1. On January 2, 2011, Gold Star Leasing Company leases equipment to Brick Co. with equal annual payments of $40,000 each, payable beginning December 31, 2011. Brick Co. agrees to guarantee the $25,000 residual value of the asset at the end of the lease term. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What journal entry would Gold Star make at January 2, 2011 assuming this is a direct financing lease?
PV Annuity Due
PV Ordinary Annuity
PV Single Sum
8%, 5 periods
10%, 5 Periods
Lease Receivable 225,000
Lease Receivable 159,708
Lease Receivable 167,155
Lease Receivable 176,835
2. Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a capital lease for Metcalf. The six-year lease requires payment of $102,000 at the beginning of each year, including $15,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271. Metcalf should record the leased asset at
Use the following to answer questions 3-4:
The following information relates to the pension plan for the employees of Turner Co:
Accum. benefit obligation
Projected benefit obligation
Fair value of plan assets
AOCI - net (gain) or loss
Settlement rate (for year)
Expected rate of return (for year)
Turner estimates that the average remaining service life is 16 years. Turner's contribution was $756,000 in 2011 and benefits paid were $564,000.
3. The interest cost for 2011 is
4. The corridor for 2011 is
Use the following to answer questions 5-6:
Napier Co. provided the following information on selected transactions during 2011:
Purchase of land by issuing bonds
Proceeds from issuing bonds
Purchases of inventory
Purchases of treasury stock
Loans made to affiliated corporations
Dividends paid to preferred stockholders
Proceeds from issuing preferred stock
Proceeds from sale of equipment
5. The net cash provided (used) by investing activities during 2011 is
6. The net cash provided by financing activities during 2011 is
PROBLEM 4: (22 Points)
You have been engaged to review the financial statements of Water Sync Inc. In the midst of your investigation you find a number of irregularities during the current year.
1. Insurance for a 6-month period purchased on October 1 of this year was charged to prepaid insurance expense in the amount of $5,000.
2. Year-end estimate of bonuses totaled $61,000 and was not recorded because the payment would not be made until next year.
3. Warranty expense averages 5% on current year sales of $5,000,000. Warranty expense is automatically debited for 5% of each sale. During the current year, the company also paid $225,000 in warranty related claims. The bookkeeper thought that the payments were an expense and debited warranty expense.
4. Office rent is paid quarterly in advance. The first quarter rent for next year ($25,000) was paid in December and rent expense was debited.
Prepare the necessary correcting entries, assuming that Water Sync Inc. uses a calendar-year basis. (Ignore income tax considerations.)
The reported net incomes for the first 2 years of US Books Corp. were as follows: 2009, $268,000; and 2010, $412,000. Early in 2011, the following entries were discovered.
1. Depreciation of equipment for 2009 was understated $68,500
2. Depreciation of equipment for 2010 was overstated $39,000
3. December 31, 2009, inventory was overstated $12,000
4. December 31, 2010, inventory was understated $73,600
Prepare the correcting entry necessary when those errors are discovered. Assume that the books are closed. (Ignore income tax considerations.)
Problem 2: (Textbook pg. 1318 à E21-10 & E21-11)
LSU Company signs an agreement on January 1, 2009, to lease equipment to Tiger Corporation. The following information relates to this agreement:
1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.
2. The cost of the asset to the lessor is $245,000. The fair value of the asset on January 1, 2009, is $245,000.
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $43,622, none of which is guaranteed.
4. The agreement requires annual rental payments, beginning Jan. 1, 2009.
5. Collectability of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
6. The lessor's rate of return is 10% and is known to the lessee. The lessee's borrowing rate is 12%.
1. Calculate the annual rent payment.
2. Prepare the journal entries for the lessor for 2009 and 2010.
PROBLEM 3: (20 Points)
The income statement of Alem Corporation is shown below.
FOR THE YEAR ENDED DECEMBER 31, 2010
Cost of goods sold
1. Accounts receivable decreased $63,000 during the year.
2. Inventory increased $38,000 during the year.
3. Prepaid expenses increased $12,000 during the year.
4. Accounts payable to increased $25,000 during the year.
5. Accrued expenses payable increased $6,000 during the year.
6. Administrative expenses include depreciation expense of $20,000.
Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2010, for Guesser Company, using the Direct Method.
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