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Questions and Answers of Accounting

At January 1, 2011, Brant Cargo acquired equipment by issuing a five-year, $150,000 (payable at maturity), 4% note. The market rate of interest for notes of similar risk is 10%.Required:1. Prepare
At the beginning of 2011, VHF Industries acquired a machine with a fair market value of $6,074,700 by issuing a four-year, noninterest-bearing note in the face amount of $8 million. The note is
Braxton Technologies, Inc., constructed a conveyor for A&G Warehousers that was completed and ready for use on January 1, 2011. A&G paid for the conveyor by issuing a $100,000, four-year note
Three years ago American Insulation Corporation issued 10 percent, $800,000, 10-year bonds for $770,000. Debt issue costs were $3,000. American Insulation exercised its call privilege and retired the
The long-term liability section of Twin Digital Corporation's balance sheet as of December 31, 2010, included 12% bonds having a face amount of $20 million and a remaining discount of $1 million.
Cupola Fan Corporation issued 10%, $400,000, 10-year bonds for $385,000 on June 30, 2011. Debt issue costs were $1,500. Interest is paid semiannually on December 31 and June 30. One year from the
The long-term liability section of Eastern Post Corporation's balance sheet as of December 31, 2010, included 10% bonds having a face amount of $40 million and a remaining premium of $6 million. On
Bradley-Link's December 31, 2011, balance sheet included the following items:Note 8: Bonds (in part)The 9.6% bonds were issued in 1998 at 97.5 to yield 10%. Interest is paid semiannually on June 30
Listed below are several terms and phrases associated with long-term debt. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it.
On January 1, 2011, NFB Visual Aids issued $800,000 of its 20-year, 8% bonds. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. NFB Visual Aids records
Appling Enterprises issued 8% bonds with a face amount of $400,000 on January 1, 2011. The bonds sold for $331,364 and mature in 2030 (20 years). For bonds of similar risk and maturity the market
The following transactions relate to bond investments of Livermore Laboratories. The company's fiscal year ends on December 31. Livermore uses the straight-line method to determine interest.2011July
At January 1, 2011, Rothschild Chair Company, Inc., was indebted to First Lincoln Bank under a $20 million, 10% unsecured note. The note was signed January 1, 2008, and was due December 31, 2014.
It is not unusual to issue long-term debt in conjunction with an arrangement under which lenders receive an option to buy common stock during all or a portion of the time the debt is outstanding.
The 2008 annual report of Hewlett-Packard Company reports zero-coupon notes issued at the end of its 1997 fiscal year. One billion, eight hundred million dollars face amount of 20-year debt sold for
Some financial instruments can be considered compound instruments in that they have features of both debt and shareholders' equity. The most common example encountered in practice is convertible
The following appeared in the October 15, 2011, issue of the Financial World Journal:Required:1. Explain what is being described by the announcement.2. Can you think of a psychological reason for the
While reading a recent issue of Health & Fitness, a trade journal, Brandon Wilde noticed an ad for equipment he had been seeking for use in his business. The ad offered oxygen therapy equipment under
The Jaecke Group, Inc., manufactures various kinds of hydraulic pumps. In June 2011, the company signed a four-year purchase agreement with one of its main parts suppliers, Hydraulics, Inc. Over the
The Pastel Paint Company recently loaned $300,000 to KIX 96, a local radio station. The radio station signed a noninterest-bearing note requiring the $300,000 to be repaid in three years. As part of
The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assistant to the controller for Hunt Manufacturing, wore one of the gloomy faces that were just emerging
AGF Foods Company is a large, primarily domestic, consumer foods company involved in the manufacture, distribution, and sale of a variety of food products. Industry averages are derived from Troy's
EDGAR, the Electronic Data Gathering. Analysis, and Retrieval system, performs automated collection, validation, indexing, acceptance and forwarding of submissions by companies and others who are
On August 31, 2008, Chickasaw Industries issued $25 million of its 30-year, 6% convertible bonds dated August 31, priced to yield 5%. The bonds are convertible at the option of the investors into
British Airways, Plc. (BA), a U.K. company, prepares its financial statements according to International Financial Reporting Standards. BA's annual report for the year ended March 31, 2009, which
The basic concept of “substance over form” influences lease accounting. Explain.
How is interest determined in a capital lease transaction? How does the approach compare to other forms of debt (say bonds payable or notes payable)?
How are leases and installment notes the same? How do they differ?
IASB chairman David Tweedie has noted that current GAAP allows airlines' balance sheets to appear as if the companies don't have airplanes. How can this be true?
A lessee should classify a lease transaction as a capital lease if it is noncancelable and one or more of four classification criteria are met. Otherwise, it is an operating lease. What are these
What is a bargain purchase option? How does it differ from other purchase options?
Lukawitz Industries leased equipment to Seminole Corporation for a four-year period, at which time possession of the leased asset will revert back to Lukawitz. The equipment cost Lukawitz $4 million
Can the present value of minimum lease payments differ between the lessor and lessee? If so, how?
Compare the way a bargain purchase option and a residual value are treated by the lessee when determining minimum lease payments.
What are executory costs? How are they accounted for by the lessee in a capital lease when paid by the lessee? When paid by the lessor? Explain.
The discount rate influences virtually every amount reported in connection with a lease by both the lessor and the lessee. What is the lessor's discount rate when determining the present value of
A lease might specify that rental payments may be increased (or decreased) at some future time during the lease term depending on whether or not some specified event occurs such as revenues or
The lessor's initial direct costs often are substantial. What are initial direct costs?
When are initial direct costs recognized in an operating lease? In a direct financing lease? In a sales-type lease? Why?
What are the required lease disclosures for the lessor and lessee?
In a sale-leaseback transaction the owner of an asset sells it and immediately leases it back from the new owner. This dual transaction should be viewed as a single borrowing transaction. Why?
Explain how the general classification criteria are applied to leases that involve land.
What are the guidelines for determining when a material amount of land is involved in a lease?
How does a leveraged lease differ from a nonleveraged lease?
Could a finance (capital) lease under IFRS be classified as an operating lease under U.S. GAAP? Explain.
Describe the primary differences between IFRS and U.S. GAAP in the way leases are classified as either operating or finance (capital) leases.
The IASB and FASB are collaborating on a joint project to revise accounting standards for leases. Briefly describe the direction the project is taking.
In the situation described in BE 15-1, what will be the effect of the lease on Lakeside's earnings for the first year (ignore taxes)?
Ward Products leased office space under a 10-year operating lease agreement. The lease specified 120 monthly rent payments of $5,000 each, beginning at the inception of the lease. In addition to the
Corinth Co. leased equipment to Athens Corporation for an eight-year period, at which time possession of the leased asset will revert back to Corinth. The equipment cost Corinth $16 million and has
In the situation described in BE 15-4, how should Corinth classify this lease? Why?
The 2008 annual report of the Sonic Corporation reported minimum lease payments receivable of $3,292,000 and a net investment in direct financing leases of $2,500,000. What accounts for the
A lease agreement calls for quarterly lease payments of $5,376 over a 10-year lease term, with the first payment at July 1, the lease's inception. The interest rate is 8%. Both the fair value and the
A lease agreement that qualifies as a capital lease calls for annual lease payments of $26,269 over a six-year lease term, with the first payment at January 1, the lease's inception. The interest
In the situation described in BE 15-8, what would be the pretax amounts related to the lease that the lessee would report in its income statement for the year ended December 31?
In the situation described in BE 15-8, assume the asset being leased cost the lessor $125,000 to produce. Determine the price at which the lessor is “selling” the asset (present value of the
Manning Imports is contemplating an agreement to lease equipment to a customer for five years. Manning normally sells the asset for a cash price of $100,000. Assuming that 8% is a reasonable rate of
Ace Leasing acquires equipment and leases it to customers under long-term direct financing leases. Ace earns interest under these arrangements at a 6% annual rate. Ace leased a machine it purchased
On January 1, James Industries leased equipment to a customer for a four-year period, at which time possession of the leased asset will revert back to James. The equipment cost James $700,000 and has
Adams Storage and Appraisal leased equipment to OAC Corporation for an eight-year period, at which time possession of the leased asset will revert back to Adams. The equipment cost Adams $32 million
On January 1, 2011, Nath-Langstrom Services, Inc., a computer software training firm, leased several computers from Computer World Corporation under a two-year operating lease agreement. The contract
On January 1, 2011, Winn Heat Transfer leased office space under a three-year operating lease agreement. The arrangement specified three annual rent payments of $80,000 each, beginning January 1,
Manufacturers Southern leased high-tech electronic equipment from Edison Leasing on January 1, 2011. Edison purchased the equipment from International Machines at a cost of $112,080.Required:Prepare
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.Required:Prepare a
Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2011. International Machines manufactured the equipment at a cost of $85,000.Required:1. Show
Each of the four independent situations below describes a lease requiring annual lease payments of $10,000. For each situation, determine the appropriate lease classification by the lessee and
American Food Services, Inc. leased a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2011. The lease agreement for the $4
On June 30, 2011, Georgia-Atlantic, Inc., leased a warehouse facility from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $562,907 over a
On June 30, 2011, Georgia-Atlantic, Inc. leased a warehouse facility from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $562,907 over a
On June 30, 2011, Georgia-Atlantic, Inc., leased a warehouse facility from Builders, Inc. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $562,907 over a
Airway Leasing entered into an agreement to lease aircraft to Ouachita Airlines. Consider each of the following, a–e, to be independent scenarios.a. The agreement calls for ownership of the
Each of the three independent situations below describes a capital lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit rate of
Each of the three independent situations below describes a capital lease in which annual lease payments are payable at the end of each year. The lessee is aware of the lessor's implicit rate of
Each of the four independent situations below describes a capital lease in which annual lease payments are payable at the beginning of each year. Determine the annual lease payments foreach:
Each of the four independent situations below describes a direct financing lease in which annual lease payments of $100,000 are payable at the beginning of each year. Each is a capital lease for the
For each of the three independent situations below determine the amount of the annual lease payments. Each describes a capital lease in which annual lease payments are payable at the beginning of
Federated Fabrications leased a tooling machine on January 1, 2011, for a three-year period ending December 31, 2013. The lease agreement specified annual payments of $36,000 beginning with the first
Universal Leasing leases electronic equipment to a variety of businesses. The company's primary service is providing alternate financing by acquiring equipment and leasing it to customers under
On January 1, 2011, NRC Credit Corporation leased equipment to Brand Services under a direct financing lease designed to earn NRC a 12% rate of return for providing long-term financing. The lease
Refer to the lease agreement described in the previous exercise. Assume the contract specified that NRC (the lessor) was to pay, not only the $5,000 maintenance fees, but also insurance of $700 per
Terms of a lease agreement and related facts were:a. Leased asset had a retail cash selling price of $100,000. Its useful life was six years with no residual value (straight-line depreciation).b.
The following relate to an operating lease agreement:a. The lease term is 3 years, beginning January 1, 2011.b. The leased asset cost the lessor $800,000 and had a useful life of eight years with no
Terms of a lease agreement and related facts were:a. Costs of negotiating and consummating the completed lease transaction incurred by the lessor were $4,242.b. The retail cash selling price of the
The lease agreement and related facts indicate the following:a. Leased equipment had a retail cash selling price of $300,000. Its useful life was five years with no residual value.b. Collectibility
Listed below are several terms and phrases associated with leases. Pair each item from List A with the item from List B (by letter) that is most appropriately associated withit.
To raise operating funds, Signal Aviation sold an airplane on January 1, 2011, to a finance company for $770,000. Signal immediately leased the plane back for a 13-year period, at which time
Refer to the situation described in the previous exercise.Required:How might your solution differ if Signal Aviation prepares its financial statements according to International Financial Reporting
To raise operating funds, National Distribution Center sold its office building to an insurance company on January 1, 2011, for $800,000 and immediately leased the building back. The operating lease
Refer to the situation described in the previous exercise.Required:How might your solution differ if National Distribution Center prepares its financial statements according to International
In a sale-leaseback transaction, the owner of an asset sells it and immediately leases it back from the new owner. The FASB Accounting Standards Codification represents the single source of
On January 1, 2011, Cook Textiles leased a building with two acres of land from Peck Development. The lease is for 10 years at which time Cook has an option to purchase the property for $100,000. The
Access the FASB's Codification Research System at the FASB website (www.fasb.org). Determine the specific citation for accounting for each of the following items:1. Definition of a bargain purchase
The following questions are used in the Kaplan CPA Review Course to study leases while preparing for the CPA examination. Determine the response that best completes the statements or questions.1. A
The following questions dealing with leases are adapted from questions that previously appeared on Certified Management Accountant (CMA) examinations. The CMA designation sponsored by the Institute
On January 1, 2011, Sweetwater Furniture Company leased office space under a 21-year operating lease agreement. The contract calls for annual rent payments on December 31 of each year. The payments
On January 1, 2011, National Insulation Corporation (NIC) leased office space under a capital lease. Lease payments are made annually. Title does not transfer to the lessee and there is no bargain
Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians' Leasing purchased a lithotripter from Rand for $2,000,000 and leased
At the beginning of 2011, VHF Industries acquired a machine with a fair value of $6,074,700 by signing a four-year lease. The lease is payable in four annual payments of $2 million at the end of each
Werner Chemical, Inc., leased a protein analyzer on September 30, 2011. The five-year lease agreement calls for Werner to make quarterly lease payments of $391,548, payable each September 30,
Abbott Equipment leased a protein analyzer to Werner Chemical, Inc., on September 30, 2011. Abbott purchased the machine from NutraLabs, Inc., at a cost of $6 million. The five-year lease agreement

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