The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010

E21-2 Lessee Accounting Issues

The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010. The lease terms, provision, and related events are as follows:

a)The lease term is five years. The lease is non-cancelable and requires equal rental payments to be made at the end of each year.
b)The computers have an estimated life of five years, a fair value of $300,000, and a zero estimated residual value.
c) Sax Company agrees to pay all executor costs.
d) The lease contains no renewal or bargain purchase option.
e) The annual payment is set by Appleton at $83,222.92 to earn a rate of return of 12% on its net investment. The Sax Company is aware of this rate, which is equal to its borrowing rate.
f) Sax Company uses the straight-line method to record depreciation on similar equipment.

REQUIRED:
1. Determine what type of lease this is for Sax Company.
2. Calculate the amount of the asset and liability of the Sax Company at the inception of the lease (round to the nearest dollar).

Click here for the solution: The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010

On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease

P21-1 Determining Type of Lease and Subsequent Accounting

On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease. Superior Equipment Company, the lessor, agrees to pay $70,000 annually at the beginning of each year under the non-cancelable lease. Superior Equipment Company, the lessor, agrees to pay all executor costs, estimated to be $3,450 per year. The cost and also fair value of the equipment is 305,000. Its estimated life is 10 years. The estimated residual value at the end of five years is $64,000 and is not guaranteed by Alice; at the end of 10 years, it is $5,000. There is no bargain purchase option in the lease or any agreement to transfer ownership at the end of the lease to the lessee. The implicit interest rate is 12%. During 2010, Superior Equipment pays property taxes of $650, maintenance costs of $1,600, and insurance of $1,200. There are no important uncertainties surrounding the amount of un-reimbursable costs yet to be incurred by the lessor. Straight-line depreciation is considered the appropriate method both companies.

REQUIRED:
1.Identify the type of lease involved for Alice Company and Superior Equipment Company and give reasons for your classifications.
2.Prepare appropriate journal entries for 2010 for the lessee and lessor.
3.If the residual value at the end of five years is guaranteed by Alice, identify the type of lease. Prepare journal entries for 2010 and 2011 for the lessee and lessor. Also prepare the journal entries for the lessee and the lessor when the lessee pays the guaranteed residual value.

Click here for the solution: On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease

On January 1, 2007, Gottlieb Corporation issued $4,000,000 of 10-year, 8% convertible debentures at 102

E16-6 (Conversion of Bonds) On January 1, 2007, Gottlieb Corporation issued $4,000,000 of 10-year, 8% convertible debentures at 102. Interest is to be paid semiannually on June 30 and December 31. Each $1,000 debenture can be converted into eight shares of Gottlieb Corporation $100 par value common stock after December 31, 2008. On January 1, 2009, $400,000 of debentures are converted into common stock, which is then selling at $110. An additional $400,000 of debentures are converted on March 31, 2009. The market price of the common stock is then $115. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight-line basis.

Instructions
Make the necessary journal entries for:
(a) December 31, 2008.
(b) January 1, 2009.
(c) March 31, 2009.
(d) June 30, 2009.

Record the conversions using the book value method.

Click here for the solution: On January 1, 2007, Gottlieb Corporation issued $4,000,000 of 10-year, 8% convertible debentures at 102

On May 1, 2010, Kirmer Corp. purchased $450,000 of 12% bonds, interest payable on January 1 and July 1, for $422,800 plus accrued interest

On May 1, 2010, Kirmer Corp. purchased $450,000 of 12% bonds, interest payable on January 1 and July 1, for $422,800 plus accrued interest. The bonds mature on January 1, 2016.  Amortization is recorded when interest is received by the straight-line method (by months and rounded to the nearest dollar). (Assume bonds are available for sale.)

Instructions
(a) Prepare the entry for May 1, 2010.
(b) The bonds are sold on August 1, 2011 for $425,000 plus accrued interest. Prepare all entries required to properly record the sale.

Click here for the solution: On May 1, 2010, Kirmer Corp. purchased $450,000 of 12% bonds, interest payable on January 1 and July 1, for $422,800 plus accrued interest

Joy Cunningham Co. purchased a machine on January 1, 2005 for $550,000

E22-9 (Error and Change in Estimate-Depreciation) Joy Cunningham Co. purchased a machine on January 1, 2005 for $550,000. At that time it was estimated that the machine would have a 10 year life and no salvage value. On December 31, 2008, the firm’s accountant found that the entry for depreciation expense had been omitted in 2006. In addition, management has informed the accountant that the company plans to switch to straight-line depreciation, starting with the year 2008. At present the company uses the sum of the year’s digits method for depreciating equipment.

Instructions
Prepare the general journal entries that should be made at December, 31 2008 to record these events. (Ignore the effects)

Click here for the solution: Joy Cunningham Co. purchased a machine on January 1, 2005 for $550,000

Crosley Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2008

E21-6 (Lessor Entries; Sales Type Lease) Crosley Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2008. The lease is for an 8 year period and requires equal annual payments of $35,013 at the beginning of each year. The first payment is received on January 1, 2008. Crosley had purchased the machine during 2007 for $160,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Crosley. Crosley set the annual rental to ensure an 11% rate of return. The machine has an economic life of 10 yrs with no residual value and reverts to Crosley at the termination of the lease.

Instructions
Prepare all necessary journal entries for Crosley for 2008.

Click here for the solution: Crosley Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2008

Assume that on January 1, 2008, Kimberly Clark Corp. signs a 10 year noncancelable lease agreement to lease a storage building from Sheffield Storage Company

E21-3 (Lessee Entries; Capital Lease with Executory Costs) Assume that on January 1, 2008, Kimberly Clark Corp. signs a 10 year noncancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement.

1.) The agreement requires equal rental payments of $72,000 beginning on January 1, 2008.
2.) The fair value of the building on January 1, 2008 is $440,000
3.) The building has an estimated economic life of 12 years, with an unguaranteed residual value of $10,000. Kimberly Clark depreciates similar buildings on the straight line method.
4.) The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
5.) Kimberly Clark's incremental borrowing rate is 12% per year. The lessor’s implicit rate is not known by Kimberly Clark.
6.) The yearly rental payment includes $2,470.51 of executory costs related to taxes on property.

Instructions
Prepare the journal entries on the lessee's books to reflect the signing of the lease agreement and to record payments and expenses related to this lease for the years 2008 and 2009, Kimberly Clark's corporate year end is December 31.

Click here for the solution: Assume that on January 1, 2008, Kimberly Clark Corp. signs a 10 year noncancelable lease agreement to lease a storage building from Sheffield Storage Company

On January 1, 2008, Diana Peter Company has the following defined benefit pension plan balances

P20-1 (Two-Year Worksheet) On January 1, 2008, Diana Peter Company has the following defined benefit pension plan balances.

Projected benefit obligation $4,200,000
Fair value of plan assets $4,200,000

The interest (settlement) rate applicable to the plan is 10%. On January 1, 2009 the company amends its pension agreement so that prior service costs of $500,000 area created. Other data related to the pension plan are as follows.

2008 2009
Services costs 150,000 180,000
Prior service costs amortization 0 90,000
Contributions (funding) to plan 140,000 185,000
Benefits paid 200,000 280,000
Actual return on plan assets 252,000 260,000
Expected rate of return on assets 6% 8%

Instructions
a.) Prepare a pension worksheet for the pension plan for 2008 & 2009
b.) For 2009, prepare the journal entry to record pension related amounts.

Click here for the solution: On January 1, 2008, Diana Peter Company has the following defined benefit pension plan balances

On January 1 2008, Hi and Lois Company purchased 12% bonds having a maturity value of $300,000 for $322,744.44

E17-3 (Entries for Held-to-Maturity Securities) On January 1 2008, Hi and Lois Company purchased 12% bonds having a maturity value of $300,000 for $322,744.44. The bonds provide the bondholders with a 10%yield. They are dated January 1, 2008, and mature January 1, 2013, with interest receivable Dec 21 of each year. Hi and Lois Company uses effective interest method to allocate unamortized discount or premium. The bonds are classified in the held to maturity category.

Instructions
a.) Prepare the journal entry at the date of the bond purchase.
b.) Prepare a bond amortization schedule.
c.) Prepare the journal entry to record the interest received and the amortization for 2008.
d.) Prepare the journal entry to record the interest received and the amortization for 2009.

Click here for the solution: On January 1 2008, Hi and Lois Company purchased 12% bonds having a maturity value of $300,000 for $322,744.44

(ACC 422 Week 5) On January 1, 2007, Bensen Company leased equipment to Flynn Corporation

ACC 422 Week 5
Chapter 13 and Chapter 21
E21-7 (Lessee-Lessor Entries; Sales-Type Lease) On January 1, 2007, Bensen Company leased equipment to Flynn Corporation. The following information pertains to this lease.

1. The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease.
2. Equal rental payments are due on January 1 of each year, beginning in 2007.
3. The fair value of the equipment on January 1, 2007, is $150,000, and its cost is $120,000.
4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $10,000. Flynn depreciates all of its equipment on a straight-line basis.
5. Bensen set the annual rental to ensure an 11% rate of return. Flynn’s incremental borrowing rate is 12%, and the implicit rate of the lessor is unknown.
6. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.

Instructions
(Both the lessor and the lessee’s accounting period ends on December 31.)
(a) Discuss the nature of this lease to Bensen and Flynn.
(b) Calculate the amount of the annual rental payment.
(c) Prepare all the necessary journal entries for Flynn for 2007.
(d) Prepare all the necessary journal entries for Bensen for 2007

Click here for the solution: (ACC 422 Week 5) On January 1, 2007, Bensen Company leased equipment to Flynn Corporation

Holder-Webb Company began operations on January 1, 2005, and uses the average cost method of pricing inventory

E22-2 (Change in Principle—Inventory Methods) Holder-Webb Company began operations on January 1, 2005, and uses the average cost method of pricing inventory. Management is contemplating a change in inventory methods for 2008. The following information is available for the years 2005–2007.

Net Income Computed Using
2005: Average Cost = $15,000 FIFO: $19,000 LIFO: $12,000
2006: Average Cost = $18,000 FIFO: $23,000 LIFO: $14,000
2007: Average Cost= $20,000 FIFO: $25,000 LIFO: $17,000

Instructions
(Ignore all tax effects.)

(a) Prepare the journal entry necessary to record a change from the average cost method to the FIFO method in 2008.

(b) Determine net income to be reported for 2005, 2006, and 2007, after giving effect to the change in accounting principle.

(c) Assume Holder-Webb Company used the LIFO method instead of the average cost method during the years 2005–2007. In 2008, Holder-Webb changed to the FIFO method. Prepare the journal entry necessary to record the change in principle.

Click here for the solution: Holder-Webb Company began operations on January 1, 2005, and uses the average cost method of pricing inventory

Using the information from Rebekah Company prepare a pension worksheet inserting January 1, 2008

E20-3 (Preparation of Pension Worksheet with Reconciliation) Using the information from Rebekah Company prepare a pension worksheet inserting January 1, 2008, balances, showing December 31, 2008, balances, the reconciliation schedule, and the journal entry recording pension expense.

Rebekah Company provides the following information about its defined benefit pension plan for the year 2008.

Service cost $ 90,000
Contribution to the plan $ 105,000
Prior service cost amortization $ 10,000
Actual and expected return on plan assets $64,000
Benefits paid $40,000
Accrued pension cost liability at January 1, 2008 $10,000
Plan assets at January 1, 2008 $ 640,000
Projected benefit obligation at January 1, 2008 $800,000
Unrecognized prior service cost balance at January 1, 2008 $150,000
Interest/discount (settlement) rate 10%

Click here for the solution: Using the information from Rebekah Company prepare a pension worksheet inserting January 1, 2008

Edison Leasing leased high-tech electronic equipment to Manufacturers Southern on January 1, 2011

E 15-4 Direct financing lease; lessor

Edison Leasing leased high-tech electronic equipment to Manufacturers Southern on January 1, 2011. Edison purchased the equipment from International Machines at a cost of $112,080.

Related Information
Lease term 2 years (8 quarterly periods)
Quarterly rental payments $15,000 at the beginning of each period
Economic life of asset 2 years
Fair value of asset $112,080
Implicit interest rate
(Also lessee’s incremental borrowing rate) 8%

Required:
Prepare a lease amortization schedule and appropriate entries for Edison Leasing from the inception of the lease through January 1, 2012. Edison's fiscal year ends December 31.

Click here for the solution: Edison Leasing leased high-tech electronic equipment to Manufacturers Southern on January 1, 2011

The stockholders' equity accounts of Sigma Corporation on January 1, 2010, were as follows

The stockholders' equity accounts of Sigma Corporation on January 1, 2010, were as follows.

Preferred Stock (8%, $100 par noncumulative, 5,000 shares authorized) $300,000
Common Stock ($5 stated value, 300,000 shares authorized) 1,000,000
Paid-in Capital in Excess of Par Value - Preferred Stock 15,000
Paid-in Capital in Excess of Stated Value - Common Stock 480,000
Retained Earnings 688,000
Treasury Stock - Common (5,000 shares) 40,000

During 2010 the corporation had these transactions and events pertaining to its stockholders' equity.

Feb. 1 Issued 5,000 shares of common stock for $30,000.
Mar. 20 Purchased 1,000 additional shares of common treasury stock at $7 per share.
Oct. 1 Declared a 8% cash dividend on preferred stock, payable November 1.
Nov. 1 Paid the dividend declared on October 1.
Dec. 1 Declared a $0.50 per share cash dividend to common stockholders of record on December 15, payable December 31, 2010.
Dec. 31 Determined that net income for the year was $280,000. Paid the dividend declared on December 1.

Instructions
(a) Journalize the transactions. (Include entries to close net income and dividends to Retained Earnings.)
(b) Enter the beginning balances in the accounts and post the journal entries to the stockholders’ equity accounts. (Use T accounts.)
(c) Prepare the stockholders’ equity section of the balance sheet at December 31, 2010.
(d) Calculate the payout ratio, earnings per share, and return on common stockholders’ equity ratio. (Note: Use the common shares outstanding on January 1 and December 31 to determine the average shares outstanding.)

Click here for the solution: The stockholders' equity accounts of Sigma Corporation on January 1, 2010, were as follows

On January 1, 2008, a new Board of Directors was elected for Bradley Hospital

Problem 19-2 Various Funds—Hospital

On January 1, 2008, a new Board of Directors was elected for Bradley Hospital. The new board switched to a different accountant. After reviewing the hospital’s books, the accountant decided that the accounts should be adjusted. Effective January 1, 2008, the board decided that

1. Separate funds should be established for the General Fund, the Bradley Endowment Fund, and the Plant Replacement and Expansion Fund (the old balances will be reversed to eliminate them).

2. The accounts should be maintained in accordance with fund accounting principles. The balances in the general ledger at January 1, 2008, are presented here:

Cash $ 50,000
Investment in U.S. treasury bills 105,000
Investment in common stock 417,000
Interest receivable 4,000
Accounts receivable 40,000
Inventory 25,000
Land 407,000
Building 245,000
Equipment 283,000
Allowance for depreciation $ 376,000
Accounts payable 70,000
Bank loan 150,000
Endowment fund balance 119,500
Other fund balances 860,500
Total $1,576,000 $1,576,000

The following additional information is available:
1. Under the terms of the will of J. Ethington, founder of the hospital, “The principal of the bequest is to be fully invested in trust forevermore in mortgages secured by productive real estate in Central City and/or in U.S. Government securities . . . and the income therefrom is to be used to defray current expenses.”
2. The Endowment Fund consists of the following:
Cash received in 1898 by bequest from Ethington $ 81,500
Net gains realized from 1956 through 1989 from the sale of real estate acquired in mortgage foreclosures 23,500
Income received from 1990 through 2007 from 90-day U.S. treasury bill investments 14,500
Balance per general ledger on January 1, 2008 $119,500
3. The land account balance is composed of 1900 appraisal of land at $10,000 and building at $5,000, received by donation at that time. The building was demolished in 1934. $15,000 Appraisal increase based on insured value in land title policies issued in 1954. 380,000
Landscaping costs for trees planted. 12,000
Balance per general ledger on January 1, 2008 $407,000
4. The building balance is composed of
Cost of present hospital building completed in January 1961, when the
hospital commenced operations $ 300,000
Adjustment to record appraised value of building in 1971. (100,000)
Cost of elevator installed in hospital building in January 1987. 45,000
Balance per general ledger on January 1, 2008 $ 245,000
The estimated useful lives of the hospital building and the elevator when new were 50 years
and 20 years, respectively.
5. The hospital’s equipment was inventoried on January 1, 2008. The costs shown in the inventory
agreed with the equipment account balance in the general ledger. The allowance
for depreciation account at January 1, 2008, included $158,250 applicable to equipment,
and that amount was determined to be accurate. All depreciation is computed on a
straight-line basis.
6. A bank loan was obtained to finance the cost of new operating room equipment purchased
in 2004. Interest was paid to December 31, 2007.
7. Common stock with a market value of $417,000 was donated to Bradley Hospital with the stipulation that the proceeds from the sale of the stock must be used for facilities expansion. The hospital plans to undertake expansion of its facilities next year and to sell these securities at that time.

Required:
Using the workpaper form below, prepare the entries necessary to establish the correct balances as of January 1, 2008.
Plant
Endowment Replacement
Trial Balance Adjustments General Fund Fund Fund
Account
Description Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Click here for the solution: On January 1, 2008, a new Board of Directors was elected for Bradley Hospital

Big A's Auto Service was started on January 1, 2012

Exercise 5-3 Effect of recognizing uncollectible accounts expense on financial statements percent of revenue allowance method

Big A's Auto Service was started on January 1, 2012. The company experienced the following events during its first two years of operation.

Events affecting 2012:
1. Provided $30,000 of repair services on account
2. Collected $25,000 cash from accounts receivable
3. Adjusted the accounting records to reflect the estimate that uncollectible accounts expense would be 1 percent of the service revenue on account.

Events affecting 2013:
1. Wrote of a $280 account receivable that was determined to be uncollectible
2. Provided $35,000 of repair services on account
3. Collected $31,000 cash from accounts receivable
4. Adjusted the accounting records to reflect the estimate that uncollectible accounts expense would be 1 percent of the service revenue on account

Required:
a. Organize the transaction data in accounts under an accounting equation.

b. Determine the following amounts:
1. Net income for 2012
2. Net cash flow from operating activities for 2012
3. Balance of accounts receivable at the end of 2012
4. Net realizable value of accounts receivable at the end of 2012

c. Repeat requirement b for the 2013 accounting period.

Click here for the solution: Big A's Auto Service was started on January 1, 2012

Brainiac Company purchased a delivery truck for $30,000 on January 1, 2011 (ACC 291 Week 2 Assignment)

ACC 291 Week 2 Assignment

E9-7 Brainiac Company purchased a delivery truck for $30,000 on January 1, 2011. The truck has a expected salvage value of 2,000 and is expected to be driven 100,000 miles over its estimated useful life of 8 years. Actual miles driven were 15,000 in 2011 and 12,000 in 2012.

Instructions
a) compute depreciation expense for 2010 and 2011 using (1) the straight line method (2) the units of activity method and (3) the double declining balance method.
b) Assume that Brainiac uses the straight line method
(1) prepare the journal entry to record 2010 depreciation.
(2) Show how the truck would be reported in the December 31, 2010 balance sheet.


Click here for the solution: Brainiac Company purchased a delivery truck for $30,000 on January 1, 2011

Shine Corporation purchased 30 percent of the common stock of Ash Corporation on January 1, 2002

Shine Corporation purchased 30 percent of the common stock of Ash Corporation on January 1, 2002, at $28,000 in excess of underlying book value. The excess is attributable to equipment with a remaining useful life of 2 years. The companies reported the following operating results and dividends for the 3 years following the date of purchase:

Shine Ash
Operating Income Dividends Net Income Dividends
2002 1,000,000 130,000 400,000 40,000
2003 960,000 140,000 300,000 40,000
2004 1,200,000 140,000 500,000 22,000

Required:
A) Compute the net income reported by Shine for each of the 3 years, assuming Shine accounts for its investment in Ash using the cost method.

B) Compute the net income reported by Shine for each of the 3 years, assuming Shine accounts for its investment in Ash using the equity method.


Click here for the solution: Shine Corporation purchased 30 percent of the common stock of Ash Corporation on January 1, 2002

ACC 225 Week 8 Dane Co. establishes a $200 petty cash fund on January 1

ACC 225 Week 8

Exercise 8-5

Dane Co. establishes a $200 petty cash fund on January 1. One week later, the fund shows $28 in cash along with receipts for the following expenditures: postage, $64; transportation-in, $19; delivery expenses, $36; and miscellaneous expenses, $53. Dane uses the perpetual system in accounting for merchandise inventory. Prepare journal entries to (1) establish the fund on January 1, (2) reimburse it on January 8, and (3) both reimburse the fund and increase it to $500 on January 8, assuming no entry in part 2.

Check (3) Cr. Cash $472 (total)


Click here for the solution: ACC 225 Week 8 Dane Co. establishes a $200 petty cash fund on January 1

National Orthopedics Co. issued 9% bonds, dated January 1, with a face amount of $500,000 on January 1, 2011

E 14-10 Issuance of bonds; effective interest; amortization schedule

National Orthopedics Co. issued 9% bonds, dated January 1, with a face amount of $500,000 on January 1, 2011. The bonds mature in 2014 (4 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually on June 30 and December 31.

Required:
1. Determine the price of the bonds at January 1, 2011.
2. Prepare the journal entry to record their issuance by National on January 1, 2011.
3. Prepare an amortization schedule that determines interest at the effective rate each period.
4. Prepare the journal entry to record interest on June 30, 2011.
5. Prepare the appropriate journal entries at maturity on December 31, 2014.


Click here for the solution: National Orthopedics Co. issued 9% bonds, dated January 1, with a face amount of $500,000 on January 1, 2011