Intermediate 2 Exam 2 pt 2
Lee, Inc. acquired 30% of Polk Corp.'s voting stock on January 1, year 1, for $100,000. During year 1, Polk earned $40,000 and paid dividends of $25,000. Lee's 30% interest in Polk gives Lee the ability to exercise significant influence over Polk's operating and financial policies. During year 2, Polk earned $50,000 and paid dividends of $15,000 on April 1 and $15,000 on October 1. On July 1, year 2, Lee sold half of its stock in Polk for $66,000 cash. The carrying amount of this investment in Lee's December 31, year 1 Balance Sheet should be
$104,500.
Elliot Events entered into a lease with Premier Party Rentals on January 1, 2025. Premier will lease large party tents to Elliot Events for 3 years at a rental rate of $2,000 per month. In addition, Elliot can continue the lease for another two years for $200 per month. What is the term of this lease that would be used in the lease term test?
5 years
Beal, Inc. intends to lease a machine from Paul Corp. Beal's incremental borrowing rate is 14%. The prime rate of interest is 8%. Paul's implicit rate in the lease is 10%, which is known to Beal. Beal computes the present value of the minimum lease payments using
10%
Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?
Fair Value Method- No effect Equity Method-decrease
When applying the present value test, lease payments determined by the lessee include: I. fixed payments. II. variable payments based on an index. III. a bargain purchase option. IV. a guaranteed residual value.
I, II, III, and IV.
Dublin Company holds a 30% stake in Club Company which was purchased in 2025 for $3,000,000. After applying the equity method, the Investment in Club Company account has a balance of $3,040,000. At December 31, 2025, the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2025? I. $3,000,000 II. $3,040,000 III. $3,120,000
II or III only.
Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases?
Lease A Finance lease Lease B Finance lease
The total charges to operations over the lease term are
the same for a finance lease as an operating lease.
Advantages to lessors in leasing assets include all of the following except
protection against obsolescence.
A lessee had a ten-year finance lease requiring equal annual payments. The reduction of the lease liability in year 2 should equal
the current liability reported for the lease at the end of year 1.
Steam Co. acquired equipment under a finance lease for 6 years. Minimum lease payments were $60,000 payable annually at the year's end. The interest rate was 5% with an annuity factor for 6 years of 5.0757. The present value of the payments was equal to the fair value of the equipment. What amount should Steam report as interest expense at the end of the first year of the lease?
$15,227
On January 1, Year 2, Justo purchases 30,000 shares of the 100,000 outstanding shares of stock in Bonita Corp. for $5 per share. During the year, Bonita Corporation has $20,000 of net income and pays $4,000 in dividends. On December 31, Year 2, the value of a share of Bonita Corporation stock is $6 per share. Assuming Justo uses the equity method of accounting for Bonita stock, what is the amount shown for Investment in Bonita on the December 31, Year 2, balance sheet?
$154,800
On 1/31/Y1, Bailey Company leased a new machine from Sussex Corp. The following data relate to the lease transaction at its inception: Lease term 10 years Annual rental payable at beginning of each lease year $50,000 Useful life of machine 15 years Implicit interest rate 10% Present value of an annuity of 1 in advance for 10 periods at 10% 6.76 Present value of annuity of 1 in arrears for 10 periods at 10% 6.15 Fair value of the machine $400,000 Depreciation method Straight line The lease has no renewal option, the possession of the machine reverts to Sussex when the lease terminates, and the machine does have alternative uses. The first lease payment of $50,000 is paid at the inception of the lease. What amount does Sussex Corp. report for depreciation expense in year 1?
$26,667
On 1/31/Y1, Clay Company leased a new machine from Saxe Corp. The following data relate to the lease transaction at its inception: Lease term 10 years Annual rental payable at beginning of each lease year $50,000 Useful life of machine 15 years Implicit interest rate 10% Present value of an annuity of 1 in advance for 10 periods at 10% 6.76 Present value of annuity of 1 in arrears for 10 periods at 10% 6.15 Fair value of the machine $400,000 The lease has no renewal option, and the possession of the machine reverts to Saxe when the lease terminates. At the inception of the lease, Clay should record a lease liability of
$338,000
On January 2, Year 1, Adam Co. purchased 10,000 shares of Mill Corp.'s common stock for $40 a share. On December 31, Year 1, the market price of Mill's stock was $35 a share. On December 28, Year 2, Adam sold 8,000 shares of Mill stock for $30 a share. For the year ended December 31, Year 2, Adam should report a loss on sale of investment of
$40,000.
Sage, Inc. bought 40% of Adams Corp.'s outstanding common stock on January 2, Year 1 for $400,000. The investment gave Sage significant influence over Adams. The carrying amount of Adams' net assets at the purchase date totaled $900,000. Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by $90,000 and $10,000, respectively. The plant has an 18-year life. All inventory was sold during Year 1. During Year 1, Adams reported net income of $120,000 and paid a $20,000 cash dividend. What amount should Sage report in its Income Statement from its investment in Adams for the year ended December 31, Year 1?
$42,000
On 1/01/Y5, Zeus Company leased a new machine from Thor Corp. The following data relate to the lease transaction at its inception: Lease term 5 years Annual rental payable at beginning of each lease year $30,000 Useful life of machine 10 years Implicit interest rate 8% Present value of an annuity of 1 in advance for 5 periods at 8% 4.3121 Present value of annuity of 1 in arrears for 5 periods at 8% 3.9927 Fair value of the machine $200,000 The lease has no renewal option, the possession of the machine reverts to Thor when the lease terminates, and the machine does have alternative uses. The first lease payment of $30,000 is paid at the inception of the lease. What is the amount of the first year's lease expense attributable to the interest component?
$7,949
Shettleton Corp purchased 1,000 shares of Upstate Co. (Upstate) on April 1, Year 1, for $60 per share. On November 1, Year 1, Upstate declared a two-for-one stock split. Upstate's shares have a readily determinable fair value of $32 and $35 per share on December 31, Year 1 and Year 2, respectively. During Year 2, Upstate paid a dividend of $1.00 per share. What amount of income would Shettleton report on its year 2 income statement related to the investment in Upstate?
$8,000
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 January 1, year 1 and ends on December 31, year 2. The lease agreement requires Frost to pay Ananz two annual lease payments of $8,000. The present value of the minimum lease payments is $13,000. Which of the following circumstances would require Frost to classify and account for the arrangement as a finance lease?
The fair value of the computers on January 1, year 1, is $14,000.
On March 14, Apple Corporation purchased 6,000 shares of Pear Inc. for $25 per share plus a $340 brokerage fee. On June 30, when the shares were trading at $27, Apple prepared an adjustment to fair value and recorded the annual dividend of $0.40 per share. On August 14, Apple sold 4,000 shares of Pear for $29 per share less a brokerage fee of $225. The journal entry at the date of sale would include
a debit to cash for $115,775.
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2025 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2025, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. What type of lease is this from Alt Corporation's viewpoint?
finance lease
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2025 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2025, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. Click here to view factor tables. From the viewpoint of Yates, what type of lease agreement exists?
sales-type lease
