2.18 ANALYZING TRANSACTIONS

(1) a. January 15, 2009: Purchased marketable equity securities for $100,000.Marketable equity securities 100,000

Cash 100,000b. December 31, 2009: Revalued the marketable securities to their market value of $90,000. Unrealized changes in the market value of marketable equity securities appear in accumulated other comprehensive income.

Unrealized loss 10,000Marketable equity securities 10,000

c. December 31, 2009: Recognized income tax effects of the revaluation in Part b at an income tax rate of 40 percent. The income tax law includes changes in the market value of equity securities in taxable income only when the investor sells the securities.

Deferred tax asset 4,000 (10,000*40%)Unrealized loss 4,000

d. January 5, 2010: Sold the marketable equity securities for $94,000.Cash 94,000Loss on marketable equity securities 6,000

Unrealized loss 10,000Marketable equity securities 90,000

e. January 5, 2010: Recognized the tax effect of the sale of the securities in Part (d). Assume that the tax is paid in cash immediately.

Unrealized loss 4,000Cash 2,400

Deferred tax asset 4,000Tax expense 2,400 (6,000*40%)

(2) a. During 2010: Sells inventory on account for $500,000.Account receivable 500,000

Sales 500,000b. During 2010: The cost of goods sold in Part (b) is $400,000.

Cost of Goods Sold 400,000Inventory 400,000

c. During 2010: Estimated that uncollectible accounts on the goods sold in Part (a) will equal 2 percent of the selling price.

Bad debt expense 10,000Allowance for uncollectible accounts 10,000 (500,000*2%)

d. During 2010: Estimated that warranty claims on the goods sold in Part (a) will equal 4 percent of the selling price.

Warranty expense 20,000Warranty claim 20,000 (500,000*4%)

e. During 2010: Actual accounts written off as uncollectible totaled $3,000.Allowance for uncollectible accounts 3,000

Account receivable 3,000

f. During 2010: Actual cash expenditures on warranty claims totaled $8,000.

Warranty claim 8,000Cash 8,000

g. December 31, 2010: Recognized income tax effects of the preceding six transactions. The income tax rate is 40 percent. The income tax law permits a deduction for uncollectible accounts when a firm writes off accounts as uncollectible and for warranty claims when a firm makes warranty expenditures. Assume that any tax is paid in cash immediately.

Income tax expense 28,000Deferred tax asset 7,600*

Cash 35,600** *(10,000+20,000-3,000-8,000)*40%**(500,000-400,000-3,000-8,000)*40%

(3) a. January 1. 2010: Purchased $100,000 face value of zero-coupon bonds for $68,058. These bonds mature on December 31, 2014, and are priced on the market at the time of issuance to yield 8 percent compounded annually. Zero-coupon bonds earn interest until maturity. Assume that any tax owed on taxable income is paid in cash immediately.

Bond 68,058Cash 68,058

b. December 31, 2010: Recognized interest revenue on the bonds for 2010.Bond 5,445

Interest revenue 5,445 (68,058*8%)c. December 31, 2010: Recognized income tax effect of the interest revenue for 2010.

Income tax expense 2,178 (5,445*40%)Cash 2,178

d. December 31, 2010: Recognized interest revenue bonds for 2011.Bond 5,880

Interest revenue 5,880 [(68,058+5,445)*8%]e. December 31, 2010: Recognized income tax effect of the interest revenue for 2011.

Income tax expense 2,352 (5,880*40%)Cash 2,352

f. January 2, 2012: Sold the zero-coupon bonds for $83,683.Cash 83,683

Bond 79,383*Gain on sale 4,300

*68,058+5,445+5,880g. January 2, 2012: Recognized the income tax effect of the gain or loss on the sale. The applicable income tax rate is 40 percent, which affects cash immediately.

Income tax expense 1,720 (4,300*40%)Cash 1,720