ACCT 3561 EXAM 1
During Year 3, Gilman Co. purchased 5,000 shares of the 500,000 outstanding shares of Meteor Corp.'s common stock for $35,000. During Year 3, Gilman received $1,800 of dividends from its investment in Meteor's stock. The fair value of Gilman's investment on December 31, Year 3, is $32,000. Gilman has elected the fair value option for this investment. What amount of income or loss that is attributable to the Meteor stock investment should be reflected in Gilman's earnings for Year 3?
$1,200 why: gilman co would recognize a loss of $1,200. Gilman has selected fair value option. therefore, the dividends of $1,800 received are NOT recognized in net income. The unrealized holding loss on the investment of $3,000 (initial purchase price of $35,000-fair value of $32,000)- 1,800(dividends) = $1,200
Grant, Inc. acquired 30% of South Co.'s voting stock for $200,000 on January 2, Year 1. Grant's 30% interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During Year 1, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, Year 2, and $200,000 for the year ended December 31, Year 2. On July 1, Year 2, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, Year 2. In grant's dec 31, year 1 balance sheet, what should be the carrying amount of this investment?
$209,000 why: purchase $ $200,000 + year 1 income (80,000 x 30%)= $24,000 - year 1 dividends (50,000 x 30%)= ($15,000) Balance at 12/31/yr 1 $209,000
jen corp. purchased bonds at a discount of $10,000 ($90,000). subsequently, went sold these bonds at a premium of $14,000($114,000). during the period that went held this investment, amortization of the discount amounted to $2,000. what amount should rent report as a gain on sale?
$22,000 why: when a bond is purchased at a discount, it is purchased for less than the face value of the bond. the discount is reflected in the purchase price of the bond and the journal entry is recorded on that date. assuming the bond had a value of $100,000.... $104,000(sold $) -($2,000)(discount $) $102,000 -($90,000) (purchase $) $22,000 (Gain $)
on jan 2, year 1, Kean co. purchased a 30% interest in Pod. co. for $250,000. on this date, Pod's stockholder equity was $500,000. The carrying amount of Pod's identifiable net assets approximated their fair value, except for land whose fair value exceeded its carrying amount by $200,000. Pod reported net income of $100,000 for year 1, and paid no dividends. mean accounts for this investment using the equity method. In its dec 31, year 1 balance sheet, what amount should Kean report as investment in subsidiary?
$280,000 why: under the equity method, the investment account will be increased by the investors share of investee's net income (30% x $100,000) and decreased by any dividends paid. ($0) thus, the investment in Pod at dec 31, year 1 is equal to $280,000 ($250,000 + $30,000)
a company lease a machine from leasing inc. on jan 1, year 1. the lease terms include a $100,000 annual payment beginning Jan 1, year 1. the machine's fair value is $500,000 and the residual value is estimated at $20,000. The company guarantees the residual value. the useful life of the machine is 6 years, and the lease term is 5 years. the implicit rate of interest is 6% and is known by the company. the following present value factors are provided: 5 years 6 years Present value of $1 @ 6% .7473 .705 Present value of an annuity due at 6% 4.4651 5.2124 Present value of an ordinary annuity at 6% 4.2124 4.9173 what is the value of the machine int eh company's balance sheet at lease inception?
$461,456 why: the lessee will record the lease as both an asset and a liability at the present value of minimum lease payment. the lease cost has 2 components; required payment: $100,000 x 4.4651= $446,510 guaranteed residual: $20,000 x .7473= $ 14,946 $461,456
Market value cost 12/31 yr. 2 12/31/ yr 1 trading $150,000 $155,000 $100,000 available for sale $150,000 $130,000 $120,000 what amount should be reported as unrealized gain (loss) in its year 2 income statement?
$55,000 why: unrealized gains and losses are reported as followed: trading debt securities--> report at fair value with unrealized gains-> losses included in earnings (along with "realized" gains (losses). 12/31/year 2 $155,000 12/31/year 1 $100,000 $55,000 Available for sale debt--> reported at fair value with unrealized gains and losses reimported as separate components in other comprehensive income until realized.
on jan 1 of the current year, tell co. leased equipment from swill co. under a 9 year sales-type (finance) lease. The equipment had a cost of $400,000 and an estimated useful life of 15 years. Semiannual payments of $44,000 are due every jan 1 and July 1. The present value of lease payments at 12% was $505,000, which equal the sales price of the equipment. Using the straight line method, what amount should tell recognize as depreciation expense on the equipment in the current year?
$56,111 why: the lessee record the lease as an asset and a liability at the present value of the minimum lease payments. The lease should be deprecated over the lease term if the lessee does not take ownership of the asset by the end of the lease or if there is not a written purchase option. $505,000(pv of minimum lease payment)/ 9 years (lease term) = $56,111
Green Corp. owns 30% of the outstanding common stock and 100% of the outstanding noncumulative nonvoting preferred stock of Axel Corp. In Year 1 Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel's operations. What amount of dividend revenue should Green report in its income statement for the year ended Dec 31 Year 1?
$60,000 why: Green, the investor, exercises significant influence over the investee corp, it must use the equity method for recording common stock dividends. under the equity method, the common stock dividends are recorded as a reduction to the investment account. Preferred stock ownership does not allow the investor to exercise influence, so the preferred stock investment is accounted for using the fair value method and the preferred stock dividends of $60,000 are recorded as dividend revenue on the income statement.
on january 1 of the current year, tree co. enters into a five year lease agreement for production equipment. the lease require tree to pay $12,500 per year in lease payments. at the end of the five year lease term, tree can purchase the equipment for $30,000. The fair value of the equipment is $75,000. the estimated useful life of the equipment is 10 years. the present value of the lease payments is $50,000. the present value of the purchase option is $20,000. Tree's controller believes the purchase option price is sufficiently below the expected fair value of the equipment at the date the option becomes exercisable to reasonably assure its exercise. tree would normally depreciate equipment of this type using the straight line method. what amount is the carrying value of the asset related to this lease and dec 31, of the current year?
$63,000 why: this lease qualifies for finance lease treatment bc it meets 2 of the 4 criteria. (written purchase option & present value of minimum lease payment is greater than 90% of fair value.) the equipment will be recorded at a cost of $70,000. (the present value of mimimim lease pmt + purchase option). as this lease contains a purchase option, regarding the depreciation, the useful life of the asset rather than the lease period will be used to calculate depreciation --> 70,000/10,000= 7,000 depreciation 70,000 equipment cost (7,000) depreciation 63,000
on July 2, year 1, wynn inc. purchased as an available for sale debt security a $1,000,000 face value Kean co. 8% bond for $910,000 plus accused interest to yield 10%. the bond mature on jan 1 year 7 and pays interest annually on jan 1. on dec 31, year 1, the bonds has a market value of $945,000. On feb 13, year 2, wynn sold the bonds for $920,000. In its December 31, year 1, balance sheet, what amount should Wynn report for available for sale investments in debt securities?
$945,000 why: the security would be recorded at fair value on july 2, year 1, or $910,000. accord interest is a receivable and does not affect cost. the $90,000 discount is not amortized on short term investments. on dec. 31, year 1, the investment would be adjusted to fair value of $945,000. the unrealized holding gain of $35,000 would be reported as a separate component of other comprehensive income.
a company has an operating lease for its office space. the lease term is 120 months and requires monthly rent of $15,000. as an incentive for the company to enter into the lease, the lessor granted the first EIGHT months rent at no cost. What amount of monthly rent expense should be recognized over the life go the lease?
14,000 why: the lessor is granting 8 months of free rent, so the total rent expense that will be recorded over the lease period is (120 months - 8 months= 112 x $15,000)=1,680,000. the expense must be EQUALLY allocated over the rental period of 120 months according to the matching principle. therefor, (1,680,000/120 months)= $14,000
neal corp. entered into a nine year finance lease on a warehouse on dec 31, year 1. Lease payments of 52,000, which include real estate tax of 2,000, are due annually, beginning on dec 31, year 2, and every dec 31 thereafter. Neal doesn't know the interest rate implicit in the lease. Neals incremental borrowing rate is 9%. the rounded present value of an ordinary annuity for nine years at 9% is 5.6... what amount should neal report as a lease liability at dec 31, year 1?
280,000 why: finance lease should be recorded at present value of the minimum lease payments. the lease payment is used. taxes should be expensed when paid (i.e. not included in the calculation) --> 52,000-2,000= 50,000 x 5.6 = 280,000 (PMT - Taxes)
Robbins, Inc. leased a machine from Ready Leasing Co. The lease qualifies as a capital lease and requires 10 annual payments of $10,000 beginning immediately. The lease specifies an interest rate of 12% and a purchase option of $10,000 at the end of the tenth year, even though the machine's estimated value on that date is $20,000. Robbins' incremental borrowing rate is 14%. The present value of an annuity due of $1 at: 12% for 10 years is 6.328 14% for 10 years is 5.946 The present value of $1 at: 12% for 10 years is .322 14% for 10 years is .270 What amount should Robbins record as lease liability at the beginning of the lease term?
66,500 why: the lessee should record the finance lease at the present value of minimum lease payments. the interest rate applied is 12%. the lease payments begin immediately, the purchase option must also be capitalized on. 10,000 x 6.328 = 63,280 10,000 x .322= + 3220 66,500
under US GAAP, one criterion for finance lease classification is that the term of the lease represents the major part of the leased property's estimated economic life at the inception of the lease. what is a reasonable minimum threshold % for representing a "major part" of the assets economic life?
75% why: a reasonable minimum threshold is that the lease term be greater than or equal to 75% if the economic life.
long co. invested in marketable securities. at year end, fair value changes in this investment were included in Long's other comprehensive income. how would Long classify this investment?
Available for sale securities why: unrealized gains and losses from marking available for sale debt securities to fair value at the balance sheet date are treated as other comprehensive income items and bypass the income statement.
Peel Co. received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it uses the cost method or the equity method of accounting?
Fair value= NO Equity= NO why: under the fair value method, receipt of dividend is recorded as income and does not affect the investment account. under the equity method, receipt of a dividend is recorded as a decrease in the investment account.
when the market value of an investment in debt securities in which the company has a positive intent and ability to hold to maturity exceeds its carrying amount, how should each of the following assets be reported at eh end of the year?
Long term short term marketable martketable debt securities debt securities carrying value carrying value why: marketable debt security that the company has the intent and ability to hold to maturity, both long term and short term, are reported at carrying amount (amortized cost) unless there is a permanent decline in market value.
Able Co. leased equipment to Baker under a noncancelable lease with a transfer of title. Will Able record depreciation expense on the leased asset and interest revenue related to the lease?
depreciation expense--> NO Interest revenue--> YES why: the lessee will capitalize the lease (due to transfer of title) and will incur both depreciation and interest expense. able will earn and book interest income when the payments from baker are received. able will remove the asset from its books at the inception of the lease and will not depreciate the asset.
at the inception of a finance lease, the guaranteed residual value should be:
included as part of the minimum lease payment at present value why: guaranteed residual value is, in effect, and additional lease payment and must be included in the calculation of the present value of the minimum lease payment.
on January 1, year 1, Frost co entered into a two year lease agreement with ananz co. to lease 10 new computers. the lease term begins on Jan 1, year 1, and ends on dec 31, year 2. the lease agreement requires frost o pay ananz two annual lease payments of $8000. the present value of the minimum lease payment is $13,000. which of the following circumstances would require Frost to classify and account for the arrangement as a finance lease under US GAAP ?
the fair value of the computers on Jan 1, year 1 is $14,000 why: for a lessee to account for a lease as a finance lease the terms of the lease must meet at least one of the fiancee lease criteria: 1) ownership transfer at the end of the lease 2) written purchase option the lessee is reasonably certain to exercise. 3) PV of minimum lease payments= Fair value of asset (aprx. 90% FV of lease property.) --> what is here -->13,000/14,000=93% 4) lease term= major part (75%) of assets useful life. 5) asset is specialized such that it has no alternative use to the lessor.
which of the following is a criterion for classifying a lease as a finance lease by a lessee?
the lease term is equal to 75% of more of the estimate economic life of the leased property. why: above 5 criteria that may be used to determine whether a lessee should capitalize a lease, only one criteria needs to be met.
