Carl Leasing, Inc. agrees to lease medical equipment to Sally, Inc. on January 1, 2012. They agree on the following terms. 1) The normal selling price of the medical equipment is $260,000 and the cost of the asset to Carl Leasing, Inc. was $135,000. 2) Sally, Inc. will pay all maintenance, insurance, and tax costs directly and annual payments of $35,000 on January 1 each year. 3) The lease begins on January 1, 2012, and payments will be in equal annual installments. 4) The lease is noncancelable with no renewal option. The lease term is 10 years (the same as the estimated economic life). 5) At the end of the lease, the medical equipment will revert to Carl Leasing, Inc. and have an unguaranteed residual value of $20,000. Their implicit interest rate is 10%. 6) Carl Leasing, Inc. incurred costs of $6,500 in negotiating and closing the lease. There are no uncertainties regarding additional costs yet to be incurred and the collectability of the lease payments is reasonably predictable.

Homework - Week 5 - Chapter 22 Problems: The Diamond Glitter Company is in the process of preparing its financial statements for 2012. Assume that no entries for depreciation have been recorded in 2012. The following information related to depreciation of fixed assets is provided to you. 1. The company purchased equipment on January 2, 2009, for $165000. At that time, the equipment had an estimated useful life of 7 years with a $25000 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2012, as a result of additional information, the company determined that the equipment has a remaining useful life of 3 years with a $15000 salvage value. 2. During 2012, the company changed from the double-declining-balance method for its building to the straight-line method. The building originally cost $625000. It had a useful life of 10 years and a salvage value of $50000. The following computations present depreciation on both bases for 2010 and 2011. 2011 Straight-line Decliningbalance $ 57,500 $ 92,000 2010 $ 57,500 $ 115,000 3. The company purchased a machine on July 1, 2010, at a cost of $450000. The machine has a salvage value of $25000 and a useful life of 10 years. The company's bookkeeper recorded straight-line depreciation in 2010 and 2011 but failed to consider the salvage value. Ignore Tax effect. 4. The company has failed to accrue sales commissions payable at the end of each of the last 2 years, as follows. December $ 31, 2011 5,400 December $ 31, 2012 4,600 5. In reviewing the December 31, 2011, inventory, the company discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows. The company has already made an entry that established the incorrect December 31, 2012, inventory amount. December 31, Understated 2010 December 31, Understated 2011 December 31, Overstated 2012 $ 32,000 $ 51,000 $ 9,500 6. At December 31, 2012, the company decided to change to the straight -line method depreciation method on its retail display equipment from double-declining-balance. The equipment had an original cost of $250000 when purchased on January 1, 2011. It has a salvage value of 0 and a 8-year useful life. Depreciation expense recorded prior to 2012 under the double-declining-balance method was $62500. The company has already recorded 2012 depreciation expense of $46875 using the double-declining-balance method. 7. Before the current year, the company accounted for its income from long-term construction contracts on the completed-contract basis. Early this year, the company changed to the percentage-of-completion basis for accounting purposes but continues to use the completed-contract method for tax purposes. Income for the current year has been Homework - Week 5 - Chapter 22 recorded using the new method. Prior year tax effects must be considered. The following information is available. Prior to 2012 2012 Pretax Income Percentage- Completed-Contract ofCompletion $320,000 $180,00 0 $140,000 $120,00 0 Required: Prepare the journal entries necessary at December 31, 2012, to record the corrections and changes made to date related to the information provided. The books are still open for 2012. The income tax rate is 35%. The company has not yet recorded its 2012 income tax expense and payable amounts so current-year tax effects may be ignored. ANSWERS 1. Answer: Cost of equipment Less: Salvage value Depreciable cost $ 165,000 $25,000 $140,000 Depreciation to 2012 2009 ($140000/7) 2010 ($140000/7) 2011 ($140000/7) Depreciation in 2012 Cost of equipment Less: Depreciation to 2012 Book value (January 1, 2012) Less: Salvage value Depreciable cost $20,000 $20,000 $20,000 $60,000 $ 165,000 $60,000 $ 105,000 $15,000 $90,000 Homework - Week 5 - Chapter 22 Depreciation in 2012 Depreciation Expense $ 30,000 Accumulated Depreciation $ Equipment ($90000/3) 30,000 2. Answer Cost of Building Less: Depreciation to 2012 $ 625,000 2010 2011 Book value (January 1, 2012) Less: Salvage value Depreciable cost 115,000 92,000 $418,000 50,000 $368,000 Depreciation in 2012 Depreciation Expense $ 46,000 Accumulated Depreciation Buildings $ 46,000 ($368000/8) 3. Answer Depreciation Expense 42,500 Accum Depreciation Machinery Accum Depreciation Machinery 3,750 Retained Earnings Depreciation recorded in 42,500 3,750 Homework - Week 5 - Chapter 22 2010: ($450000 10) X .5 = $22500 Depreciation that should be recorded in 2010: (($450000 - $25000) 10) X .5 = $21250 Depreciation recorded in 2011: ($450000 10) = $45000 Depreciation that should be recorded in 2011: (($450000 $25000) 10) = $42500 Depreciation taken 2010 $ 22,500 2011 $ 45,000 $ 67,500 Depreciation that should be taken Differences $ $ 21,250 1,250 $ $ 42,500 2,500 $ $ 63,750 3,750 4. Answe r Retaine d Earning s $ 5,400 Sales Commissions Payable Sales Commissions Expense $ $ 4,600 800 Homework - Week 5 - Chapter 22 5. Answer Cost of Goods 60,500 Sold Retained Earnings Inventory 51,000 9,500 Income Overstated (Understated) 2010 Beginning inventory Ending inventory 2011 $ 32,000 $ (32,000) 2012 $ -51,000 51,000 9,500 ($32,000) ($19,000) $60,500 ----------------------6. Answers Accumulated Depreciation Equipment $20,089 Depreciation Expense *Equipment cost Depreciation before 2012 Book value Depreciation recorded Depreciation to be taken Difference $20,089 $250,000 $(62,500) $187,500 $46,875 $(26,705) $ 26,705 7. Answer Construction in Process $140,000 Deferred Tax Liability Retained Earnings Tax liab=($32000 0 - $180000) X 35% $ 49,000 $ 91,000 Homework - Week 5 - Chapter 22