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AC 5230 Problem Set 3 Instructions: Create a single Excel document with one worksheet/tab for each problem. Each problem is worth 20 points. Problem 1 Equipment that cost $80,000 and has accumulated depreciation of $63,000 is exchanged for similar equipment with a fair value of $35,000 and $15,000 cash is received. The exchange lacked commercial substance. Directions (20 Points): Respond to these questions on a separate Excel spreadsheet as directed on the Problem Set 3 instructions. a) Show the calculation of the gain to be recognized from the exchange. b) Prepare the entry for the exchange. Problem 2 Presented below is information related to copyrights owned by Jeff Corporation at December 31, 2008. Cost $2,700,000 Carrying Amount $2,400,000 Expected Future Net Cash Flows $2,100,000 Fair Value $1,400,000 Assume Jeff Corporation will continue to use this asset in the future. As of December 31, 2008, the copyrights have a remaining useful life of 5 years. Directions (20 points): Respond to these questions on a separate Excel spreadsheet as directed on the Problem Set 3 instructions. a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2008. b) Prepare the journal entry to record amortization expense for 2009. c) The fair value of the copyright at December 31, 2009 is $1,500,000. Prepare the journal entry (if any) necessary to record this increase in fair value. Problem 3 Dave Co. purchased a patent from Larry Co. for $180,000 on July 1, 2005. Expenditures of $51,000 for successful litigation in defense of the patent were paid on July 1, 2008. Dave Co. estimates that the useful life of the patent will be 20 years from the date of acquisition. Directions (20 points): Prepare a computation of the carrying value of the patent as of December 31, 2008 on a separate Excel spreadsheet as directed on the Problem Set 3 instructions. Problem 4 On January 1, 2008, Michelle Co. issued ten-year bonds with a face value of $1,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Directions (20 points): Prepare your responses on a separate Excel spreadsheet as directed on the Problem Set 3 instructions. a. Calculate the issue price of the bonds. b. Without prejudice to your solution in part a, assume that the issue price was $884,000. Prepare the amortization table for 2008, assuming that amortization is recorded on interest payment dates. Problem 5 Amy Equipment Company sells computers for $1,500 each and also gives each customer a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2008, the company sold 700 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $30 for parts and $60 for labor. (Assume sales all occur at December 31, 2008.) In 2009, Amy Equipment Company incurred actual warranty costs relative to 2008 computer sales of $10,000 for parts and $18,000 for labor. Directions (20 points): Prepare your responses to these problems on a separate Excel spreadsheet as directed on the Problem Set 3 instructions. a) Under the expense warranty treatment, give the entries to reflect the above transactions (accrual method) for 2008 and 2009. b) Under the cash basis method, what are the Warranty Expense balances for 2008 and 2009?