Midterm 1 --Version A
Acc 3100, Spring 2008
Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2006. The
manufacturing cost of the computers was $12 million.
This non-cancelable lease had the following terms:
- Lease payments: $2,466,754 at each Jan. 1 and June 30, with the first payment being made at 1/1/06.
- Lease term: 5 years (10 semi-annual payments)
- No residual value; no bargain purchase option
- Economic life of equipment: 5 years
- Implicit interest rate and lessee's incremental borrowing rate: 5% semi-annually
- Fair value of the computers at 1/1/06: $20 million
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred.
What is the interest revenue that Technoid would report on this lease in its 2006 income statement?
None of the above is correct.
2. Liberty Company issued ten-year bonds at 105 during the current year. In the year-end financial statements, the
premium should be:
A. Deducted from bonds payable.
B. Added to bonds payable.
C. Included in revenue for the year of sale.
D. Reported as an intangible asset.
3. Dim Corporation purchased one thousand shares of Witt Corporation stock in 2003 for $800 per share and classified
the investment as securities available for sale. Witt's market value was $400 per share on December 31, 2004, and
$300 on December 31, 2005. During 2006, Dim sold all of its Witt stock at $350 per share. For 2006, Dim would
A. A realized gain of $50,000.
B. A recognition of unrealized losses of $400,000.
C. A loss on the sale of investments of $450,000.
D. A trading gain of $50,000 and an unrealized loss of $500,000.
4. On January 1, 2006, Everglade Company purchased the following securities and properly accounted for them as
securities available for sale:
All declines in value are considered temporary. What amount should the Everglade Company report relative to these
securities in its 2006 income statement?
B. $7,000 unrealized loss.
C. $19,000 unrealized gain.
D. $12,000 net unrealized gain.
5. On January 1, 2006, an investor paid $291,000 for bonds with a face amount of $300,000. The contract rate of interest
is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income
is recognized by the investor in 2007 (assume annual interest payments and amortization)?