Case 21-2 (CA21-2) (Lessor and Lessee Accounting and Disclosures) Sylvan
Inc. entered into a noncancelable lease arrangement with Breton Leasing
Corporation for a certain machine. Breton's primary business is
leasing; it is not a manufacturer or dealer. Sylvan will lease the
machine for a period of 3 years, which is 50% of the machine's economic
life. Breton will take possession of the machine at the end of the
initial 3-year lease and lease it to another, smaller company that does
not need the most current version of the machine. Sylvan does not
guarantee any residual value of the machine and will not purchase the
machine at the end of the lease term.
Sylvan's incremental borrowing rate is 10%, and the implicit rate in
the lease is 9%. Sylvan has no way of knowing the implicit rate used by
Brenton. Using either rate in the lease is 9%. Sylvan has no way of
knowing the implicit rate used by Brenton. Using either rate, the
present value of the minimum lease payments is between 90% and 100% of
the fair value of the machine at the date of the lease agreement. Sylvan
has agreed to pay all executor costs directly, and no allowance for the
costs is included in the lease payments.
Brenton is reasonably certain that Sylvan will pay all lease payments,
and because Sylvan has agreed to pay all executor cost, there are no
important uncertainties regarding costs to be incurred by Breton. Assume
that no indirect cost are involved.
Instructions:
(a) With respect to Sylvan (the lessee), answers the following.
(1) What type of lease has been entered into? Explain the reason for your reason.
(2) How should Sylvan compute the appropriate amount to be recorded for the else or asset acquired?
(3) What accounts will be created or affected by the transaction, and
how will the lease or asst and other cost related to the transaction be
matched with earnings.
(4) What disclosures must Sylvan make regarding the leased asset?
(b) With respect to Breton (the lessor). Answer the following:
(1) What type of leasing arrangement has been entered into? Explain the reason for your reason.
(2) How should the lease be recorded by Brenton, and how are the appropriate amounts determined?
(3) How should Breton determined the appropriate amount of earning to be recognized from each lease payment?
(4) What disclosures must Breton make regarding the lease?
Click here for the solution: (Lessor and Lessee Accounting and Disclosures) Sylvan Inc. entered into a noncancelable lease arrangement with Breton Leasing Corporation for a certain machine
Showing posts with label Disclosures. Show all posts
Showing posts with label Disclosures. Show all posts
Wednesday, June 24, 2015
Saturday, June 20, 2015
(Disclosures Required in Various Situations) Rem Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems
Case 24-2 (CA24-2) (Disclosures Required in Various Situations) Rem Inc.
produces electronic components for sale to manufacturers of radios,
television sets, and digital sound systems. In connection with her
examination of Rem’s financial statements for the year ended December
31, 2007, Maggie Zeen, CPA, completed field work 2 weeks ago. Ms. Zeen
now is evaluating the significance of the following items prior to
preparing her auditor’s report. Except as noted, none of these items
have been disclosed in the financial statements or notes.
Item 1
A 10-year loan agreement, which the company entered into 3 years ago, provides that dividend payments may not exceed net income earned after taxes subsequent to the date of the agreement. The balance of retained earnings at the date of the loan agreement was $420,000. From that date through December 31, 2007, net income after taxes has totaled $570,000 and cash dividends have totaled $320,000. On the basis of these data, the staff auditor assigned to this review concluded that there was no retained earnings restriction at December 31, 2007.
Item 2
Recently Rem interrupted its policy of paying cash dividends quarterly to its stockholders. Dividends were paid regularly through 2006, discontinued for all of 2007 to finance purchase of equipment for the company’s new plant, and resumed in the first quarter of 2008. In the annual report dividend policy is to be discussed in the president’s letter to stockholders.
Item 3
A major electronics firm has introduced a line of products that will compete directly with Rem’s primary line, now being produced in the specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Rem’s line. The competitor announced its new line during the week following completion of field work. Ms. Zeen read the announcement in the newspaper and discussed the situation by telephone with Rem executives. Rem will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but will permit recovery of only a portion of fixed costs.
Item 4
The company’s new manufacturing plant building, which cost $2,400,000 and has an estimated life of 25 years, is leased from Ancient National Bank at an annual rental of $600,000. The company is obligated to pay property taxes, insurance, and maintenance. At the conclusion of its 10-year noncancellable lease, the company has the option of purchasing the property for $1. In Rem’s income statement the rental payment is reported on a separate line.
Instructions
For each of the items above discuss any additional disclosures in the financial statements and notes that the auditor should recommend to her client. (The cumulative effect of the four items should not be considered.)
Click here for the solution: (Disclosures Required in Various Situations) Rem Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems
Item 1
A 10-year loan agreement, which the company entered into 3 years ago, provides that dividend payments may not exceed net income earned after taxes subsequent to the date of the agreement. The balance of retained earnings at the date of the loan agreement was $420,000. From that date through December 31, 2007, net income after taxes has totaled $570,000 and cash dividends have totaled $320,000. On the basis of these data, the staff auditor assigned to this review concluded that there was no retained earnings restriction at December 31, 2007.
Item 2
Recently Rem interrupted its policy of paying cash dividends quarterly to its stockholders. Dividends were paid regularly through 2006, discontinued for all of 2007 to finance purchase of equipment for the company’s new plant, and resumed in the first quarter of 2008. In the annual report dividend policy is to be discussed in the president’s letter to stockholders.
Item 3
A major electronics firm has introduced a line of products that will compete directly with Rem’s primary line, now being produced in the specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Rem’s line. The competitor announced its new line during the week following completion of field work. Ms. Zeen read the announcement in the newspaper and discussed the situation by telephone with Rem executives. Rem will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but will permit recovery of only a portion of fixed costs.
Item 4
The company’s new manufacturing plant building, which cost $2,400,000 and has an estimated life of 25 years, is leased from Ancient National Bank at an annual rental of $600,000. The company is obligated to pay property taxes, insurance, and maintenance. At the conclusion of its 10-year noncancellable lease, the company has the option of purchasing the property for $1. In Rem’s income statement the rental payment is reported on a separate line.
Instructions
For each of the items above discuss any additional disclosures in the financial statements and notes that the auditor should recommend to her client. (The cumulative effect of the four items should not be considered.)
Click here for the solution: (Disclosures Required in Various Situations) Rem Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems
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