Sharke Inc. was incorporated in 2016 to operate as a computer software service firm with an accounting fiscal year ending July 31. Sharke's primary product is an on-line inventory-control system; its customers pay a fixed fee plus usage charges for using the system.

On August 1, 2017, Sharke leased a large computer system from the manufacturer. The lease terms are shown below:

Annual lease payment

$410,000.00

paid at the beginning of the year

Maintenance (executory) costs

$35,000.00

included in the annual lease payment

Date of first payment

Aug. 1, 2017

Term

12

years from date of first payment

Estimated Useful Life of equipment

15

years

Implied interest rate in the contract

11%

Depreciation method

Straight-line

Residual value guaranteed by Sharke

$25,000.00

This lease is to be accounted for as a capital lease. Following is a schedule of the present value of $1 for selected periods discounted a specific interest rate when payments are made at the beginning of each period.

12%

11%

Present value of Annuity Due for 10 yrs.

6.32825

6.53705

Present value of Annuity Due for 12 yrs.

6.93770

7.20652

Present value of Annuity Due for 15 yrs.

7.62817

7.98187

Present value of $1 for 10 yrs.

0.32197

0.35218

Present value of $1 for 12 yrs.

0.25668

0.28584

Present value of $1 for 15 yrs.

0.18270

0.20900

Required:

1.

Identify the four criteria for determining capital leases, under the current lease accounting standard.

2.

Prepare an amortization schedule for this lease agreement

3.

Prepare, in general journal form, all entries Sharke should make in its accounting records for the first two fiscal years relating to this lease

Problem #4 -- Due at the beginning of class on November 21, 2017.

Sapphire Distribution has a defined benefit pension plan. Pension information concerning the fiscal years 2016 and 2017 are presented below ($ in millions)

(in '000s)

Information provided by Pension Plan Actuary:

a.

Projected benefit obligation at December 31, 2015

$1,845

b.

Prior service cost from plan amendment on January 1, 2016 (straight-line amortization for 10-year average

remaining service period.)

350

c.

Service cost for 2016

530

d.

Service cost for 2017

575

e.

Discount rate used by actuary on projected benefit obligation for 2016 & 2017

10%

f.

Payments to retirees in 2016

460

g.

Payments to retirees in 2017

520

h.

No changes in actuarial assumptions or estimates

i.

Net gain -- AOCI on January 1, 2016

260

j.

Net gains and losses are amortized for 10 years beginning in 2016

Information provided by Pension Fund Trustee:

a.

Plan asset balance at fair value on December 31, 2015

$1,680

b.

2016 contributions

550

c.

2017 contributions

610

d.

Expected long-term rate of return on plan assets

12%

e.

2016 actual return on plan assets

255

f.

2017 actual return on plan assets

355

Required:

1.

Calculate pension expense for the years ended December 31, 2016 & 2017.

2.

Determine the balances in the PBO and Plan Asset accounts at December 31, 2016 and 2017.

3.

Prepare the journal entries for 2016 and 2017 to record pension expense

4.

Prepare the journal entries for 2016 and 2017 to record any gains and losses and new prior service cost.

5.

Prepare the journal entries for 2016 and 2017 to record the cash contributions to plan assets and benefits paid to retirees.