I need help with this assignment its my finals and hope you help by answering it.

Question 1. (20 marks)

HALLEY Company offers lease financing as an alternative to customers who want to buy its telescopes. HALLEY has just built a powerful telescope at a cost of $4,000,000 and will lease it on September 1, 2008, to ENCKE Corp., a small research company. HALLEY marks up its telescopes 20% of cost to arrive at a selling price. The selling price is deemed to be a fair market price for this type of telescope.

ENCKE and HALLEY post adjusting entries only at year end. Both companies have a December 31 year end. All amounts are considered material to the financial statements.

The lease terms are as follows:

Lease term 15 years

Useful life 25 years

Executory (maintenance) costs of $5,000 per year are paid directly by ENCKE to CHICO Inc., a company that is not related to either ENCKE or HALLEY

Unguaranteed residual value at end of lease term $250,000

Ownership transfers to ENCKE at the end of the lease term

Estimated salvage value, end of useful life $150,000

Interest rate implicit in the lease 8% (this rate is known to the lessee)

Incremental borrowing rate for the lessee 10%

Due dates for first annual lease payment and first annual maintenance payment both due September 1, 2008

Required:

a. Calculate the lease payments required by the lessor.

b. How should ENCKE classify this lease obligation? Justify your answer by analyzing the criteria for recognition as a capital lease or an operating lease.

c. Independent of your answer to part (b), assume that this is a capital lease for ENCKE. Prepare all required journal entries for ENCKE for the year 2008.

d. Assume that this lease qualifies as a capital lease for HALLEY, prepare all required journal entries for HALLEY for the year 2008. Question 2. (20 Marks)

Part A - 13 Marks

Following are the financial statements for Seven Sisters Co. as at and for the year ended December 31, 2006.

Seven Sisters Co.

Income Statement

year ended December 31, 2006

Sales $ 370,000

Dividend revenue (note 3) 15,000

385,000

Costs and expenses:

Cost of goods sold 110,000

Salaries and wages 100,000

Amortization 80,000

Advertising 17,000

Bad debt 1,000

Interest Long-term debt 5,000

Interest Bonds 21,000

334,000

Operating Income 51,000

Unrealized gain on held-for-trading investment 6,000

Gain on sale of equipment 3,500

Income before income taxes 60,500

Income tax expense 29,000

Net income $ 31,500

Seven Sisters Co.

Balance Sheet

December 31, 2006

2006 2005

ASSETS

Current assets

Cash $ 76,000 $ 54,000

Held-for-trading investments 206,000 200,000

Accounts receivable 50,000 20,000

Allowance for doubtful accounts (2,000) (1,500)

Inventory 53,000 39,500

383,000 312,000

Property, plant and equipment

Buildings and equipment (note 2) 270,000 72,000

Accumulated amortization (55,000) (25,000)

Land 25,000 25,000

240,000 72,000

$ 623,000 $ 384,000

LIABILITIES

Current liabilities

Accounts payable $ 38,800 $ 41,800

Interest payable 3,000 500

Income taxes payable 4,200 2,000

Dividends payable 2,000

Future income taxes liabilities 4,000 7,000

50,000 53,300

Long-term liabilities

Long-term bank loans 114,500 80,700

Bonds payable (note 1) 200,000

Discount on bonds payable (19,000)

295,500 80,700

SHAREHOLDERS EQUITY

Conversion rights (note 1) 12,000

Common shares (notes 4-6) 98,000 100,000

Retained earnings (notes 4-6) 167,500 150,000

277,500 250,000

$ 623,000 $ 384,000

Notes:

1. Convertible bonds were issued January 1, 2006. Bond discount was $20,000 at January 1, 2006.

2. Equipment was purchased for $250,000.

3. Dividend revenue is from the held-for-trading investment.

4. 1,000 common shares were repurchased for $2 more than book value and retired.

5. A stock dividend in the amount of $12,000 was declared and issued during the year.

6. No other common share transactions other than those listed occurred during the year.

Required:

a. Prepare the operating section of the cash flow statement using the indirect approach.

b. Prepare the financing section of the cash flow statement.

c. Prepare the journal entry to record the repurchase and retirement of shares (see note 4 above).

d. Assume all the bonds were converted on January 1, 2007. Prepare the journal entry to record this event using the book-value method.

Question 2. Continued

Part B 7 marks

Charlie Brown would like to expand his pig farming business to include new machinery and equipment. To finance the equipment, Charlie has applied for a loan from a government venture capital agency. The agency requires a complete set of financial statements before it can approve any loan application and has employees assigned to each applicant to assist them in preparing the necessary financial statements.

You have been assigned to assist Charlie and he has provided you with a basic income statement and balance sheet for his business. You explain to Charlie that a complete set of financial statements includes a cash flow statement and that one will have to be prepared for his business before the loan application can be processed. Charlie does not understand the purpose of the cash flow statement and what types of information he will have to gather in order to prepare it.

Required: Prepare a brief memo to Charlie Brown outlining the purpose and structure of the cash flow statement and any additional information beyond the income statement and balance sheet that he will have to provide to assist you in preparing a cash flow statement for his business.

Question 3. (20 Marks)

The Sombrero Company began operations on January 1, 2007. As at December 31, 2008 the partial balance sheet of Sombrero Company reflected the following balances:

Long-term bank loans $ 800,000

Bonds payable 10%, convertible

par value $500,000, net of discount 480,000

Preferred shares $2 dividend, nopar value,

cumulative, 100,000 shares authorized,

10,000 shares outstanding 100,000

Preferred shares $5 dividend, nopar value,

noncumulative, convertible, 500,000 shares authorized,

100,000 shares outstanding 400,000

Conversion rights 150,000

Common shares nopar value; 1,000,000 authorized,

500,000 issued 1,500,000

Additional information

1. Net income for the 2008 was $950,000.

2. No dividends were declared in 2007.

3. Dividends in the amount of $600,000 were declared in 2008.

4. Each $1,000 bond is convertible into 100 common shares. Interest expense on the bonds for the year was $22,000.

5. The conversion rate on the preferred shares is one preferred to one common share. These preferred shares were issued on January 1, 2007.

6. Options are outstanding to purchase 100,000 common shares at $5 per share. The options expire in 2 years. The average market price of the common shares for 2008 was $8 per share.

7. The income tax rate is 40%.

8. All items have been outstanding for the entire year, except for the convertible bonds that were issued July 1, 2008.

9. No common shares have been issued or retired during 2008.

Required:

a. Determine the dividend distributions for 2008. Show your work.

b. Calculate the basic and diluted earnings per share (EPS) for 2008.

Show your work.

Question 4. (20 Marks)

Part A 16 Marks

Wild Duck Corporation uses the liability method of tax allocation. At January 1, 2007, Wild duck had the following balances:

Capital assets, net $1,540,000

Undepreciated Capital Cost (UCC: tax basis) 1,800,000

Future income taxes (FIT) long term ??

During 2007, the following events and transactions occurred:

1. Income before income taxes and extraordinary items was $1,200,000.

2. During the year an extraordinary loss of $200,000 was incurred. Only $150,000 of this loss is tax deductible; the remaining amount is a permanent difference for tax purposes.

3. Dividend revenue of $50,000 was received from another Canadian company.

4. Amortization for the year was $300,000; CCA was $350,000. Amortization was the only temporary taxation difference in prior years.

5. Rent was prepaid in the amount of $20,000 at year end. For tax purposes, rent expense is deductible when the cash is paid. There was no prepaid rent at January 1, 2007.

6. The income tax rate for 2006 was 35%, and for 2007 it is 40%. The 2007 income tax rate was not known until February 2007; the financial statements for 2006 were released by the end of January 2007.

Required:

a. Determine the opening future income tax account balance as at January 1, 2007. Indicate whether the amount is an asset or liability.

b. Prepare the journal entry to record tax expense for 2007. Show all calculations.

c. Prepare the income statement for 2007 beginning with the line Income before income taxes and extraordinary items. Ignore EPS disclosures.

d. Suppose the company is aware that the future enacted tax rate is set higher than the current tax rate. If the company is permitted to claim a deduction in the current year or in a future year then give one reason why the company would choose to take the tax deduction in the current period rather than in a future period.

Question 4. Continued

Part B 4 Marks

In 2007, its first year of operations, Marcos Corp. has a $500,000 net operating loss when the tax rate is 30%. In 2008, Marcos has $200,000 taxable income and the tax rate remains at 30%.

Assume the management of Marcos Corp. thinks that it is more likely than not that the loss carryforward will not be realized because it is difficult to project future profitability (this is before results of 2008 operations are known). Marcos Corp. does not use the valuation allowance approach.

Required:

(a) What are the entries in 2007 to record the tax loss carryforward?

(b) What entries would be made in 2008 to record the current and future income taxes and to recognize the loss carryforward? (Assume that at the end of 2008 it is more likely than not that the future tax asset from the loss carryfoward will be realized.)

Question 5. (20 Marks)

You have just started as an accountant with NKL Company. The previous bookkeeper left you a note stating he was unsure of how to record some transactions. His files with supporting documentation and details on how he recorded the transactions are as follows:

File 1 Pensions

NKL started a pension plan for its employees in late 2005. The following are some excerpts from the actuarial statements for 2006.

Contributions made to the plan in 2006 $ 12,000

Current service costs for 2006 14,000

Plan assets January 1, 2006 13,000

Accrued benefit obligation (ABO) January 1, 2006 15,500

Actual return on plan assets for 2006 1,500

2005 pension expense 15,000

Expected return on plan assets for 2006 12%

Interest rate on ABO 11%

No benefits have been paid to employees as none has yet retired.

To record the pension for 2005, the bookkeeper made the following entry at December 31, 2005:

Plan assets ................................................................................... 13,000

Pension expense .......................................................................... 15,000

Accrued benefit obligation.............................................................. 15,500

Cash................................................................................................. 12,500

He reported the plan assets under non-current assets and the projected benefit obligation under long-term liabilities on the 2005 balance sheet. No entries have been recorded for 2006.

File 2 Employee Stock Options

1. On June 1, 2006, the shareholders of NKL adopted a stock option plan for its top executives whereby each might receive rights to purchase up to 7,000 common shares at $40 per share. The shares were trading at $52 per share on June 1, 2006.

2. On July 1, 2006, options were granted to each of five executives to purchase 7,000 shares. The options were non-transferable and the executive had to remain an employee of the company to exercise the option. The options expire on July 1, 2010. It is assumed that the options were for services performed equally over 24 months. The Black-Scholes option pricing model determines total compensation expense of the plan to be $780,000.

No entry has been recorded in the books of NKL for the stock options since the bookkeeper determined there was no exchange of cash during the year.

File 3 Complex Financial Instrument

NKL occasionally speculates in the stock market and currently holds 10,000 shares of Sterns Bear Inc. at a cost of $1,710,000. NKL Management had designated the securities as held for trading when purchased on November 16, 2006. NKL purchased put options on the Sterns Bear Inc. shares at a cost of $5,000 on November 30, 2006. The puts give NKL the right, but not the obligation, to sell 10,000 Sterns Bear Inc. shares at $100 per share on or before their expiry date of February 28, 2007. Each share has been reliably determined to be worth $32 per share on December 31, 2006. The puts time value was reliably determined to be worth $4,000 at year end.

The bookkeeper recorded the investments as follows on their respective dates of purchase:

Investments Sterns Bear - Held for Trading $1,710,000

Cash $1,710,000

Investments Put option Held for Trading $5,000

Cash $5,000

No other entry for items in File 3 has been recorded by the bookkeeper in 2006.

It is nearing December 31, 2006, NKLs year end. Your task is to evaluate the transactions and events affecting NKL and make any necessary adjusting or correcting journal entries. NKL only records adjusting entries at year end.

Note: Ignore income taxes

Required:

a. Prepare a correcting journal entry dated January 1, 2006 regarding the pension plan initiated in 2005 as described in File 1.

b. Calculate the 2006 pension expense as described in File 1.

c. Prepare the journal entry to record the 2006 pension expense as described

in File 1.

d. Prepare any adjusting journal entries for the employee stock options described in File 2 for the year 2006.

e. Prepare any necessary adjusting journal entries for File 3 for the year 2006.