EXAMINATION NAME
__________________________________________________________________
FINAL ACCOUNTING 302 FALL 2005
(December 13th ; 10:30am 12:30pm)
This exam consists of 10 pages, including this cover. Please put your name at the top of this page and initial the other test pages. For multiple choice questions, circle the best answer. Unless indicated otherwise, questions are worth 4 points each. There are 140 total points for the exam.
Please have a wonderful break and holidays. Larry
-1-
Accounting 302
Fall 2005
FINAL EXAM
Initial ______
1. DAY Company owns a plot of land on which buried toxic wastes have been discovered. Since it will require several years and a considerable sum of money before the property is fully detoxified and capable of generating revenues, DAY wishes to sell the land now. It has located two potential buyers: Buyer A, who is willing to pay $385,000 for the land now, and Buyer B, who is willing to make 20 annual payments of $60,000 each, with the first payment to be made 5 years from today. Assuming that the appropriate rate of interest is 9%, to whom should DAY sell the land? Show calculations. [6 pts.]
2. On 1/1/2004, DIEP Company issued $10,000,000 of 5%, 5-year bonds with interest payable annually on Dec.31. At time of issue, the market required 6% for similar bonds. Fill in the table below. [12 pts.] Date 1/1/2004 xxxxxxxxxxxxxx 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 xxxxxxxxxxxxxx 12/31/2008 Principal pmt. $10,000,000 xxxxxxxxxxxxxx xxxxxxxxxxxxxx xxxxxxxxxxxxxx Interest payment Proceeds xxxxxxxxxxxxx xxxxxxxxxxxxx Interest Expense xxxxxxxxxxxxxx xxxxxxxxxxxxxx Discount Amortization xxxxxxxxxxxxxx CV of Bond
xxxxxxxxxxxxx = cells that are not to be filled in.
-2-
Accounting 302
Fall 2005
FINAL EXAM
Initial ______
3. The general ledger of LAM Corporation as of December 31, 2004, includes the following accounts: Copyrights...................................................................................................$ 40,000 Deposits with advertising agency (will be used to promote goodwill)...........27,000 Discount on bonds payable.............................................................................67,500 Excess of cost over fair value of identifiable net assets of acquired subsidiary.................................................................................490,000 Trademarks.....................................................................................................90,000 In the preparation of LAM's balance sheet as of December 31, 2004, what should be reported as total intangible assets? [4 pts.]
4. In January 2004, HORI Mining Corporation purchased a mineral mine for $6,300,000 with removable ore estimated by geological surveys at 3,000,000 tons. The property has an estimated value of $600,000 after the ore has been extracted. HORI incurred $1,725,000 of development costs preparing the property for the extraction of ore. During 2004, 340,000 tons were removed and 300,000 tons were sold. For the year ended December 31, 2004, HORI should include what amount of depletion in its cost of goods sold? [4 pts.]
5. Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating
cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty A. should be reported as long-term. B. should be reported as current. C. should be reported as part current and part long-term. D. need not be disclosed. 6. TRAN Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The loss accrual should be A. zero. B. the maximum of the range. C. the mean of the range. D. the minimum of the range.
-3-
Accounting 302
Fall 2005
FINAL EXAM
Initial ______
7. On January 3, 2004, KO Corp. owned a machine that had cost $300,000. The accumulated depreciation was $180,000, estimated salvage value was $18,000, and fair market value was $480,000. On January 4, 2004, this machine was irreparably damaged by PHAM Corp. and became worthless. In October 2004, a court awarded damages of $480,000 against PHAM in favor of KO. At December 31, 2004, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of KO's attorney, PHAM's appeal will be denied. At December 31, 2004, what amount should KO accrue for this gain contingency?
8. POPA Company estimates its annual warranty expense as 2% of annual net sales. The following data relate to the calendar year 2004: [4 pts.] Net sales Warranty liability account Balance, Dec. 31, 2004 Balance, Dec. 31, 2004 $1,800,000 $ 6,000 30,000 debit before adjustment credit after adjustment
Which one of the following entries was made to record the 2004 estimated warranty expense? A. Warranty Expense ................................................................. 36,000 Retained Earnings (prior-period adjustment) ............. 6,000 Warranty Liability ...................................................... 30,000 B. Warranty Expense ................................................................. Retained Earnings (prior-period adjustment) ........................ Warranty Liability ...................................................... C. Warranty Expense ................................................................. Warranty Liability ...................................................... D. Warranty Expense ................................................................. Warranty Liability ................................................ 30,000 6,000 36,000 24,000 24,000 36,000 36,000
9. KOEHNE Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2004. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having KOEHNE recall all cans of this paint sold in the last six months. The management of KOEHNE estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation? A. No recognition B. Note disclosure only C. Operating expense of $800,000 and liability of $800,000 D. Appropriation of retained earnings of $800,000
-4-
Accounting 302
Fall 2005
FINAL EXAM
Initial ______
10. YU Equipment Company sells computers for $2,000 each and also gives each customer a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2004 (first year of operation), the company sold 700 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $40 for parts and $80 for labor. (Assume sales all occur at December 31, 2004.) In 2005, YU incurred actual warranty costs relative to 2004 computer sales of $10,000 for parts and $24,000 for labor. Under the expense warranty treatment, give the journal entries to reflect the above transactions (accrual method) for 2004 and 2005. Remember to record the sales. [12 pts.]
Under the cash-basis method, how much Warranty Expense will be recognized for 2004 and 2005? [4 pts.]
11. If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a [4 pts.] A. debit to Interest Payable. B. credit to Interest Receivable. C. credit to Interest Expense. D. credit to Unearned Interest.
-5-
Accounting 302
Fall 2005
FINAL EXAM
Initial ______
12. The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as A. an adjustment to the cost basis of the asset obtained by the debt issue. B. an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument. C. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt. D. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption. 13. Which of the following is an example of "off-balance-sheet financing"? A. Non-consolidated subsidiary. B. Special purpose entity. C. Operating leases. D. All of the above are examples of "off-balance-sheet financing." E. None of the above are examples of "off-balance-sheet financing." 14. In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at the date of restructure, but no interest expense should be recognized over the remaining life of the debt, whenever the A. carrying amount of the pre-restructure debt is less than the total future cash flows. B. carrying amount of the pre-restructure debt is greater than the total future cash flows. C. present value of the pre-restructure debt is less than the present value of the future cash flows. D. present value of the pre-restructure debt is greater than the present value of the future cash flows. 15. On January 1, 1998, ROYBAL Corporation issued $1,800,000 of 10% ten-year bonds at 103. The bonds are callable at the option of ROYBAL at 105. ROYBAL has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective interest method). On December 31, 2004, when the fair market value of the bonds was 96, ROYBAL repurchased $400,000 (face) of the bonds in the open market at 96. ROYBAL has recorded interest and amortization for 2004. Ignoring income taxes and assuming that the gain is material, ROYBAL should report this reacquisition as (indicate gain or loss of how much): [6 pts.]
-6-
Accounting 302
Fall 2005
FINAL EXAM
Initial ______
16. When the effective interest method is used to amortize bond premium or discount, the periodic amortization will A. increase if the bonds were issued at a discount. B. decrease if the bonds were issued at a premium. C. increase if the bonds were issued at a premium. D. increase if the bonds were issued at either a discount or a premium. E. none of the above. 17. If a company invests in bonds and plans to hold them to maturity, what journal entry would they make at the end of the year to reflect the fact that the market price of the bonds has increased by $13,000 over the bond's book value?
18. What is the definition of Available-for-Sale securities?
19. How does accounting for Trading securities differ from Available-for-Sale securities?
20. When you transfer a security into Held-to-Maturity, what do you do with the unrealized holding gain/loss at the time of transfer?
-7-
Accounting 302
Fall 2005
FINAL EXAM
Initial ______
21. On January 2, 2003, HUANG Capital Corp. purchases 30% (significant influence) of the outstanding common shares of SPARKMAN Manufacturing Company for $100 million. For 2003, SPARKMAN reports net income of $30 million ($2 million of which was an extraordinary loss). SPARKMAN declared and paid dividends of $3 million in 2003. The following information related to SPARKMAN is available: Net assets at acquisition: Fair value = $300 million Book value = $285 million The depreciable assets have an average remaining useful life of 8 years. HUANG uses straightline to depreciate assets. Assume the difference between BV and FV of net assets is because depreciable assets have a FV in excess of their undepreciated cost. Below give all the journal entries that HUANG should make in the first year (through 12/31/2003) of this investment. [10 pts.]
-8-
Accounting 302
Fall 2005
FINAL EXAM
Initial ______
22. On January 1, 2004, HONG Co. sells machinery to LIAO Corp. at its fair value of $1,440,000 and leases it back. The machinery had a carrying value of $1,260,000 (original cost = $1,800,000), the lease is for 10 years and the implicit rate is 10%. The lease payments of $213,000 start on January 1, 2004. HONG uses straight-line depreciation and there is no residual value. Below prepare all of HONG's entries for all of 2004. [16 pts.]
Below prepare all of LIAO's entries for all of 2004. [10 pts.]
-9-
Accounting 302
Fall 2005
FINAL EXAM
Initial ______
Period 1 2 3 4 5 6 7 8 9 10 . 20 24
5% 1.00000 2.05000 3.15250 4.31013 5.52563 6.80191 8.14201 9.54911 11.02656 12.57789 . 33.06595 44.50200
Future Value of Ordinary Annuity of 1 6% 8% 9% 1.00000 1.00000 1.00000 2.06000 2.08000 2.09000 3.18360 3.24640 3.27810 4.37462 4.50611 4.57313 5.63709 5.86660 5.98471 6.97532 7.33592 7.52334 8.39384 8.92280 9.20044 9.89747 10.63663 11.02847 11.49132 12.48756 13.02104 13.18079 14.48656 15.19293 . . . 36.78559 45.76196 51.16012 50.81558 66.76476 76.78981 Present Value of an Ordinary Annuity of 1 6% 8% 9% 0.94340 0.92593 0.91743 1.83339 1.78326 1.75911 2.67301 2.57710 2.53130 3.46511 3.31213 3.23972 4.21236 3.99271 3.88965 4.91732 4.62288 4.48592 5.58238 5.20637 5.03295 6.20979 5.74664 5.53482 6.80169 6.24689 5.99625 7.36009 6.71008 6.41766 11.46992 12.55036 9.81815 10.52876 9.12855 9.70661
10% 1.00000 2.10000 3.31000 4.64100 6.10510 7.71561 9.48717 11.43589 13.57948 15.93743 . 57.27500 88.49733
11% 1.00000 2.11000 3.34210 4.70973 6.22780 7.91286 9.78327 11.85943 14.16397 16.72201 . 64.20283 102.17415
Period 5% 1 0.95238 2 1.85941 3 2.72325 4 3.54595 5 4.32948 6 5.07569 7 5.78637 8 6.46321 9 7.10782 10 7.72173 . 20 12.46221 24 13.79864
10% 0.90909 1.73554 2.48685 3.16986 3.79079 4.35526 4.86842 5.33493 5.75902 6.14457 8.51356 8.98474
11% 0.90090 1.71252 2.44371 3.10245 3.69590 4.23054 4.71220 4.14612 5.53705 5.88923 7.96333 8.34814
(To convert an ordinary annuity to an annuity due, multiply the above factors by 1+r) Present Value of 1 (present value of a single sum) 5% 6% 8% 9% 10% 0.82270 0.79209 0.73503 0.70843 0.68301 0.78353 0.74726 0.68058 0.64993 0.62092 0.37689 0.31007 0.31180 0.24689 0.21455 0.17843 0.15770...........0.12641 0.14864 0.10153
Period 4 5 . 20 24
11% 0.65873 0.59345 0.12403 0.08170
- 10 -
Accounting 302
Fall 2005
FINAL EXAM
************* KEY ************
1. Dolan Company owns a plot of land on which buried toxic wastes have been discovered. Since it will require several years and a considerable sum of money before the property is fully detoxified and capable of generating revenues, Dolan wishes to sell the land now. It has located two potential buyers: Buyer A, who is willing to pay $385,000 for the land now, and Buyer B, who is willing to make 20 annual payments of $60,000 each, with the first payment to be made 5 years from today. Assuming that the appropriate rate of interest is 9%, to whom should Dolan sell the land? Show calculations. [6 pts.] Buyer A. The present value of the purchase price is $385,000. Buyer B. The present value of the purchase price is: Present value of ordinary annuity of $60,000 for 24 periods at 9% Less present value of ordinary annuity of $60,000 for 4 periods (deferred) at 9% Difference Multiplied by annual payments Present value of payments 9.70661 3.23972 6.46689 $60,000 $388,013
Or PV(60K,9%,20)/[1 + PVF(9%,4)] = 9.12855/ (1.09)^4 = 9.70661/1.411582 = 6.46689 Conclusion: Dolan should sell to Buyer B. 2. On 1/1/2004, DOI Company issued of $10,000,000 5%, 5-year bonds with interest payable annually on Dec.31. At time of issue, the market required 6% for similar bonds. Fill in the table below. [12 pts.] Date 1/1/2004 xxxxxxxxxxxxxx 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 xxxxxxxxxxxxxx 12/31/2008 Proceeds $9,578,764 Interest payment $500,000 $500,000 $500,000 $500,000 $500,000 Principal pmt. $10,000,000 xxxxxxxxxxxxx xxxxxxxxxxxxx Interest Expense 574,726 579,209 583,962 589,000 594,340 xxxxxxxxxxxxxx 0 xxxxxxxxxxxxxx xxxxxxxxxxxxxx Discount Amortization 74,726 79,209 83,962 89,000 94,340 xxxxxxxxxxxxxx 0 CV of Bond $9,578,764 xxxxxxxxxxxxxx 9,653,489 9,732,699 9,816,661 9,905,660 10,000,000 xxxxxxxxxxxxxx -0-
xxxxxxxxxxxxx = cells that are not to be filled in.
- 11 -
Accounting 302
Fall 2005
FINAL EXAM
************* KEY ************
3. The general ledger of CHU Corporation as of December 31, 2004, includes the following accounts: Copyrights $ 40,000 Deposits with advertising agency (will be used to promote goodwill) 27,000 Discount on bonds payable 67,500 Excess of cost over fair value of identifiable net assets of acquired subsidiary 490,000 Trademarks 90,000 In the preparation of CHU's balance sheet as of December 31, 2004, what should be reported as total intangible assets? [4 pts.] $40 + 490 + 90 = $620,000
4. In January 2004, Kohl Mining Corporation purchased a mineral mine for $6,300,000 with removable ore estimated by geological surveys at 3,000,000 tons. The property has an estimated value of $600,000 after the ore has been extracted. Kohl incurred $1,725,000 of development costs preparing the property for the extraction of ore. During 2004, 340,000 tons were removed and 300,000 tons were sold. For the year ended December 31, 2004, Kohl should include what amount of depletion in its cost of goods sold? [4 pts.] [($6.3M + 1.725M - .6M) / 3M] * .3M = $742,500 OR pg. 537 says explor. cost usually expensed as incurred, but if substantial & high risk, then capitalize: [($6.3M - .6M) / 3M] * .3M = $570,000
5. Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating
cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty A. should be reported as long-term. B. should be reported as current. C. should be reported as part current and part long-term. D. need not be disclosed. 6. SUH Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The loss accrual should be A. zero. B. the maximum of the range. C. the mean of the range. D. the minimum of the range.
- 12 -
Accounting 302
Fall 2005
FINAL EXAM
************* KEY ************
7. On January 3, 2004, Acme Corp. owned a machine that had cost $300,000. The accumulated depreciation was $180,000, estimated salvage value was $18,000, and fair market value was $480,000. On January 4, 2004, this machine was irreparably damaged by Reed Corp. and became worthless. In October 2004, a court awarded damages of $480,000 against Reed in favor of Acme. At December 31, 2004, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Acme's attorney, Reed's appeal will be denied. At December 31, 2004, what amount should Acme accrue for this gain contingency? $0 never accrue a gain contingency--could disclose in FN if probable
8. Moore Company estimates its annual warranty expense as 2% of annual net sales. The following data relate to the calendar year 2004: [4 pts.] Net sales Warranty liability account Balance, Dec. 31, 2004 Balance, Dec. 31, 2004 $1,800,000 $ 6,000 30,000 debit before adjustment credit after adjustment
Which one of the following entries was made to record the 2004 estimated warranty expense? A. Warranty Expense ................................................................. 36,000 Retained Earnings (prior-period adjustment) ............. 6,000 Warranty Liability ...................................................... 30,000 B. Warranty Expense ................................................................. Retained Earnings (prior-period adjustment) ........................ Warranty Liability ...................................................... C. Warranty Expense ................................................................. Warranty Liability ...................................................... D. Warranty Expense .............................................................. Warranty Liability ................................................ 30,000 6,000 36,000 24,000 24,000 36,000 36,000
9. Lopez Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2004. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Lopez recall all cans of this paint sold in the last six months. The management of Lopez estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation? A. No recognition B. Note disclosure only C. Operating expense of $800,000 and liability of $800,000 D. Appropriation of retained earnings of $800,000
- 13 -
Accounting 302
Fall 2005
FINAL EXAM
************* KEY ************
10. KAO Equipment Company sells computers for $2,000 each and also gives each customer a 2year warranty that requires the company to perform periodic services and to replace defective parts. During 2004 (first year of operation), the company sold 700 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $40 for parts and $80 for labor. (Assume sales all occur at December 31, 2004.) In 2005, KAO incurred actual warranty costs relative to 2004 computer sales of $10,000 for parts and $24,000 for labor. Under the expense warranty treatment, give the journal entries to reflect the above transactions (accrual method) for 2004 and 2005. Remember to record the sales. [12 pts.]
2004 Accounts Receivable or (Cash)....................................................... 1,400,000 Sales ...................................................................................... Warranty Expense .......................................................................... Estimated Liability Under Warranties ............................. 2005 Estimated Liability Under Warranties ......................................... Inventory .............................................................................. Accrued Payroll ................................................................... 84,000
1,400,000 84,000
34,000 10,000 24,000
Under the cash-basis method, how much Warranty Expense will be recognized for 2004 and 2005? [4 pts.] 2004 2005 $0. $34,000.
11. If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a [4 pts.] A. debit to Interest Payable. B. credit to Interest Receivable. C. credit to Interest Expense. D. credit to Unearned Interest.
- 14 -
Accounting 302
Fall 2005
FINAL EXAM
************* KEY ************
12. The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as A. an adjustment to the cost basis of the asset obtained by the debt issue. B. an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument. C. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt. D. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption. 13. Which of the following is an example of "off-balance-sheet financing"? A. Non-consolidated subsidiary. B. Special purpose entity. Pg. 690 C. Operating leases. D. All of the above are examples of "off-balance-sheet financing." E. None of the above is an example of "off-balance-sheet financing." 14. In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at the date of restructure, but no interest expense should be recognized over the remaining life of the debt, whenever the A. carrying amount of the pre-restructure debt is less than the total future cash flows. B. carrying amount of the pre-restructure debt is greater than the total future cash flows. C. present value of the pre-restructure debt is less than the present value of the future cash flows. D. present value of the pre-restructure debt is greater than the present value of the future cash flows. 15. On January 1, 1998, Rodriquez Corporation issued $1,800,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Rodriquez at 105. Rodriquez has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective interest method). On December 31, 2004, when the fair market value of the bonds was 96, Rodriquez repurchased $400,000 (face amount) of the bonds in the open market at 96. Rodriquez has recorded interest and amortization for 2004. Ignoring income taxes and assuming that the gain is material, Rodriquez should report this reacquisition as (indicate gain or loss of how much): [6 pts.]
[$1,800,000 1.03 ( 54,000/10 7)] 2/9 = $403,600 (CV of retired bonds)
$403,600 ($400,000 .96) = $19,600. a gain of $19,600.
- 15 -
Accounting 302
Fall 2005
FINAL EXAM
************* KEY ************
16. When the effective interest method is used to amortize bond premium or discount, the periodic amortization will A. increase if the bonds were issued at a discount. B. decrease if the bonds were issued at a premium. C. increase if the bonds were issued at a premium. D. increase if the bonds were issued at either a discount or a premium. E. none of the above. 17. If a company invests in bonds and plans to hold them to maturity, what journal entry would they make at the end of the year to reflect the fact that the market price of the bonds has increased by $13,000 over the bond's book value? None, these are held-to-maturity investments and amortized cost method is used to account for them.
18. What is the definition of Available-for-sale securities? All investments in debt and equity securities that do not fit the definition of other reporting categories. "Catch-all" category.
19. How does accounting for Trading securities differ from Available-for-sale securities? Holding gains/losses for trading securities are part of earnings (I/S) while they are reported as a component of shareholder's equity and do not go to the I/S for AFS.
20. When you transfer a security into held-to-maturity, what do you do with the unrealized holding gain/loss at the time of transfer?
It should be amortized over the remaining time to maturity.
- 16 -
Accounting 302
Fall 2005
FINAL EXAM
************* KEY ************
21. On January 2, 2003, LOZAN Capital Corp. purchases 30% (significant influence) of the outstanding common shares of WATNE Manufacturing Company for $100 million. For 2003, WATNE reports net income of $30 million ($2 million of which was an extraordinary loss). WATNE declared and paid dividends of $3 million in 2003. The following information related to WATNE is available: Net assets at acquisition: Fair value = $300 million Book value = $285 million The depreciable assets have an average remaining useful life of 8 years. LOZAN uses straightline to depreciate assets. Assume the difference between BV and FV of net assets is because depreciable assets have a FV in excess of their undepreciated cost. Below give all the journal entries that LOZAN should make in the first year (through 12/31/2003) of this investment.
[10 pts.]
Investment in equity securities Cash (purchase investment) Investment in equity securities Investment loss (EO) Investment Revenue (share of income) Cash
$100,000,000 $100,000,000
$9,000,000 600,000 $9,600,000
$900,000 $900,000
Investment in equity securities (dividends rec. from investment)
FV > BV by $15 M, $15M * 0.30 = $4.5M; $4.5M / 8 = $0.5625 M / year additional depreciation. 12/31/2003: Investment Revenue $562,500 Investment in Equity Securities $562,500
- 17 -
Accounting 302
Fall 2005
FINAL EXAM
************* KEY ************
22. On January 1, 2004, Hayden Co. sells machinery to Colt Corp. at its fair value of $1,440,000 and leases it back. The machinery had a carrying value of $1,260,000 (original purchase price = $1,800,000), the lease is for 10 years and the implicit rate is 10%. The lease payments of $213,000 start on January 1, 2004. Hayden uses straight-line depreciation and there is no residual value. Below prepare all of Hayden's entries for 2004. [16 pts.] Hayden Co. (Lessee) January 1, 2004 Cash .............................................................................................$1,440,000 A/D ........................................................................................... 540,000 Machinery .......................................................................... $1,800,000 Unearned Profit on Sale-Leaseback ................................... 180,000 Leased Machinery .......................................................................... 1,440,000 Lease Liability.................................................................... Lease Liability................................................................................ Cash .................................................................................... December 31, 2004 Depreciation Expense .................................................................... Accumulated Depreciation--Capital Lease ....................... Unearned Profit on Sale-Leaseback ............................................... Depreciation Expense ........................................................ Interest Expense [10% ($1,440,000 $213,000)] ...................... Interest Payable .................................................................. Below prepare all of Colt's entries for 2004. [10 pts.] Colt Corp. (Lessor) January 1, 2004 Machinery ......................................................................................$1,440,000 Cash .................................................................................... $1,440,000 Lease Receivable ........................................................................... 1,440,000 Machinery .......................................................................... Cash ................................................................................................ Lease Receivable ............................................................... December 31, 2004 Interest Receivable ......................................................................... Interest Revenue ........................................................ 213,000 213,000 122,700 122,700 - 18 1,440,000 213,000 213,000 144,000 144,000 18,000 18,000 122,700 122,700 1,440,000