Units 5-9
A lessor leases a piece of equipment to a lessee, under lease terms that qualify as an operating lease. The present value of required rental payments is $280,000; and the present value of the estimated residual value, which is unguaranteed, is $30,000. The lessor incurred total costs of $160,000 to build the leased asset. Which amount of lease receivable, if any, should the lessor record?
$0; Under an operating lease, the lessor does not recognize a lease receivable because the asset never left the books.
A company purchases a machine on January 1 of Year 1 for $10,000 that was estimated to have a five-year life and $0 salvage value. Straight-line depreciation is used. On January 1 of Year 3, the company estimates that the machine will last until the end of Year 7, with a salvage value of $500. How much depreciation expense is recorded in Year 4?
$1,100=$10,000-$4,000-500/5
Company A (lessee) has reached an operating lease agreement with Company B (lessor) to lease a new boom lift beginning January 1, Year 1. The lease agreement contains no renewal options and contains the following information: The lease is for three years, requiring annual payments at the beginning of the year of $10,213. The boom lift has a cost and fair value at the beginning of the lease of $40,000; an estimated economic life of five years; and a non-guaranteed residual value of $12,500. Present value of the residual value is $10,798. Company B depreciates assets like the boom lift using straight-line depreciation. What is the depreciation expense for Year 2 that the lessor will record?
$8,000=$40,000/5
Which investor concern does the statement of cash flows address?
A company's ability to meet its current obligations
Company A acquires all shares of Company B on January 1 of Year 2. Both companies have conducted operations for the past 10 years. Company A presents two years of its financial position and results of operations when preparing financial statements. What is the appropriate financial statement treatment for this situation?
Company A should report consolidated information for both Year 1 and Year 2 financial statements.
On January 1, 2020, Company A leased an asset from Company B. The asset originally cost Company B $300,000. The lease agreement is an operating lease that calls for four annual payments beginning on January 1, 2020, in the amount of $36,000. The other three remaining payments will be made on January 1 of each subsequent year. What JE should Company B record on December 31, 2020?
Debit unearned lease revenue 36,000; Credit lease revenue 36,000
What is the Lessor JE to record operating lease revenue at year end?
Debit unearned revenue; Credit lease revenue
Operating Activity unusual outflows
Decrease in deferred income tax liability, decrease in accounts payable, decrease in accrued liabilities
A company provides a pension plan to eligible new hires. Pension payments are typically based on the employee's years of service and the compensation level as the employee approaches retirement. It is the responsibility of the employer to pay any shortfall in the accumulated assets held by the trust. Which type of plan is described in the scenario?
Defined benefit plan
Which plan involves an employer adding a certain sum to a pension trust each period, based on a formula?
Defined contribution plan
How should the lessee account for a guaranteed residual value in measuring the lease liability?
Depends; ERV > GRV, exclude GRV b/c lessee to owe nothing at end. ERV < GRV, include difference b/c lessee records loss on final payment.
A company is leasing cars for four years at an agreed price of $500 per month, per car. The company provides the option to lease one additional year for $100 per month, per car. Each car has a useful life of six years. The company classifies the lease as a finance lease based on a specific test. Which test did the company use for this purpose based on the information provided?
Lease term
A start-up company is trying to decide if it should purchase or lease cellular phones for its 2,500 new employees. Which decision should the company make?
Lease, because leasing can pass the risk of residual value to the lessor
On December 31, 2020, Dodd Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement purposes. The change will result in an increase in the Inventory account at January 1, 2020. The amount of the change, net of tax is, $2,300,000 (all tax effects should be ignored). What is the cumulative effect of this accounting change that should be reported by Dodd Inc, in 2020?
Retained earnings statement as a $2,300,000 addition to the beginning balance
What is (are) the proper time period(s) to record the effects of a change in accounting principle?
Retrospectively
What is (are) the proper time period(s) to record the effects of a change in reporting entity?
Retrospectively
Which two scenarios are examples of differential disclosure?
SEC requires companies report specific information in addition to the information provided in their annual reports; FASB excuses nonpublic companies from reporting fair value of financial instruments and segment reporting
Which post-balance-sheet event would require adjustment of the accounts before issuance of the financial statements?
Settlement payments paid on a lawsuit, the outcome of which was deemed uncertain at year end
A company prepares three-year comparative financial statements. In Year 3, the company discovered an error in the financial statements for Year 1. The error affects the financial statements that were issued in Years 1 and 2. How should the company account for the error?
Statements for Years 1 and 2 should be restated; cumulative effect of the error reflected in carrying amounts of assets and liabilities beginning year 3.
A company made an investment that was recorded as an asset. Which financial statement note disclosure specification is required?
The cost and fair value of the investment
Which amount does a defined contribution plan specify?
The required payment amount by the employer
In Year 2, a company receives notice of a $1,200,000 lawsuit relating to a customer's injury on company property in Year 1. The company decides to settle the lawsuit out of court before issuing financial statements for Year 1. Does the company need to adjust the financial statements for Year 1?
Yes, because the lawsuit was settled prior to issuing the financial statements for Year 1
Which two finance lease elements are a part of a lease at year end?
an increase in the lease liability and the financing cost (interest expense)
A lessee leased an asset at the beginning of the year and classified it as a finance lease. Which journal entry should the lessee record at the end of the year?
debit interest expense, amortization expense; credit lease liability, ROU asset
A lessor incurs $10,000 of initial direct costs related to an operating lease. How should the $10,000 cost be treated?
defer the cost and allocate it over the term of the lease in proportion to the recognition of rental revenue
What information should a company disclose when a reporting entity changes?
effect of change on EPS for current year
What do you do with initial direct costs of a sales type lease?
expensed in the period of the sale
A company entered into an agreement to lease a backhoe for ten months. The lease agreement provides the option to renew the lease term for an additional three months and the company is reasonably certain that it will exercise the renewal option. What is a valid option for the company's accounting treatment of this lease?
finance or operating lease
Company A (lessee) enters into a lease agreement with Company B (lessor). The term of the lease is five years with monthly payments of $1,500. Prior to the beginning of the lease, Company A paid $9,000 in advance. Which adjustment should be made by Company A to the value of the right-of-use asset?
increased by $9,000
How does a decrease in prepaid expenses affect the statement of cash flows?
increases cash flows from operating activities
A construction company leases dump trucks rather than purchasing them outright. The accountant for the company evaluates the leases, determines that they are finance leases, and then records the transaction on the income statement in the appropriate account. Which account should the accountant use for this purpose?
interest expense and amortization of the right to use asset separately on the income statement for finance leases
A construction company leases dump trucks rather than purchasing them outright. The accountant for the company evaluates the leases and determines that they are operating leases, and then records the transaction on the income statement in the appropriate account. Which account should the accountant use for this purpose?
lease expense for operating lease
On January 1, Year 1, a company signed an agreement to lease a delivery truck for 36 months. The fair market value of the truck was $80,000 as of January 1, Year 1. The corporation estimates that the truck's fair market value will be $20,000 on December 31, Year 3. The corporation is reasonably certain it will exercise the lease option to purchase the delivery truck for $1,000 at the end of the lease. How will the company report lease payments on its income statement?
partially amortization and partially interest
What is the amount reported by the lessee for an operating lease in the balance sheet for an ROU asset?
present value of the lease payments
Company A has agreed to lease a full body scanner from Company B. The lease has the following information: The lease is for three years, requiring annual payments at the beginning of the year of $6,352. At the end of the lease, Company B may purchase the scanner for $5,000 but doubts that it will. The scanner has a fair value at the beginning of the lease of $25,000; an estimated economic life of five years; and a guaranteed residual value of $7,800. Present value of the scanner is $14,700. Which test does the lease pass in order to be classified as a finance lease?
present value; $14,700+ 7,800 is 90% of the fair value
What best describes the primary purpose of the information provided by the statement of cash flows?
provide info about cash receipts payments of an entity during a period
A company recorded a purchase of merchandise for $9,000 in 2020 that applied to 2021. The physical inventory for 2020 was correctly stated. The company uses the periodic inventory method. Which action, if any, should the company take in 2021 to address the error?
record a credit to RE
On December 31, Year 1, a company records revenue for $150,000 that applied to Year 2. The books have not been closed in Year 2. Which action, if any, should the company take to address the error?
record a debit to RE
A lessor with a sales-type lease involving an unguaranteed residual value at the end of the lease term will report sales revenue in the period of inception of the lease at what amount?
the sales price less the present value of the residual value
A lessor leases a piece of equipment to a lessee, under lease terms that qualify as an operating lease. The present value of required rental payments is $280,000; and the present value of the estimated residual value, which is unguaranteed, is $30,000. The lessor incurred total costs of $160,000 to build the leased asset. Which amount of lease liability, if any, should the lessee record?
$250,000=$280,000 - $30,000
Company A (lessee) has reached a lease agreement with Company B (lessor) to lease a new boom lift beginning January 1, Year 1. This is an operating lease with no renewal option and contains the following information: The lease is for three years, requiring annual payments at the beginning of the year of $10,213. The boom lift has a cost and fair value at the beginning of the lease of $40,000; an estimated economic life of five years; and a nonguaranteed residual value of $12,500. Present value of the residual value is $10,798. Company B depreciates assets like the boom lift using straight-line depreciation. How much should Company A record as the right of use asset on January 1, Year 1?
$29,202=$40,000 - $10,798
Company A agrees to lease a robotic welding unit from Company B on January 1, Year 1. The following conditions apply to the lease: The term of the lease is five years, is noncancellable, and requires payments of $101,350 at the beginning of each year. The robotic welding unit will have a fair value of $50,000 at the end of the lease; an estimated useful life of five years; and $45,000 guaranteed residual value. There are no renewal options, so the unit will revert to Company B at the termination of the lease. Company A can borrow at a 5% interest rate. Company A uses straight-line depreciation on its assets. Company B set its annual rate of return at 4%, and Company A is aware of this rate. Present values are as follows: Present value of lease payments at 4%: $469,240. Present value of lease payments at 5%: $460,737. Present value of residual at 4%: $38,457. Present value of residual at 5%: $37,021. Which amount should be used to record the lease on January 1, Year 1?
$469,240; Company A ignores the GRV since ERV ($50,000) > GRV ($45,000)
Company A leases a piece of machinery to Company B on January 1, Year 1. Information pertaining to the lease is as follows: The lease is noncancellable with a term of three years. The machinery has a cost and fair value at the start of the lease of $60,000; an estimated economic life of five years; and a residual value at the end of the lease of $12,000 (unguaranteed). The lease contains no renewal options, and the machinery reverts to Company A at the end of the lease. The present value of the residual value has been calculated as $10,075.44. The annual lease payments has been calculated as $17,620.08. How much should Company B record as the right of use asset on January 1, Year 1?
$49,924.56=$60,000 - $10,075.44
A company purchases a machine on January 1 of Year 1 for $10,000 that was estimated to have a five-year life and no salvage value. Straight-line depreciation is used. On January 1 of Year 3, the company estimates that the machine will last until the end of Year 7, with a salvage value of $500. What is the balance in the accumulated depreciation account at December 31, Year 4?
$6,200=$2,000+$2,000+$1,100+$1,100
A company reports the following transactions at the end of the year: • Stock dividends: $20,000 • Cash dividends: $10,000 • Purchase of treasury stock: $15,000 • Issuance of common stock: $100,000 • Major equipment repairs: $25,000 The company uses the indirect method to prepare a statement of cash flows for the year. How much should the company report as net cash provided by financing activities?
$75,000=$10,000+$15,000+$100,000
During 2021, Stout Inc. had the following activities related to its financial operations: Payment in 2021 of cash dividend declared in 2020 to preferred shareholders: $279,000 Payment for the early retirement of long-term bonds payable (carrying amount $3,930,000): $3,975,000 Proceeds from the sale of treasury stock (on books at cost of $387,000): $450,000 Which amount of net cash used in financing activities should appear in Stout's statement of cash flows?
($3,804,000)=$450,000-$3,975,000-$279,000
Which calculation determines the actual return plan assets?
(ending balance - beginning balance) - (contributions - benefits paid)
Label the following as direct or indirect: 1. An employee profit-sharing plan based on net income when a company uses the percentage-of-completion method 2. The inventory balance as a result of a change in the inventory valuation method 3. An impairment adjustment resulting from applying the lower-of-cost-or-market-test to the adjusted inventory balance 4. Deferred income tax effects of an impairment adjustment resulting from applying the lower-of-cost-or-market test to the adjusted inventory balance
1. indirect; all others direct
Xanthe Corporation had the following transactions occur in the current year: 1. Cash sale of merchandise inventory 2. Sale of delivery truck at book value 3. Sale of Xanthe common stock for cash 4. Issuance of a note payable to a bank for cash 5. Sale of a security held as an available-for-sale investment 6. Collection of loan receivable. How many of the above items will appear as a cash inflow from investing activities on a statement of cash flows for the current year?
3; 2, 5, 6
A company is trying to determine how many years that the aggregate amount of maturities for all long-term borrowing must be reported. How many years should be disclosed?
5
Which account is subject to common disclosures in the notes to the financial statements?
All of the above
Operating Activity unusual inflows
Amortization of intangibles and deferred charges, increase in deferred income tax liability, increase in accounts payable, increase in accrued liabilities
Which type of change occurs when presenting consolidated financial statements this year when statements of individual companies were presented last year?
An accounting change that should be reported by restating the financial statements of all prior periods presented
A company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent?
Changing from FIFO to LIFO requires subjective assumptions about LIFO layers and is accounted for prospectively. no recasting of prior statements
Which single lease expense is recognized on the income statement?
An operating lease
In accounting for a defined-benefit pension plan what must be established?
Appropriate funding pattern to ensure enough monies are available at retirement to meet benefits promised
A company determines that its pension benefit obligation for the period is overfunded. How should the company report this overfunding on the financial statements?
As a noncurrent asset
How is the failure to record depreciation expense in a given year accounted for?
As a prior period adjustment
What is the Lessee JE to record initial operating or finance lease?
Debit right of use; Credit lease liability; ROU include initial direct costs, add prepayments, and deduct incentives.
To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. How is this accomplished?
By eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash
A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance. In a statement of cash flows, which amount is included in investing activities for the transaction?
Cash payment
Which type of accounting change should always be accounted for in current and future periods?
Change in accounting estimate
What should companies do to fund a defined benefit plan?
Contribute toward future obligations
Which type of error(s) affects both the income statement and balance sheet?
Counterbalancing and Noncounterbalancing
A company using periodic inventory methods discovered it had understated inventory by $8,000,000 after the books had been closed for Year 1. The company's tax rate is 18%. Which partial entry should be included to correct this error in the financial statements for Year 2?
Credit RE $6,560,000=$8,000,000 - ($8,000,000 x 0.18). Understated inventory; overstated COGS; Understated income
A hospital accidentally invoiced a patient twice for the same treatment, which cost $400. The patient received two invoices and paid them both. The hospital recorded $800 of revenue and $800 of payments. What is the impact of this error on the balance sheet?
Current liabilities are understated
For an asset lease with a four-year term, where should a Lease Liability be classified on the balance sheet?
Current portions in current liabilities and the remainder in noncurrent liabilities
On January 1, Year 1, a company places a machine in service at a cost of $175,000 with an estimated useful life of 7 years. The accountant incorrectly expenses this machine in Year 1 but discovers the error at the end of Year 2 before the books are closed. The company uses straight-line depreciation on this asset. Which entry should be recorded on December 31, Year 2, to correct for this material error?
Debit Equipment $175,000; Debit Depreciation Expense $25,000; Credit RE $150,000; Credit Accumulated Depreciation $50,000
A company discovers an error from the prior year, where a bad debt was materially understated. Which partial journal entry should be made in the current year to correct the error?
Debit RE
A company purchases $1,000 of inventory that is subsequently sold. The company incorrectly records the purchase for $10,000. Which entry should be used to correct this material error on the balance sheet?
Debit RE $9,000; Credit Inventory $9,000
In 2021, a company changed writing-off receivables from the direct write-off method to the allowance for doubtful accounts because of negligent application of an accounting principle. The company estimates that an additional $1,400 of receivables will be uncollectible in 2021. Which action, if any, should the company take in 2021 to correct the error?
Debit RE; Credit allowance for doubtful accounts
Assume that Company A paid $29,500 to a real estate broker as a fee for finding the lessee on January 1, 2020. The lease is for 10 years. How should Company A record an expense on December 31, 2020?
Debit amortization expense 2,950; Credit finders fee 2,950
What is the Lessee JE to record a finance lease amortization expense at year end?
Debit amortization expense; Credit ROU asset
What is the Lessor JE to record sales type lease payment receipt?
Debit cash; Credit lease receivable
What is the Lessor JE to record initial operating lease?
Debit cash; Credit unearned revenue
What is the Lessor JE to record an operating lease depreciation expense at year end?
Debit depreciation expense; Credit accumulated depretiation
What is the Lessee JE to record finance lease accrued interest at year end?
Debit interest expense; Credit lease liability
In 2020, a company changed from FIFO to average cost for recording its inventory. The following information shows the differences in income for the company since it began business in 2015. Net Income Year FIFO Average Cost 2015 35,000 33,000 2016 63,000 67,000 2017 74,000 75,000 2018 79,000 78,000 2019 93,000 94,000 2020 87,500 89,000 What journal entry should the company report at the beginning of 2020 if no comparative financial statements are presented?
Debit inventory 3,000; Credit RE 3,000: Difference=2015 (2,000), 2016 4,000, 2017 1,000, 2018 (1,000), 2019 1,000, Total beginning 2020 3,000
What is the Lessee JE to record an operating lease expense at year end?
Debit lease expense; Credit lease liability, ROU asset
What is the Lessee JE to record a lease payment for an operating or finance lease?
Debit lease liability; Credit cash
What is the Lessor JE to record initial sales type lease?
Debit lease receivable, COGS; Credit inventory, sales revenue
What is the Lessor JE to record sales type lease accrued interest revenue at year end?
Debit lease receivable; Credit interest revenue
Which category is considered in a defined contribution plan?
Employer payments
How should the lessee account for an unguaranteed residual value in measuring the lease liability?
Exclude
How should the lessor account for an unguaranteed residual value for purposes of lease classification?
Exclude
A company reports a total inventory of $75,000 on its balance sheet using the lower-of-cost-or-market (LCM) basis and determines cost using the first-in, first-out (FIFO) method. The balance sheet reports $8,000 in raw materials; $37,000 in work-in-process inventory; and $30,000 in finished goods. The company keeps $15,000 of finished goods inventory on hand as pledged collateral for a loan. Which financial disclosure note is required?
FIFO inventory method is used to report inventory. Inventory pledged as collateral is $15,000. Inventory provisions are recorded to reduce inventory to the LCM based on assumptions about future demand and marketability
What is an example of a counterbalancing error?
Failure to record prepaid expenses
A lessor has two sales-type leases. Both leases are for assets with the same fair value, residual value, and useful life. Asset A has a guaranteed residual value, and Asset B has an unguaranteed residual value. Does residual value affect lease receivable?
GRV or unGRV in a sales-type does not affect the lease receivable
On March 3, 2022, Phillips Inc.'s began preparing financial statements and the accompanying notes for the year ended December 31, 2021. On February 25, 2022, Allen Corporation, Phillips Inc.'s largest customer, informed Phillips that it was filing bankruptcy and would be unable to pay its balance due to Phillips. Phillips found that Allen Corporation owed $250,000 in accounts receivable as of December 31, 2021. Phillips Inc.'s CFO, Kellyn, has asked her four interns to determine how the information provided by Allen Corporation should be treated. Sarah indicates that the information did not require an adjustment but, instead, should be discussed only in the MD&A (Management's Discussion and Analysis) section of the annual report. Josh suggests that the issue should be disclosed only in the Notes to the Financial Statements. George recommends that the information should be used to record an adjustment on the December 31, 2021 financial statements. Maggie advises that the information should be used to record an adjustment directly to the Retained Earnings account on February 25, 2022. Which intern is correct?
George
How should the lessor account for an unguaranteed residual value in measuring the lease receivable?
Include
Company A leases cars from Company B for their salespeople. The leases are for three years. Company A paid a commission to a third party for helping to negotiate the leases from Company B. How should Company A account for this commission?
Include the commission in the amount for the right-of-use asset but not in the lease liability
A company has decided to use the indirect cash flow method to reconcile the differences between accrual accounting net income and cash from operating activities. The company is making a deduction from net income when calculating cash flow from operating activities. Which deduction is possible under this method?
Increase in prepaid expense
How does a direct effect of a change to a financial statement compare to an indirect effect?
Indirect effects do not change prior period amounts; direct effects change prior period amounts
A company wants to prepare its statement of cash flows. What type of transaction should be included in the financing activities section?
Issuance of common stock
Company A (lessee) has reached a lease agreement with Company B (lessor) to lease an office building beginning January 1, 2020. The relevant information related to the lease is as follows: The lease arrangement is for ten years. The lease building, costing $4,725,000, was purchased for cash on January 1, 2020. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value. Lease payments are $276,200 per year and are made at the end of the year. Property tax expense of $82,500 and insurance expense of $9,600 on the building were incurred by Company A in the first year. Payment on these two items were made at the end of the year. Both the lessor and the lessee are on a calendar-year basis. Prepare the journal entries for the lessee and lessor on December 31, 2020.
Lessee: Debit lease expense 276,200; Credit cash ,,276,200 Lessor: Debit cash 276,200; Credit lease revenue 276,200 Debit depreciation expense 94,500; Credit accumulated depreciation 94,500 Debit property tax expense 82,500, insurance expense 9,600; Credit cash 92,100
A company is determining whether a disclosure to the financial statements must be included in a note. Which of the following disclosures would be required?
Liens held against equipment
Which of the following post-balance-sheet events would require adjustment of the accounts before issuance of the financial statements?
Loss on a lawsuit, the outcome of which was deemed uncertain at year end
In a defined benefit plan, what is meant by the process of funding?
Making periodic contributions to funding agency to ensure funds are available to meet retiree claims
A company changed from straight-line to double-declining-balance depreciation. What is the journal entry to record this change?
No JE needed
After a successful year, a company's board of directors votes to expand operations. The company sells 40,000 shares of $1 par value common stock for $60 per share to fund the $2.4 million dollar project in January of Year 2, weeks before issuing the financial statements for Year 1. Which type of transaction has occurred in this company?
Non-recognized subsequent event
After a successful year, a company's board of directors votes to expand operations. The company sells 40,000 shares of $1 par value common stock for $60 per share to fund the $2.4 million dollar project in January of Year 2, weeks before issuing the financial statements for Year 1. Which type of transaction has occurred in this company?
Nonrecognized subsequent event
What is included in the present value for the lease receivable amount?
Rental payments plus the present value of guaranteed and unguaranteed residual values
A company is considering circumstances that will require related-party note disclosures and has identified four items for consideration. Which circumstance will require this type of note disclosure in the financial statements?
Note receivable from the fourth-largest customer
What amount is recorded for an initial sales type lease?
PV of lease payments + PV of GRV and unguaranteed residual value
On January 1, Year 1, a corporation signed an agreement to lease a delivery truck for 36 months. The fair market value of the truck was $80,000 as of January 1, Year 1. The corporation estimates that the truck's fair market value will be $20,000 on December 31, Year 3. The corporation is reasonably certain it will exercise the lease option to purchase the delivery truck for $1,000 at the end of the lease. How will the corporation report lease payments in its income statement?
Partially as amortization expense and partially as interest expense
Which calculation is used to measure the funding needed for projected benefit obligations of a defined benefit plan?
Present value
What is a major reason why a company may become involved in leasing to other companies?
Profitable interest margins, stimulate sales, provide tax benefits, and provide high residual value of leased asset
A lessee had a ten-year finance lease requiring equal annual payments. What should the reduction of the lease liability in year 2 be equal to?
The current liability shown for the lease at the end of year 1
Which statement accurately describes an employer's accounting when making a required contribution to a defined contribution pension plan?
The employer pays an amount each year to the plan based on a formula calculated by the plan.
What will be the gross profit for a sales type lease if the residual value is guaranteed or unguaranteed?
The same
According to GAAP, why is the disclosure of accounting policies adopted by a reporting entity important to financial statement readers?
To determine whether accounting policies are consistently applied from year to year
Which benefits are employers obligated to make payments on, regardless of future service?
Vested benefits
