BCO123 Accounting II Midterm Task Brief And Rubrics

BCO123 Accounting II Task brief & rubrics Task: Midterm Timed Assignment

This is an individual task. Students are required to answer all questions in the following three exercises. Use the accounting textbook and notes to inform responses. Clearly show all work, demonstrate thorough understanding of accounting concepts and principles, and analyze deeply. Submissions must be in a single PDF with answers clearly separated; questions should not be included in the file to reduce similarity. Use Arial 12.5 pts font, justified text, and Harvard citation style for references. Submit by specified deadlines via Moodle, with the assignment accounting for 30% of the course grade. The task assesses knowledge of liabilities, notes payable, bonds, and disclosures of estimated liabilities and contingencies.

Paper For Above instruction

Introduction

Liabilities play a pivotal role in financial accounting as they represent present obligations arising from past events that a company is required to settle through the transfer of assets or services. Proper classification and recognition of liabilities are essential for accurate financial reporting and adherence to accounting standards. This paper elaborates on the nature of liabilities, including their classification into current and long-term liabilities, discusses detailed calculations and journal entries related to bonds and loans, and examines disclosure requirements for contingencies and commitments in financial statements.

Exercise 1: Analysis of Bauman Corporation’s Liabilities

Liabilities are obligations that a company owes to outside parties, which are settled over time through the transfer of money, goods, or services. They are categorized into current liabilities, which are due within one year or within the entity’s operating cycle, and long-term liabilities, which are payable beyond this period. Recognizing and classifying liabilities accurately ensures transparency and informs stakeholders of the company's financial health.

Bauman Corporation’s liabilities as of December 31, 2020, include several items. The €800,000 bond maturing in one year is a current liability, as it is due within the next 12 months. The accrued interest of €68,000 constituting interest expense payable is also classified as a current liability because it is due shortly. Notes payable of €200,000, where €40,000 is payable within 12 months, should be split between current (€40,000) and long-term (€160,000). The €92,000 interest expense related to liabilities will accrue over the next year and form part of current liabilities. Deposits from customers totaling €310,000 are considered current liabilities as they relate to goods/services to be delivered soon. The three-year commitment salary of €450,000 for Peter Smith is a long-term liability due to its duration, but the portion payable within 12 months (if any) would be current. The €190,000 note payable due within 90 days falls under current liabilities. The €195,000 of taxes payable is a current liability, whereas the remaining €180,000 deferred taxes would be a long-term liability. The lawsuit claim of €500,000 should be disclosed as a contingent liability; since legal counsel cannot estimate the liability, it is not recognized but disclosed in notes.

Therefore, the liabilities classification is as follows:

  • Current liabilities: €800,000 bond (due within 1 year), €68,000 accrued interest, €40,000 notes payable (due in 12 months), €92,000 interest expense, €310,000 customer deposits, €190,000 short-term note payable, €195,000 taxes payable.
  • Long-term liabilities: €160,000 notes payable (portion beyond 12 months), €450,000 salary commitment (if payable after 12 months), €180,000 deferred taxes, and uncertain lawsuit contingent liabilities disclosed in notes.

Items such as the lawsuit are excluded from liabilities because their outcome and potential amount are uncertain, and legal counsel cannot estimate the outcome. Similarly, deferred taxes are recognized as a liability only when realization is probable and measurable, thus the unquantifiable claim is disclosed but not recognized as a liability.

Accounting for estimated liabilities, loss contingencies, and commitments involves disclosure in the notes to financial statements. Estimated liabilities, such as warranty costs or environmental obligations, are recorded when probable and estimable. Loss contingencies that are reasonably possible or remote are disclosed or omitted based on materiality and probability. Commitments are generally disclosed in notes, providing stakeholders with insight into potential future obligations that could impact financial position.

Exercise 2: Amortization Schedule and Journal Entries for Blissful Corporation

Blissful Corporation’s mortgage is a 30-year, €600,000 loan with monthly payments of €6,485 at an annual interest rate of 12%, amortized fully over 360 months. The first payment occurs on 30 November 2020. To construct the amortization table, the monthly interest expense is calculated as the previous period’s balance multiplied by the monthly interest rate (annual rate / 12).

For the first payment on 30 November 2020, the interest expense is (€600,000 12% / 12) = €6,000. The principal reduction is (€6,485 - €6,000) = €485. The new balance becomes (€600,000 - €485) = €599,515. For the second payment on 31 December 2020, interest expense becomes (€599,515 1%) ≈ €5,995, with principal reducing by (€6,485 - €5,995) = €490, bringing the remaining balance to approximately (€599,515 - €490) = €599,025.

Journal Entry for the first payment:

Date: November 30, 2020


Debit: Mortgage Payable €6,000


Debit: Interest Expense €485


Credit: Cash €6,485

For the second payment:

Date: December 31, 2020


Debit: Mortgage Payable €5,995


Debit: Interest Expense €490


Credit: Cash €6,485

The total paid over 30 years is €6,485 * 360 months = €2,334,600. The total interest paid over the life of the loan is (€2,334,600 - €600,000) = €1,734,600, representing the cost of financing resources for the hotel purchase.

Exercise 3: Bond Issuance and Interest Recording

Maryland Corporation issued €15 million, 30-year bonds at a contract interest rate of 8%. Bonds pay semiannual interest on May 1 and November 1. The bonds were issued on July 1, 2020, at face value plus accrued interest for two months.

To record the bond issuance on August 1, 2020, we recognize the received proceeds, including accrued interest. The accrued interest from May 1 to July 1 is (€15 million 8% / 12 months) 2 months = €200,000.

Date: August 1, 2020


Debit: Cash €15,200,000


Credit: Bonds Payable €15,000,000


Credit: Interest Payable €200,000

On November 1, 2020, the company records semiannual interest payment (€15 million * 8% / 2 periods = €600,000):

Date: November 1, 2020


Debit: Interest Expense €600,000


Credit: Cash €600,000

At year-end December 31, 2020, accrued interest is computed for two months (May 1 to December 31). The interest expense accrued is (€15 million 8% / 12) 8 months ≈ €800,000.

Date: December 31, 2020


Debit: Interest Expense €800,000


Credit: Interest Payable €800,000

On May 1, 2021, the second semiannual interest is paid, and journal entries reflect this payment. The prevailing market rate at issuance typically aligns with the contractual rate if bonds are issued at face value, indicating that the market rate approximates 8%, considering no premium or discount was reported.

References

  • Boynton, W. C., & Johnson, R. (2019). Modern Auditing. Cengage Learning.
  • Epstein, L., & Jermakowicz, E. (2010). IFRS, IFRS for SMEs, US GAAP: A Comparative Study. Wiley.
  • Harrison, W. T., & Horngren, C. T. (2019). Financial & Managerial Accounting. Pearson.
  • Knapp, R., & Knapp, S. (2018). Financial Accounting. McGraw-Hill Education.
  • Revsine, L., Collins, D., & Johnson, W. (2019). Financial Reporting & Analysis. Pearson.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis. Wiley.
  • Wahlen, J., & Pandit, J. (2020). Financial Statement Analysis. McGraw-Hill Education.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2020). Financial Statement Analysis. McGraw-Hill Education.
  • Accountancy Ireland. (2020). Accounting for liabilities and contingencies. Irish Accounting Review.
  • Financial Accounting Standards Board (FASB). (2018). Accounting Standards Codification (ASC) 450 - Contingencies. FASB.

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