Question 1:True or false.

1. Service cost is the expense caused by the increase in the accumulated benefit obligation because of employees' service during the current year.
2. The difference between the PBO and the ABO is that the PBO takes into account future salary increases, while the ABO is based on current salaries.
3. Prior service cost is the increase in the PBO because of pension plan amendments.
4. The PBO is a more appropriate measure for pension obligation in the case of firm bankruptcy than the VBO.
5. Other Comprehensive Income related to pension prior service cost is reported as part of net income.
6. Executory costs should be excluded by the lessee in computing the present value of the minimum lease payments.
7. A lessee records interest expense in both a finance lease and an operating lease.
8. No lease liabilities should be reported on the balance sheet if the lease is classified as an operating lease.
9. The lessor should ignore the guaranteed residual value in its calculation of lease receivable.
10. If residual value is unguaranteed, the lessee ignores the residual value in the computation of lease liability.
11. Companies report the cash flows from purchases and sales of trading securities as cash flows from operating activities.
12. A company should add back bond premium amortization to net income to arrive at net cash flow from operating activities.
13. Dividends received from other companies' stocks should be reported as cash flow from investing activities.
14. Interest paid to creditors should be reported as cash flows from financing activities.
15. Cash paid to the lessor in the case of operating lease should be reported as cash flows from financing activities.

Q2:Colson Corp. had $900,000 net income in 2018. On January 1, 2018 there were 600,000 shares of common stock outstanding. On March 1, 400,000 shares were issued and on September 1, Colson bought 100,000 shares of treasury stock. The tax rate is 40%.

In addition, Colson issued $2,000,000 of 6% convertible bonds at face value during 2017. Each $1,000 bond is convertible into 100 shares of common stock. No bond was converted into common stock in 2018.

Required:

a) Compute basic earnings per share for 2018.

b) Compute diluted earnings per share for 2018.

Q3: On June 15, 2021, Red Sox Construction entered into a long-term construction contract to build a new baseball stadium in Boston., for $240 million. The expected completion date is April 1, 2023, just in time for the 2023 baseball season. Costs incurred in the first two years and estimated remaining costs to complete the project are as follows ($ in millions):

20212022

Costs incurred during the current year$40$90

Estimated future costs to complete12070

Required:

a. Compute the revenue and gross profit Red Sox Construction will report in year 2021 and 2022, using the percentage of completion method.

b. Provide journal entry to record revenue and gross profit for 2022.

Q4:Howard Corp. sponsors a defined-benefit pension plan for its employees.On January 1, 2011, the following balances related to this plan.

Plan assets (market-related value)$500,000

Projected benefit obligation600,000

OCI - Prior service cost75,000

OCI - Loss70,000

As a result of the operation of the plan during 2011, the actuary provided the following additional data at December 31, 2011.

Service cost for 2011$ 75,000

Actual return on plan assets in 201145,000

Amortization of prior service cost20,000

Contributions in 2011115,000

Benefits paid retirees in 201170,000

Interest rate7%

Expected return rate10%

Average remaining service life of active employees 10 years

Instructions

(a)Using the above information to complete the pension work sheet for 2011 (see the next page). Indicate (credit) entries by parentheses.

(b)Prepare the journal entry to reflect the accounting for the company's pension plan for the year ending December 31, 2011.

HowardCorp.

Pension Worksheet2011

General Journal EntriesMemo Record

Annual

Pension

Expense

Cash

OCIPrior

Service Cost

OCI

Gain/Loss

Pension

Asset/Liability

Projected

Benefit

Obligation

Plan

Assets

Balance, Jan. 1, 2011

Service cost

Interest cost

Actual return

Unexpected gain/loss

Amortization of PSC

Amortization of gain/loss

Contributions

Benefits payment

Journal entry for 2011

Balance, Dec. 31, 2011

Q5:UMB leased a Cloud Computing equipment from Academy Leasing Services on January l, 2019. Academy Leasing Services paid $454,595 for the equipment. Its fair value is $454,595. Terms of the Lease Agreement and Related Information are as below.

Lease term: 5 years

Semiannual lease payments: $ 100,000 at beginning of each period

Economic life of asset: 5 years

Annual interest rate: 5%

Required:

a. Prepare the amortization schedule that shows the pattern of interest expense for UMB.

b. Prepare the appropriate entries for 2019 for UMB.

Q6: UMB Corporation entered into a lease agreement on January 1, 2019, to provide CM Company with a piece of machinery. The terms of the lease agreement were as follows.

1. The lease is to be for 3 years with rental payments of $10,000 to be made at the end of each year.

2. The machinery has a fair value of $50,000, and an economic life of 6 years.

3. At the end of the lease term, both parties expect the machinery to have a residual value of $30,000, none of which is guaranteed.

4. The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature.

5. The implicit interest rate is 10%.

6. Collectability of the payments is probable.

Required:

a. Evaluate the criteria for classification of the lease and describe the nature of the lease for the lessee (CM company).

b. Prepare the journal entries for CM company for year 2019.

Q7:The following information is taken from French Corporation's financial statements:

December 31

20192018

Cash$90,000$27,000

Accounts receivable92,00080,000

Allowance for doubtful accounts(4,500)(3,100)

Inventory155,000175,000

Prepaid expenses7,5006,800

Land90,00060,000

Buildings287,000244,000

Accumulated depreciation(32,000)(13,000)

Patents20,00035,000

Total Assets$705,000$611,700

Accounts payable$90,000$84,000

Accrued liabilities54,00063,000

Bonds payable125,00060,000

Common stock100,000100,000

Retained earnings351,000312,700

Treasury stock, at cost(15,000)(8,000)

Total Liabilities and SE$705,000$611,700

For 2019 Year

Net income$58,300

Depreciation expense19,000

Amortization of patents5,000

French Corporation purchased some land and buildings in 2019. In addition, the company sold some of its patents. The gain or loss on the sale of patents is zero.

Instructions

Prepare the statement of cash flows for French Corporation for the year 2019. (Use the indirect method.)

Cash flow from operating activities

Net cash flow from operating activities________________

Cash flow from investing activities

Net cash flow from investing activities________________

Cash flow from financing activities

Net cash flow from financing activities_______________

Net increase/decrease in cash_______________

Cash at beginning of period_______________

Cash at end of period________________

Bonus question:

Below is selected financial information from the financial statements of company A and company B.Both company A and company B started their business on 1/1/2019.

Company A

Company B

current assets on 12/31/2019

100

8,000

total assets on 12/31/2019

11,000

28,000

current liability on 12/31/2019

200

4,000

total liability on 12/31/2019

4,000

18,000

sales revenue on 12/31/2019

4,500

20,000

Cost of goods sold for year 2019

1,000

16,000

interest expense for year 2019

400

1,000

net income for year 2019

1,500

2,500

a) Which company provides better return on assets?

b) Which company has less liquidity risk in terms of current ratio?

c) Which company has less solvency risk in terms of debt to total assets ratio?