Intermediate Accounting Midterm Problems -
Problem 1 - The following information is related to the Stone Co. postretirement benefits plan for 2013:
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Service cost
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$168,000
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Discount rate
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10%
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EPBO, January 1, 2013
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820,000
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APBO, January 1, 2013
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690,000
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Actual return on plan assets in 2013
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22,400
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Expected return on plan assets in 2013
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29,000
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Contributions (funding)
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224,000
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Instructions -
(a) Compute the amount of postretirement expense for 2013. (Show computations.)
(b) Prepare the journal entry to record postretirement expense and Stone's contributions for 2013.
Problem 2 - Krause Company on January 1, 2012, enters into a five-year non-cancelable lease, with four renewal options of one year each, for equipment having an estimated useful life of 10 years and a fair value to the lessor, Daly Corp., at the inception of the lease of $3,000,000. Krause's incremental borrowing rate is 8%. Krause uses the straight-line method to depreciate its assets. The lease contains the following provisions:
1. Rental payments of $219,000 including $19,000 for property taxes, payable at the beginning of each six-month period.
2. A termination penalty assuring renewal of the lease for a period of four years after expiration of the initial lease term.
3. An option allowing the lessor to extend the lease one year beyond the last renewal exercised by the lessee.
4. A guarantee by Krause Company that Daly Corp. will realize $100,000 from selling the asset at the expiration of the lease. However, the actual residual value is expected to be $60,000.
Instructions -
(a) What kind of lease is this to Krause Company?
(b) What should be considered the lease term?
(c) What are the minimum lease payments?
(d) What is the present value of the minimum lease payments?
(e) What journal entries would Krause record during the first year of the lease?
Problem 3 - Hayes Corp. is a manufacturer of truck trailers. On January 1, 2012, Hayes Corp. leases ten trailers to Lester Company under a six-year non-cancelable lease agreement. The following information about the lease and the trailers is provided:
1. Equal annual payments that are due on December 31 each year provide Hayes Corp. with an 8% return on net investment (present value factor for 6 periods at 8% is 4.62288).
2. Titles to the trailers pass to Lester at the end of the lease.
3. The fair value of each trailer is $50,000. The cost of each trailer to Hayes Corp. is $45,000. Each trailer has an expected useful life of nine years.
4. Collectibility of the lease payments is reasonably predictable and there are no important uncertainties surrounding the amount of costs yet to be incurred by Hayes Corp.
Instructions -
(a) What type of lease is this for the lessor? Discuss.
(b) Calculate the annual lease payment. (Round to nearest dollar.)
(c) Prepare a lease amortization schedule for Hayes Corp. for the first three years.
(d) Prepare the journal entries for the lessor for 2012 and 2013 to record the lease agreement, the receipt of the tease rentals, and the recognition of income (assume the use of a perpetual inventory method and round all amounts to the nearest dollar).
Problem 4 - Hughey Co. as lessee records a capital lease of machinery on January 1, 2012. The seven annual lease payments of 5350,000 are Trade at the end of each year. The present value of the lease payments at 10% is $1,704,000. Hughey uses the effective-interest method of amortization and sum-of-the-years'-digits depreciation (no residual value).
Instructions (Round to the nearest dollar.)
(a) Prepare an amortization table for 2012 and 2013.
(b) Prepare all of Hughey's journal entries for 2012.
Problem 5 - On December 31, 2011, Harris Co. leased a machine from Catt, Inc, for a five-year period. Equal annual payments under the lease are $630,000 (including $30,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2011, and the second payment was made on December 31, 2012. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was $2:502,400. The lebse is appropriately accounted for as a capital lease by Harris. In its December 31, 2012 balance sheet, Harris should report a lease liability of
a. $1,902,000.
b. $1,872,000.
c. $1,711,800.
d. $1,492,200.
Problem 6 - Vance Company reported net incomes for a three-year period as follows:
2009, $188,000; 2010, $189,000: 2011, $180,000.
In reviewing the accounts in 2012 after the books for the prior year have been closed, you find that the following errors have been made in summarizing activities:
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2009
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2010
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2011
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Overstatement of ending inventory
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$42.000
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$51,000
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$24,000
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Understatement of accrued advertising expense
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6,600
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12,000
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7,200
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Instructions
(a) Determine corrected net incomes for 2009, 2010, and 2011.
(b) Give the entry to bring the books of the company up to date in 2012, assuming that the books have been closed for 2011.
Problem 7 - On January 1, 2008, Hess Co. purchased a patent for $595,000. The patent is being amortized over its remaining legal life of 15 years expiring on January 1, 2023. During 2011, Hess determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2011?
a. $357,000
b. $408,000
c. $420,000
d. $436,375
Problem 8 - The net changes in the balance sheet accounts of Keating Corporation for the year 2013 are shown below:
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Account
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Debit
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Credit
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Cash
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$ 82,000
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Short-farm investments
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$121,000
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Accounts receivable
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83,200
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|
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Allowance for doubtful accounts
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13,300
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Inventory
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74,200
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|
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Prepaid expenses
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22,800
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Investment in subsidiary (equity method)
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25,000
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Plant and equipment
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210,000
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Accumulated depreciation
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130,000
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Accounts payable
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80,700
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Accrued liabilities
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21,500
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Deferred tax liability
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15,500
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8% serial bonds
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70,000
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Common stock, $10 par
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90,000
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Additional paid-in capital
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150,000
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Retained earnings-Appropriation for bonded indebtedness
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60,000
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Retained earnings-Unappropriated
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38,000
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$643,600
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$643,600
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An analysis of the Retained Earnings-Unappropriated account follows:
Retained earnings unappropriated, December 31, 2012 $1,300,000
Add: Net income 327,000
Transfer from appropriation for bonded indebtedness 60,000
Total $1,687,000
Deduct: Cash dividends $185,000
Stock dividend 240,000 425.000
Retained earnings unappropriated, December 31, 2013 $1,262,000
1. On January 2, 2013 short-term investments (classified as available-for-sale) costing $121,000 were sold for $145,000.
2. The company paid a cash dividend on February 1, 2013.
3. Accounts receivable of $16,200 and $19,400 were considered uncollectible and written off in 2013 and 2012, respectively.
4. Major repairs of $33,000 to the equipment were debited to the Accumulated Depreciation account during the year. No assets were retired during 2013.
5. The wholly owned subsidiary reported a net loss for the year of $20,000. The loss was recorded by the parent.
6. At January 1, 2013, the cash balance was $166,000.
Instructions - Prepare a statement of cash flows (indirect method) for the year ended December 31, 2011 Keating Corporation has no securities which are classified as cash equivalents.