Problem 3-10

1)

PV of principal (1,200,000 x 0.7118)

854,160

PV of interest (60,000 x 2.4018)

144,108

Web development services revenue

998,268


2)

PV of note (880,000 x 0.8929)

785,752
Less: Carrying value of
plant

500,000

Gain on sale of plant

285,752


Date
Annual
Installment Interest Total
PV
Factor PV
Dec. 31,
2010 800,000 96,000 896,000 0.8772 785,971
Dec. 31,
2011 800,000 64,000 864,000 0.7695 664,848
Dec. 31,
2012 800,000 32,000 832,000 0.675 561,600

Total

2,012,419

Carrying value of machine

-1,600,000

Gain on sale of machine

412,419

Gain on sale of plant

285,752

Total gain on sale of plant and machine

698,171


3)

Notes receivable, web development services

1,058,060

Notes receivable on sale of machine

729,900

Noncurrent notes receivable

1,787,960


4)

Notes receivable on sale of plant

880,000

Notes receivable on sale of machine (1398158-729900) 668,258

Current notes receivable

1,548,258


5)

Interest from sale of plant

94,290

Interest from web development services

119,792

Interest from sale of machine

281,739

Interest income, 2014

495,821


Amortization Schedule



1.)
Date Principal
Interest
Amortization
Carrying
Value

Received Income

Jan. 1, 2014 785,752

Dec. 31,
2014
880,000 94,290 94,290 880,000


Jan. 1, 2014 998,268
2.)
Dec. 31,
2014
60,000 119,792 59,792 1,058,060

Dec. 31,
2015
60,000 126,967 66,967 1,125,067

Dec. 31,
2016
1,200,000 60,000 135,003 75,003 1,200,000


Jan. 1, 2010 2,012,419
3.)
Dec. 31,
2010
800,000 96,000 281,739 185,739 1,398,158

Dec. 31,
2011
800,000 64,000 195,742 131,742 729,900

Dec. 31,
2012
800,000 32,000 102,186 70,186 800,000


Problem 3-11

1)

Book value of loan receivable

15,000,000

PV of projected cash flows
Dec. 31, 2014 (4750000 x
0.9091) 4,318,225
Dec. 31, 2015 (5500000 x
0.8264) 4,545,200
Dec. 31, 2016 (4750000 x
0.7513) 3,568,675 12,432,100

Impairment Loss

2,567,900













2)
Interest Income in 2014 (12,432,100 x 10%)

1,243,210


3)

Loan Receivable (15,000,000-4,750,000-5,500,000)

4,750,000

Less: Allowance for Loan Impairment

432,159

Carrying Value, Dec. 31, 2015

4,317,841


4)

Interest Income in 2015

892,531


5)

Interest Income in 2016

431,748


Case 3-1
1) For Reason 1, we disagree because it does not reflect the true position and performance
of the company. Cut-off assertion was violated as it produced materially misstated
account balances in 2014. Furthermore, revenue recognition and matching principle was
not considered.

We disagree with Reason 2 because occurrence assertion was violated. The company
should not have recorded the immediate income but rather a liability account (unearned
income).

We also disagree with Reason 3. Universal Air should perform controls effectively. They
can use an online, real-time database that would immediately update the flight details.

2) Yes, we expect it to average out over the year since the beginning balance is
understated, while ending balance is overstated. However, there is a risk of decline in
sales because of market fluctuations.

3) To determine whether the company does average out, the auditor must perform
analytical procedures, analyze the prior years financial statements, and assess economic
and other external factors to compute for the projected flight sales.

Date
Loan
Receivable
Before Current
Payment
Allowance
for Loan
Impairment
Net Loan
Receivable
Interest
Income
Payment
Received
Dec. 31, 2014 15,000,000 2,567,900 12,432,100 1,243,210 4,750,000
Dec. 31, 2015 10,250,000 1,324,690 8,925,310 892,531 5,500,000
Dec. 31, 2016 4,750,000 432,159 4,317,841 431,784 4,750,000