Problem A. Leases On January 1, 2008, Grate Company (as lessor) entered into a noncancelable lease agreement with Barrell Company for machinery which was carried on the accounting records of Grate at $4,530,000 and had a market value of $5,000,000. Minimum lease payments under the lease agreement which expires on December 31, 2017, total $7,100,000. Payments of $710,000 are due each January 1. The first payment was made on January 1, 2008 when the lease agreement was finalized. The interest rate of 10% which was stipulated in the lease agreement is the implicit rate set by the lessor. The effective interest method of amortization is being used. Barrell expects the machine to have a ten-year life with no salvage value, and be depreciated on a straight-line basis. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Instructions (a) From the lessee's viewpoint, what kind of lease is the above agreement? (b) Ignoring income taxes, what should be the expenses incurred by Barrell from this lease for the year ended December 31, 2008? (c) What journal entries should be recorded by Barrell Company on January 1, 2008? B. Statement of Cash Flows Cedar Company Comparative Balance Sheet December 31 2007 2006 Cash $ 64,000 $ 36,000 Accounts receivable, net 53,000 57,000 Inventory 171,000 123,000 Land 180,000 285,000 Building 300,000 300,000 Accumulated depreciation (75,000) (60,000) Equipment 1,545,000 900,000 Accumulated depreciation (177,000) (141,000) $2,061,000 $1,500,000 Accounts payable $ 172,000 $ 150,000 Bonds payable 480,000 -0- Capital stock, $10 par 1,125,000 1,125,000 Retained earnings 284,000 225,000 $2,061,000 $1,500,000 Additional Data: 1. Net income for the year amounted to $104,000. 2. Cash dividends were paid amounting to 4% of par value. 3. Land was sold for $120,000. 4. Cedar sold equipment, which cost $225,000 and had accumulated depreciation of $90,000, for $105,000 (Remember to T-account this transaction and determine its impact on the change in Equipment and the change in Accumulated Depreciation). Instructions: Prepare a statement of cash flows using the indirect method. C. Accounting Changes, Error Corrections, and Prior Period Adjustments. Saluki Companys reported net incomes for 2007 and the previous two years are presented below: 2007 2006 2005 $105,000 $95,000 $70,000 2007s net income was properly determined after giving effect to the following accounting changes, error corrections, etc. which took place during the year. The incomes for 2005 and 2006 do not take these items into account and are stated at the amounts determined in those years. Ignore income taxes. Instructions (a) For each of the three accounting changes, errors, or prior period adjustment situations described below, give the journal entry or entries Saluki Company made to record them during 2007. If no entry is required, write none. (b) After recording the situation in part (a) above, give the year-end adjusting entry for December 31, 2007. If no entry, write none. 1. Early in 2007, Saluki determined that equipment purchased in January, 2005 at a cost of $430,000, with an estimated life of 5 years and salvage value of $30,000 is now estimated to continue in use until December 31, 2011 and will have a $10,000 salvage value. Saluki recorded its 2007 depreciation at the end of 2007. (a) (b) 2. Saluki determined that it had understated its depreciation by $20,000 in 2006 owing to the fact that an adjusting entry did not get recorded. (a) (b) 3. Saluki bought a truck January 1, 2004 for $40,000 with a $4,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date. The truck is expected to be traded at the end of 2009. Saluki uses straight-line depreciation for its trucks. (a) (b) D. Analysis of Financial Statements. The market value of Planetarium Corp.'s common shares was quoted at $54 per share at December 31, 2007, and 2006. Planetarium 's balance sheet at December 31, 2007, and 2006, and statement of income and retained earnings for the years then ended are presented below: Planetarium Corp. Balance Sheet December 31 2007 2006 Assets: Current assets: Cash $ 9,000,000 $ 5,200,000 Short-term investments 17,200,000 11,400,000 Accounts receivable (net) 109,000,000 115,000,000 Inventories, lower of cost or market 122,000,000 140,000,000 Prepaid expenses 4,000,000 2,800,000 Total current assets $261,200,000 $274,400,000 Property, plant, and equipment (net) 350,000,000 315,000,000 Investments, at equity 2,800,000 3,500,000 Long-term receivables 15,000,000 20,000,000 Copyrights and patents (net) 6,000,000 7,000,000 Other assets 8,000,000 9,100,000 Total assets $643,000,000 $629,000,000 Liabilities and Stockholders' Equity: Current liabilities: Notes payable $ 7,000,000 $ 17,000,000 Accounts payable 35,000,000 52,000,000 Accrued expenses 27,500,000 30,000,000 Income taxes payable 1,500,000 2,000,000 Current portion of long-term debt 10,000,000 9,500,000 Total current liabilities 81,000,000 110,500,000 Long-term debt 200,000,000 190,000,000 Deferred income taxes 69,000,000 65,000,000 Other liabilities 15,000,000 9,500,000 Total liabilities 365,000,000 375,000,000 Stockholders' equity: Common stock, par value $1; authorized 20,000,000 shares; issued and outstanding 12,000,000 shares 12,000,000 12,000,000 Preferred Stock, 10% cumulative shares, par value $100; $100 liquidating value; authorized 100,000 shares; issued and outstanding 60,000 shares 6,000,000 6,000,000 Additional paid-in capital 119,000,000 119,000,000 Retained earnings 141,000,000 117,000,000 Total stockholders' equity 278,000,000 254,000,000 Total liabilities and stockholders' equity $643,000,000 $629,000,000 Problem A. Leases On January 1, 2008, Grate Company (as lessor) entered into a noncancelable lease agreement with Barrell Company for machinery which was carried on the accounting records of Grate at $4,530,000 and had a market value of $5,000,000. Minimum lease payments under the lease agreement which expires on December 31, 2017, total $7,100,000. Payments of $710,000 are due each January 1. The first payment was made on January 1, 2008 when the lease agreement was finalized. The interest rate of 10% which was stipulated in the lease agreement is the implicit rate set by the lessor. The effective interest method of amortization is being used. Barrell expects the machine to have a ten-year life with no salvage value, and be depreciated on a straight-line basis. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Instructions (a) From the lessee's viewpoint, what kind of lease is the above agreement? (b) Ignoring income taxes, what should be the expenses incurred by Barrell from this lease for the year ended December 31, 2008? (c) What journal entries should be recorded by Barrell Company on January 1, 2008? B. Statement of Cash Flows Cedar Company Comparative Balance Sheet December 31 2007 2006 Cash $ 64,000 $ 36,000 Accounts receivable, net 53,000 57,000 Inventory 171,000 123,000 Land 180,000 285,000 Building 300,000 300,000 Accumulated depreciation (75,000) (60,000) Equipment 1,545,000 900,000 Accumulated depreciation (177,000) (141,000) $2,061,000 $1,500,000 Accounts payable $ 172,000 $ 150,000 Bonds payable 480,000 -0- Capital stock, $10 par 1,125,000 1,125,000 Retained earnings 284,000 225,000 $2,061,000 $1,500,000 Additional Data: 1. Net income for the year amounted to $104,000. 2. Cash dividends were paid amounting to 4% of par value. 3. Land was sold for $120,000. 4. Cedar sold equipment, which cost $225,000 and had accumulated depreciation of $90,000, for $105,000 (Remember to T-account this transaction and determine its impact on the change in Equipment and the change in Accumulated Depreciation). Instructions: Prepare a statement of cash flows using the indirect method. C. Accounting Changes, Error Corrections, and Prior Period Adjustments. Saluki Companys reported net incomes for 2007 and the previous two years are presented below: 2007 2006 2005 $105,000 $95,000 $70,000 2007s net income was properly determined after giving effect to the following accounting changes, error corrections, etc. which took place during the year. The incomes for 2005 and 2006 do not take these items into account and are stated at the amounts determined in those years. Ignore income taxes. Instructions (a) For each of the three accounting changes, errors, or prior period adjustment situations described below, give the journal entry or entries Saluki Company made to record them during 2007. If no entry is required, write none. (b) After recording the situation in part (a) above, give the year-end adjusting entry for December 31, 2007. If no entry, write none. 1. Early in 2007, Saluki determined that equipment purchased in January, 2005 at a cost of $430,000, with an estimated life of 5 years and salvage value of $30,000 is now estimated to continue in use until December 31, 2011 and will have a $10,000 salvage value. Saluki recorded its 2007 depreciation at the end of 2007. (a) (b) 2. Saluki determined that it had understated its depreciation by $20,000 in 2006 owing to the fact that an adjusting entry did not get recorded. (a) (b) 3. Saluki bought a truck January 1, 2004 for $40,000 with a $4,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date. The truck is expected to be traded at the end of 2009. Saluki uses straight-line depreciation for its trucks. (a) (b) D. Analysis of Financial Statements. The market value of Planetarium Corp.'s common shares was quoted at $54 per share at December 31, 2007, and 2006. Planetarium 's balance sheet at December 31, 2007, and 2006, and statement of income and retained earnings for the years then ended are presented below: Planetarium Corp. Balance Sheet December 31 2007 2006 Assets: Current assets: Cash $ 9,000,000 $ 5,200,000 Short-term investments 17,200,000 11,400,000 Accounts receivable (net) 109,000,000 115,000,000 Inventories, lower of cost or market 122,000,000 140,000,000 Prepaid expenses 4,000,000 2,800,000 Total current assets $261,200,000 $274,400,000 Property, plant, and equipment (net) 350,000,000 315,000,000 Investments, at equity 2,800,000 3,500,000 Long-term receivables 15,000,000 20,000,000 Copyrights and patents (net) 6,000,000 7,000,000 Other assets 8,000,000 9,100,000 Total assets $643,000,000 $629,000,000 Liabilities and Stockholders' Equity: Current liabilities: Notes payable $ 7,000,000 $ 17,000,000 Accounts payable 35,000,000 52,000,000 Accrued expenses 27,500,000 30,000,000 Income taxes payable 1,500,000 2,000,000 Current portion of long-term debt 10,000,000 9,500,000 Total current liabilities 81,000,000 110,500,000 Long-term debt 200,000,000 190,000,000 Deferred income taxes 69,000,000 65,000,000 Other liabilities 15,000,000 9,500,000 Total liabilities 365,000,000 375,000,000 Stockholders' equity: Common stock, par value $1; authorized 20,000,000 shares; issued and outstanding 12,000,000 shares 12,000,000 12,000,000 Preferred Stock, 10% cumulative shares, par value $100; $100 liquidating value; authorized 100,000 shares; issued and outstanding 60,000 shares 6,000,000 6,000,000 Additional paid-in capital 119,000,000 119,000,000 Retained earnings 141,000,000 117,000,000 Total stockholders' equity 278,000,000 254,000,000 Total liabilities and stockholders' equity $643,000,000 $629,000,000 Problem A. Leases On January 1, 2008, Grate Company (as lessor) entered into a noncancelable lease agreement with Barrell Company for machinery which was carried on the accounting records of Grate at $4,530,000 and had a market value of $5,000,000. Minimum lease payments under the lease agreement which expires on December 31, 2017, total $7,100,000. Payments of $710,000 are due each January 1. The first payment was made on January 1, 2008 when the lease agreement was finalized. The interest rate of 10% which was stipulated in the lease agreement is the implicit rate set by the lessor. The effective interest method of amortization is being used. Barrell expects the machine to have a ten-year life with no salvage value, and be depreciated on a straight-line basis. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Instructions (a) From the lessee's viewpoint, what kind of lease is the above agreement? (b) Ignoring income taxes, what should be the expenses incurred by Barrell from this lease for the year ended December 31, 2008? (c) What journal entries should be recorded by Barrell Company on January 1, 2008? B. Statement of Cash Flows Cedar Company Comparative Balance Sheet December 31 2007 2006 Cash $ 64,000 $ 36,000 Accounts receivable, net 53,000 57,000 Inventory 171,000 123,000 Land 180,000 285,000 Building 300,000 300,000 Accumulated depreciation (75,000) (60,000) Equipment 1,545,000 900,000 Accumulated depreciation (177,000) (141,000) $2,061,000 $1,500,000 Accounts payable $ 172,000 $ 150,000 Bonds payable 480,000 -0- Capital stock, $10 par 1,125,000 1,125,000 Retained earnings 284,000 225,000 $2,061,000 $1,500,000 Additional Data: 1. Net income for the year amounted to $104,000. 2. Cash dividends were paid amounting to 4% of par value. 3. Land was sold for $120,000. 4. Cedar sold equipment, which cost $225,000 and had accumulated depreciation of $90,000, for $105,000 (Remember to T-account this transaction and determine its impact on the change in Equipment and the change in Accumulated Depreciation). Instructions: Prepare a statement of cash flows using the indirect method. C. Accounting Changes, Error Corrections, and Prior Period Adjustments. Saluki Companys reported net incomes for 2007 and the previous two years are presented below: 2007 2006 2005 $105,000 $95,000 $70,000 2007s net income was properly determined after giving effect to the following accounting changes, error corrections, etc. which took place during the year. The incomes for 2005 and 2006 do not take these items into account and are stated at the amounts determined in those years. Ignore income taxes. Instructions (a) For each of the three accounting changes, errors, or prior period adjustment situations described below, give the journal entry or entries Saluki Company made to record them during 2007. If no entry is required, write none. (b) After recording the situation in part (a) above, give the year-end adjusting entry for December 31, 2007. If no entry, write none. 1. Early in 2007, Saluki determined that equipment purchased in January, 2005 at a cost of $430,000, with an estimated life of 5 years and salvage value of $30,000 is now estimated to continue in use until December 31, 2011 and will have a $10,000 salvage value. Saluki recorded its 2007 depreciation at the end of 2007. (a) (b) 2. Saluki determined that it had understated its depreciation by $20,000 in 2006 owing to the fact that an adjusting entry did not get recorded. (a) (b) 3. Saluki bought a truck January 1, 2004 for $40,000 with a $4,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date. The truck is expected to be traded at the end of 2009. Saluki uses straight-line depreciation for its trucks. (a) (b) D. Analysis of Financial Statements. The market value of Planetarium Corp.'s common shares was quoted at $54 per share at December 31, 2007, and 2006. Planetarium 's balance sheet at December 31, 2007, and 2006, and statement of income and retained earnings for the years then ended are presented below: Planetarium Corp. Balance Sheet December 31 2007 2006 Assets: Current assets: Cash $ 9,000,000 $ 5,200,000 Short-term investments 17,200,000 11,400,000 Accounts receivable (net) 109,000,000 115,000,000 Inventories, lower of cost or market 122,000,000 140,000,000 Prepaid expenses 4,000,000 2,800,000 Total current assets $261,200,000 $274,400,000 Property, plant, and equipment (net) 350,000,000 315,000,000 Investments, at equity 2,800,000 3,500,000 Long-term receivables 15,000,000 20,000,000 Copyrights and patents (net) 6,000,000 7,000,000 Other assets 8,000,000 9,100,000 Total assets $643,000,000 $629,000,000 Liabilities and Stockholders' Equity: Current liabilities: Notes payable $ 7,000,000 $ 17,000,000 Accounts payable 35,000,000 52,000,000 Accrued expenses 27,500,000 30,000,000 Income taxes payable 1,500,000 2,000,000 Current portion of long-term debt 10,000,000 9,500,000 Total current liabilities 81,000,000 110,500,000 Long-term debt 200,000,000 190,000,000 Deferred income taxes 69,000,000 65,000,000 Other liabilities 15,000,000 9,500,000 Total liabilities 365,000,000 375,000,000 Stockholders' equity: Common stock, par value $1; authorized 20,000,000 shares; issued and outstanding 12,000,000 shares 12,000,000 12,000,000 Preferred Stock, 10% cumulative shares, par value $100; $100 liquidating value; authorized 100,000 shares; issued and outstanding 60,000 shares 6,000,000 6,000,000 Additional paid-in capital 119,000,000 119,000,000 Retained earnings 141,000,000 117,000,000 Total stockholders' equity 278,000,000 254,000,000 Total liabilities and stockholders' equity $643,000,000 $629,000,000

ACC 305 Final, Part II (Chapters 21 -24) Name _________________________________ Open Book, Open Notes Problem A. Leases On January 1, 2008, Grate Company (as lessor) entered into a noncancelable lease agreement with Barrell Company for machinery which was carried on the accounting records of Grate at $4,530,000 and had a market value of $5,000,000. Minimum lease payments under the lease agreement which expires on December 31, 2017, total $7,100,000. Payments of $710,000 are due each January 1. The first payment was made on January 1, 2008 when the lease agreement was finalized. The interest rate of 10% which was stipulated in the lease agreement is the implicit rate set by the lessor. The effective interest method of amortization is being used. Barrell expects the machine to have a ten-year life with no salvage value, and be depreciated on a straight-line basis. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Instructions (a) From the lessee's viewpoint, what kind of lease is the above agreement? (b) Ignoring income taxes, what should be the expenses incurred by Barrell from this lease for the year ended December 31, 2008? (c) What journal entries should be recorded by Barrell Company on January 1, 2008? B. Statement of Cash Flows Cedar Company Comparative Balance Sheet December 31 2007 Cash Accounts receivable, net $ 64,000 2006 $ 36,000 53,000 57,000 Inventory 171,000 123,000 Land 180,000 285,000 Building 300,000 300,000 Accumulated depreciation (75,000) (60,000) Equipment Accumulated depreciation 1,545,000 (177,000) 900,000 (141,000) $2,061,000 Accounts payable Bonds payable Capital stock, $10 par $1,500,000 $ 172,000 $ 150,000 480,000 -01,125,000 284,000 225,000 $2,061,000 Retained earnings 1,125,000 $1,500,000 Additional Data: 1. Net income for the year amounted to $104,000. 2. Cash dividends were paid amounting to 4% of par value. 3. Land was sold for $120,000. 4. Cedar sold equipment, which cost $225,000 and had accumulated depreciation of $90,000, for $105,000 (Remember to T-account this transaction and determine its impact on the change in Equipment and the change in Accumulated Depreciation). Instructions: Prepare a statement of cash flows using the indirect method. C. Accounting Changes, Error Corrections, and Prior Period Adjustments. Saluki Company's reported net incomes for 2007 and the previous two years are presented below: 2007 $105,000 2006 2005 $95,000 $70,000 2007's net income was properly determined after giving effect to the following accounting changes, error corrections, etc. which took place during the year. The incomes for 2005 and 2006 do not take these items into account and are stated at the amounts determined in those years. Ignore income taxes. Instructions (a) For each of the three accounting changes, errors, or prior period adjustment situations described below, give the journal entry or entries Saluki Company made to record them during 2007. If no entry is required, write \"none.\" (b) After recording the situation in part (a) above, give the year-end adjusting entry for December 31, 2007. If no entry, write \"none.\" 1. Early in 2007, Saluki determined that equipment purchased in January, 2005 at a cost of $430,000, with an estimated life of 5 years and salvage value of $30,000 is now estimated to continue in use until December 31, 2011 and will have a $10,000 salvage value. Saluki recorded its 2007 depreciation at the end of 2007. (a) (b) 2. Saluki determined that it had understated its depreciation by $20,000 in 2006 owing to the fact that an adjusting entry did not get recorded. (a) (b) 3. Saluki bought a truck January 1, 2004 for $40,000 with a $4,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date. The truck is expected to be traded at the end of 2009. Saluki uses straight-line depreciation for its trucks. (a) (b) D. Analysis of Financial Statements. The market value of Planetarium Corp.'s common shares was quoted at $54 per share at December 31, 2007, and 2006. Planetarium 's balance sheet at December 31, 2007, and 2006, and statement of income and retained earnings for the years then ended are presented below: Planetarium Corp. Balance Sheet December 31 2007 2006 Assets: Current assets: Cash $ Short-term investments 9,000,000 $ 5,200,000 17,200,000 11,400,000 Accounts receivable (net) 109,000,000 115,000,000 Inventories, lower of cost or market 122,000,000 140,000,000 4,000,000 2,800,000 $261,200,000 $274,400,000 350,000,000 315,000,000 Investments, at equity 2,800,000 3,500,000 Long-term receivables 15,000,000 20,000,000 Copyrights and patents (net) 6,000,000 7,000,000 Other assets 8,000,000 9,100,000 $643,000,000 $629,000,000 $ 7,000,000 $ 17,000,000 Accounts payable 35,000,000 52,000,000 Accrued expenses 27,500,000 30,000,000 1,500,000 2,000,000 Current portion of long-term debt 10,000,000 9,500,000 Total current liabilities 81,000,000 110,500,000 Prepaid expenses Total current assets Property, plant, and equipment (net) Total assets Liabilities and Stockholders' Equity: Current liabilities: Notes payable Income taxes payable Long-term debt 200,000,000 190,000,000 Deferred income taxes 69,000,000 65,000,000 Other liabilities 15,000,000 9,500,000 365,000,000 375,000,000 12,000,000 12,000,000 6,000,000 6,000,000 Additional paid-in capital 119,000,000 119,000,000 Retained earnings 141,000,000 117,000,000 278,000,000 254,000,000 $643,000,000 $629,000,000 Total liabilities Stockholders' equity: Common stock, par value $1; authorized 20,000,000 shares; issued and outstanding 12,000,000 shares Preferred Stock, 10% cumulative shares, par value $100; $100 liquidating value; authorized 100,000 shares; issued and outstanding 60,000 shares Total stockholders' equity Total liabilities and stockholders' equity D. (cont.). Planetarium Corp. Statement of Income and Retained Earnings Year ended December 31 2007 2006 $540,000,000 $500,000,000 370,900,000 400,000,000 70,000,000 65,000,000 9,100,000 6,000,000 450,000,000 471,000,000 Income before income taxes 90,000,000 29,000,000 Income taxes 27,000,000 11,600,000 Net income 63,000,000 17,400,000 Retained earnings at beginning of period 117,000,000 113,100,000 Dividends on common stock (38,500,000) (13,000,000) Dividends on preferred stock (500,000) (500,000) Net sales Cost and expenses: Cost of goods sold Selling, general, and administrative expenses Other, net Total costs and expenses Retained earnings at end of period $141,000,000 $117,000,000 Instructions Based on the above information, compute the following (for the year 2007 only): (Show supporting computations in good form.) (a) Current ratio (b) Acid-test (quick) ratio (c) Receivables turnover (d) Inventory turnover (e) Earnings per share on common stock (f) Price-earnings ratio on common stock E. Segment Reporting Romeo Company is a diversified company which has developed the following information about its five segments: SEGMENTS A Total sales $ 400,000 Operating profit (loss) Identifiable assets B C D E $1,700,000 $ 300,000 $ 320,000 $ 580,000 480,000 40,000 5,800,000 1,200,000 (250,000) 1,600,000 (300,000) 3,400,000 (10,000) 5,600,000 Instructions Identify which segments are significant enough to warrant disclosure in accordance with FASB No. 131, "Reporting Disaggregated Information about a Business Enterprise," by applying the following quantitative tests: a. Revenue test b. Operating profit or loss test c. Identifiable assets test