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BUSINESS/COMMERCE 450 SUMMER 2016, TERM 2 ASSIGNMENT 5 DUE: August 8 Question 1 (10 marks) Crooked Tree Corporation has a defined benefit pension plan for all of its employees. In early 2013, the company was advised by the plan actuaries that the present value of the accrued pension obligation at December 31, 2012, was $9,000,000 and was advised by the plan trustees that the fair value of the plan assets at that date was $8,640,000. The following information was available with respect to 2013: Current service cost (accrued at mid-year) Contributions to plan assets (made in equal instalments of $100,000 at the end of each calendar quarter) Benefit payments (made evenly over the year) Interest rate on pension obligation/expected return on assets $ 450,700 400,000 280,000 6% At the end of December 2013, the company was advised by the plan actuaries that the present value of the accrued pension obligation at December 31, 2013, was $9,950,000 and was advised by the plan trustees that the fair value of the plan assets at that date was $9,680,000. The company transfers any other comprehensive income arising from the pension plan from accumulated other comprehensive income to retained earnings at the end of each year. Required: a) Prepare movement schedules reconciling the opening and closing balances of the fair value of the pension assets and of the benefit obligation for inclusion in Crooked Tree Corporation's 2013 financial statements. b) What amount(s), if any, would be included in the financial statements proper (i.e., statement of financial position, statement of comprehensive income and statement of changes in shareholders' equity) of Crooked Tree Corporation for 2013? ***** Question 2 (6 marks) Dandriga Dumpsters, a Canadian company, reporting under ASPE, agreed to lease a truck from Lamanai Leasing Ltd. The truck had a fair value of $90,000 at the commencement of the lease on January 1, 2014. The lease term is five years, after which the truck will be returned to Lamanai Leasing. Lamanai Leasing expects the truck to have a value of $10,000 at the end of the lease. The residual value is not guaranteed by Dandriga Dumpsters. The estimated economic life of the truck is six years. Lamanai Leasing expects a return of 8% on the lease. Payments will be made annually, with the first payment due on January 1, 2014. Dandriga Dumpsters is aware of the rate implicit in the lease which is the same as its marginal borrowing rate. Required: a) Calculate the amount of the annual lease payments. b) Provide the entries for Dandriga Dumpsters at the commencement of the lease. c) Provide the entries for Lamanai Leasing at the commencement of the lease. ***** Question 3 (20 marks) Lessor is in the business of renting, leasing and selling luxury cars. On January 1, 2015 the Lessor enters into a lease with a client. Both the Lessor and the Lessee use straight line amortization to amortize all assets. The Lessor and Lessee have December 31 year ends. The lessee reports under ASPE. Fair value of car purchased by Lessor Jan 1, 2015 (equal to fair market value) Term of lease (non-cancellable) Expected residual value in five years (guaranteed) Purchase price at end of lease Useful life of car Salvage value at end of useful life Yearly lease payments due at the beginning of the year (January 1 st). Interest rate implicit in lease (known to lessee) Lessee's incremental borrowing rate Executory costs: Yearly maintenance fee reimbursed by lessee to Lessor in January at the beginning of each year. $300,000 5 years $100,000 None 10 years $30,000 ?? 10% 12% $4,000 Required: a) What yearly payment does the Lessor require of the Lessee to reflect the above information? b) Determine the appropriate accounting treatment for this lease by the Lessee and the Lessor. c) Prepare the 2015 journal entries required by the Lessee and Lessor to account for this lease. d) For this part only, assume that the Lessee does not guarantee the residual value but pays a onetime $10,000 fee (on January 1, 2015) to a third party to guarantee the residual value to the Lessor. Assume the same yearly payment calculated in part a. (i) Determine the appropriate accounting treatment for this lease by the Lessee and the Lessor. (ii) Prepare the 2015 journal entries required by the Lessee to account for this lease. ***** Question 4 (14 marks) Placentia Products, a Canadian company reporting under ASPE, has entered into a non-cancellable lease on the following terms: The leased asset has a value of $64,000 at July 1, 2014. This is also the cost of the asset to the lessor. The lease term is for four years, starting July 1, 2014. The asset has an estimated useful life of six years. The expected value of the asset after four years is $12,000 which has been guaranteed by Placentia Products. Placentia Products amortizes all assets using straight-line amortization. Placentia Products has an incremental borrowing rate of 10%. The lease requires four annual payments of $15,052 on July 1 each year, with the first payment due on July 1, 2014. Placentia Products is not aware of the implicit rate of the lease. Required: a) Is this an operating lease or a capital lease from the perspective of Placentia Products? Evaluate all considerations. b) Prepare all journal entries for Placentia Products for this lease for 2014. c) List all lease-related accounts (and balances) that would appear in the financial statements (statement of financial position and income statement) of Placentia Products as at December 31, 2014. d) Would the classification of the lease be affected if the lease was cancellable at any time by either party without penalty on three months' notice? Explain your reasoning. END OF ASSIGNMENT BUSINESS/COMMERCE 450 SUMMER 2016, TERM 2 ASSIGNMENT 5 DUE: August 8 Question 1 (10 marks) Crooked Tree Corporation has a defined benefit pension plan for all of its employees. In early 2013, the company was advised by the plan actuaries that the present value of the accrued pension obligation at December 31, 2012, was $9,000,000 and was advised by the plan trustees that the fair value of the plan assets at that date was $8,640,000. The following information was available with respect to 2013: Current service cost (accrued at mid-year) Contributions to plan assets (made in equal instalments of $100,000 at the end of each calendar quarter) Benefit payments (made evenly over the year) Interest rate on pension obligation/expected return on assets $ 450,700 400,000 280,000 6% At the end of December 2013, the company was advised by the plan actuaries that the present value of the accrued pension obligation at December 31, 2013, was $9,950,000 and was advised by the plan trustees that the fair value of the plan assets at that date was $9,680,000. The company transfers any other comprehensive income arising from the pension plan from accumulated other comprehensive income to retained earnings at the end of each year. Required: a) Prepare movement schedules reconciling the opening and closing balances of the fair value of the pension assets and of the benefit obligation for inclusion in Crooked Tree Corporation's 2013 financial statements. b) What amount(s), if any, would be included in the financial statements proper (i.e., statement of financial position, statement of comprehensive income and statement of changes in shareholders' equity) of Crooked Tree Corporation for 2013? ***** Question 2 (6 marks) Dandriga Dumpsters, a Canadian company, reporting under ASPE, agreed to lease a truck from Lamanai Leasing Ltd. The truck had a fair value of $90,000 at the commencement of the lease on January 1, 2014. The lease term is five years, after which the truck will be returned to Lamanai Leasing. Lamanai Leasing expects the truck to have a value of $10,000 at the end of the lease. The residual value is not guaranteed by Dandriga Dumpsters. The estimated economic life of the truck is six years. Lamanai Leasing expects a return of 8% on the lease. Payments will be made annually, with the first payment due on January 1, 2014. Dandriga Dumpsters is aware of the rate implicit in the lease which is the same as its marginal borrowing rate. Required: a) Calculate the amount of the annual lease payments. b) Provide the entries for Dandriga Dumpsters at the commencement of the lease. c) Provide the entries for Lamanai Leasing at the commencement of the lease. ***** Question 3 (20 marks) Lessor is in the business of renting, leasing and selling luxury cars. On January 1, 2015 the Lessor enters into a lease with a client. Both the Lessor and the Lessee use straight line amortization to amortize all assets. The Lessor and Lessee have December 31 year ends. The lessee reports under ASPE. Fair value of car purchased by Lessor Jan 1, 2015 (equal to fair market value) Term of lease (non-cancellable) Expected residual value in five years (guaranteed) Purchase price at end of lease Useful life of car Salvage value at end of useful life Yearly lease payments due at the beginning of the year (January 1 st). Interest rate implicit in lease (known to lessee) Lessee's incremental borrowing rate Executory costs: Yearly maintenance fee reimbursed by lessee to Lessor in January at the beginning of each year. $300,000 5 years $100,000 None 10 years $30,000 ?? 10% 12% $4,000 Required: a) What yearly payment does the Lessor require of the Lessee to reflect the above information? b) Determine the appropriate accounting treatment for this lease by the Lessee and the Lessor. c) Prepare the 2015 journal entries required by the Lessee and Lessor to account for this lease. d) For this part only, assume that the Lessee does not guarantee the residual value but pays a onetime $10,000 fee (on January 1, 2015) to a third party to guarantee the residual value to the Lessor. Assume the same yearly payment calculated in part a. (i) Determine the appropriate accounting treatment for this lease by the Lessee and the Lessor. (ii) Prepare the 2015 journal entries required by the Lessee to account for this lease. ***** Question 4 (14 marks) Placentia Products, a Canadian company reporting under ASPE, has entered into a non-cancellable lease on the following terms: The leased asset has a value of $64,000 at July 1, 2014. This is also the cost of the asset to the lessor. The lease term is for four years, starting July 1, 2014. The asset has an estimated useful life of six years. The expected value of the asset after four years is $12,000 which has been guaranteed by Placentia Products. Placentia Products amortizes all assets using straight-line amortization. Placentia Products has an incremental borrowing rate of 10%. The lease requires four annual payments of $15,052 on July 1 each year, with the first payment due on July 1, 2014. Placentia Products is not aware of the implicit rate of the lease. Required: a) Is this an operating lease or a capital lease from the perspective of Placentia Products? Evaluate all considerations. b) Prepare all journal entries for Placentia Products for this lease for 2014. c) List all lease-related accounts (and balances) that would appear in the financial statements (statement of financial position and income statement) of Placentia Products as at December 31, 2014. d) Would the classification of the lease be affected if the lease was cancellable at any time by either party without penalty on three months' notice? Explain your reasoning. END OF ASSIGNMENT