to require the patent totaled $12,500. Browen estimated the useful life of the patent at 10 years.

On July 1,2018, Browen sold the nonexclusive right to use the new process to Kennedy Company for $90,000. Because Bowen retained the patent, the agreement allows Kennedy to use, but not sell, the new technology for a period of 5 years. But Bowen Company and Kennedy Company have December 31 fiscal years.

On July 1, 2020, another competitor obtained a patent on a new process that made Browen's patent obsolete.

1) How should Bowen Company account for the R&D costs and legal costs incurred to obtain the patent? Show the effects of these entries using the financial statement effects template, prepare the appropriate journal entries necessary to account for the costs incurred in 2016, and psot the entries to T-accounts