Test 4
Mega Corporation sponsors a defined-benefit plan for its employees. Compute the pension cost for the year, given the following information:Service cost = $30,000,Interest on beginning PBO = $16,000,Expected return on plan assets = $45,000,Amortization of prior service costs = $5,000,Amortization of net actuarial gain = $12,000.
-6,000 Service cost $30,000+ Interest on beginning PBO $16,000- Expected return on plan assets ($45,000)+ Amortization of prior service costs $5,000+ Amortization of net actuarial gain ($12,000)= Pension cost(benefit) for the year ($6,000)
Mega Corporation sponsors a defined-benefit plan for its employees. The beginning balance of the unamortized net actuarial gain is $250,000. The plan's custodian reports that the beginning balance of the PBO is $1,450,000 and the beginning balance of the market-related value of the plan assets is $1,100,000. The average remaining service life of Mega's pension plan eligible employees is 10 years. Compute the current year's amortization required by the corridor method.
10,500 The corridor is 10% of the larger of the PBO or beginning plan assets. Since the PBO is larger, the corridor is 10% × $1,450,000 = $145,000. The cumulative unamortized net gain is $250,000 and this exceeds the corridor by $105,000. This amount is amortized over the average remaining service life of 10 years, resulting in current year amortization of $10,500.
Kataran Company enters into a 4-year lease transaction, with payments due at the beginning of each year.The lease payments are $68,000 per year.The fair value of the leased asset is $280,000.The lessor's deferred initial direct costs are equal to $14,000.The lessor's estimate of the unguaranteed residual asset is $125,000. Based on the information above, what is the implicit rate? (Calculate answer to two decimals: x.xx%)
15.1 or 15.2 Kataran should apply time value of money concepts to identify the terms needed to solve for the implicit rate. The present value, PV, is the present value of the lease payments plus the expected residual value which equals the fair value of the leased asset plus the deferred initial direct costs:Present Value of Lease Payments + Present Value of Estimated Residual Value = $280,000 Fair Value of Leased Asset + $14,000 Initial Direct Costs = $294,000. The number of periods, N, is 4 years. The payments each period, PMT, are $68,000. The future value, FV, is the residual value of $125,000. Using the RATE function in Excel (=RATE(4,68000,-294000,125000,1)), the implicit rate in the lease is 15.14%.
A company's defined-benefit pension plan had a projected benefit obligation (PBO) of $380,000 on January 1, Year 1. During Year 1, pension benefits paid were $70,000. The settlement rate for the plan for Year 1 was 12%. Service cost for the year was $109,000. Plan assets (fair value) increased during the year by $50,000. What was the PBO at December 31, Year 1?
464,600 Explanation: PBO, January 1 $380,000+ Service Cost 109,000+ Interest Cost 45,600 ($380,000 × 12 %)- Benefits Paid (70,000)= PBO, December 31 $464,600
Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $77,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,900 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,900, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,200. Assuming that this is classified as an operating lease, what is the amount of the lease liability on January 1, 2019 before the lease payment? A. $47,821 B. $64,200 C. $44,692 D. $45,892
A. $47,821 The lease liability is calculated as the present value of the future payments. Using Excel, the present value of the future lease payments, based on a rate of 7%, 5 periods, and payments at the beginning of each period of $10,900, is $47,821. The Excel formula: =PV(0.07,5,-10900,0,1) = $47,821.
What is the proper treatment of prior service costs? A. Prior service costs are included in other comprehensive income and amortized over future periods. B. Prior service costs are included in net income and amortized over future periods. C. Prior service costs are included in net income and expensed in the current year. D. Prior service costs are included in other comprehensive income and amortized retroactively over the most recent three periods.
A. Prior service costs are included in other comprehensive income and amortized over future periods.
The lessor would most likely prefer a ________ or ________ lease to an operating lease. Nonoperating lease treatment would permit a financial service company lessor to remove heavy machinery and equipment, jet airlines, oceangoing vessels, and such from its balance sheet and replace it with the ________, a financial asset compatible with the nature of its business. In addition, the nonoperating lease results in the recognition of ________, rather than ________ revenue. A. direct financing; sales-type; net investment in the lease; interest income; rent B. direct financing; operating; net investment in the lease; financing income; unearned C. standalone; operating; fair value of the leased asset; interest income; rent D. standalone price; sales-type; fair value of the leased asset; financing income; unearned
A. direct financing; sales-type; net investment in the lease; interest income; rent
Amortizing a net actuarial gain for pensions will ________. A. increase retained earnings and decrease accumulated other comprehensive income B. increase retained earnings and increase accumulated other comprehensive income C. decrease retained earnings and decrease accumulated other comprehensive income D. decrease retained earnings and increase accumulated other comprehensive income
A. increase retained earnings and decrease accumulated other comprehensive income
Which of the following assets is always considered a separate lease component in a lease, unless the impact on the financial statements of not separating it from the other asset(s) is insignificant? A. land B. services associated with the lease C. fully depreciated assets D. All of the above
A. land
Each period of a finance lease, the lessee records a lease expense that includes which of the following? A. Interest expense on the lease liability, using the effective interest rate method and the discount rate it used to compute the present value of the liability at the lease commencement date; variable lease payments not included in the lease liability in the period in which the obligation for the variable payments is incurred. B. Interest expense on the lease liability, using the effective interest rate method and the discount rate it used to compute the present value of the liability at the lease commencement date; variable lease payments not included in the lease liability in the period in which the obligation for the variable payments is incurred; and changes in variable lease payments that depend on an index or rate. C. Neither A nor B is correct. D. Both A and B are correct.
B. Interest expense on the lease liability, using the effective interest rate method and the discount rate it used to compute the present value of the liability at the lease commencement date; variable lease payments not included in the lease liability in the period in which the obligation for the variable payments is incurred; and changes in variable lease payments that depend on an index or rate.
Which of the following is a characteristic of a defined-benefit pension plan? A. Retirement benefits are contingent on how much an employee has accumulated in a retirement account. B. Retirement benefits are based on the plan benefit formula. C. It raises few accounting issues for employers. D. It is simple to construct.
B. Retirement benefits are based on the plan benefit formula.
Prior to 2019, lessees did not include the right-of-use asset and the lease liability for operating leases on their balance sheets. Both FASB and IASB wrote new standards to require that lessees nearly always report an asset and liability on their balance sheets when they engage in a lease transaction. This accounting results in which of the following? A. a more reliable estimation of the lease's value B. a more faithful representation of the rights and obligations arising from leases C. a better determination on whether the lessor held the risks and rewards of the leased asset's ownership D. All of the above
B. a more faithful representation of the rights and obligations arising from leases
Lessees often incur costs related to the ownership of the leased asset. These costs, referred to as, ________ include items such as property tax, insurance, and maintenance. A. expenses B. executory costs C. overhead costs D. All of the above
B. executory costs
Net investment in the lease for a direct financing lease (NIL-DF) is comprised of ________. A. the lease receivable, the future value of any unguaranteed residual asset, and an addition for any deferred profit B. the lease receivable, the present value of any unguaranteed residual asset, and a reduction for any deferred profit C. the lease receivable, the future value of any unguaranteed residual asset and a reduction for any deferred profit D. the lease receivable, the present value of any unguaranteed residual asset, and an addition for any deferred profit
B. the lease receivable, the present value of any unguaranteed residual asset, and a reduction for any deferred profit
Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $80,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,800 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,800, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 4% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,100. Assuming that this is classified as an operating lease, how much amortization is recorded on the right-of-use asset in 2019? A. $13,180 B. $0 C. $11,612 D. $1,568
C. $11,612 Amortization is the difference between the lease expense for the year and interest for the year. To calculate the annual lease expense, the first step is to calculate the total payments over the life of the lease, which include prepaid and annual payments and initial direct costs. Total payments are $10,800 + (5 × $10,800) + $1,100 = $65,900. Annual lease expense is calculated by allocating this amount equally over the 5-year lease life, $65,900 / 5 = $13,180. Interest for 2019 is calculated based on the lease liability reduced by the first payment of 5 times the interest rate. The lease liability is calculated as the present value of the future payments. Using Excel, the present value of the future lease payments, based on a rate of 4%, 5 periods, and payments at the beginning of each period of $10,800, is $50,003. ($50,003 - $10,800) × 4% = $1,568. Therefore, amortization is $13,180 - $1,568 = $11,612.
Elton Electronics leases testing equipment to Startup Corporation. The equipment is not specialized and is delivered on January 1, 2019. The fair value of the equipment is $78,000. The cost of the equipment to Elton is $73,000 and the expected life of the testing equipment is 8 years. Elton incurs initial direct costs of $10,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2019 and ending on December 31, 2025. Elton's implicit rate is 12% and they expect that collection of the $10,500 lease payments is probable. What is the principal balance in the Net Investment in Lease — Sale Type account after the first payment? A. $58,419 B. $73,000 C. $47,919 D. $43,169
C. $47,919 The present value of the lease payments, calculated using Excel, are $58,419, using the following inputs: rate=12%, periods=8, payment=10,500. The first payment of $10,500 reduces the principal balance with nothing allocated to interest, as it is made on the date that the lease commences. $58,419 - $10,500 = $47,919.
Which of the following is a characteristic of the projected benefit obligation measurement? A. It considers only vested employees. B. It considers only current employees. C. It uses projected future salary levels. D. It is the smallest estimate of the pension obligation.
C. It uses projected future salary levels.
Apple Plumbing reports actual returns on plan assets of $140,000, while the expected return was $121,000. In addition, an employee wellness program has resulted in changes in actuarial assumptions that result in an increase in the PBO of $24,000. What is the journal entry to record the gain on plan assets? A. dr. OCI - Pension Plan Gains/Losses 19,000, cr. Pension Plan Assets 19,000 B. dr. Pension Plan Assets 19,000, cr. OCI - Pension Plan Gains/Losses 19,000 C. dr. Pension Plan Assets 19,000, cr. OCI - Actuarial Gains/Losses 19,000 D. dr. Pension Plan Assets 19,000, cr. Retained Earnings 19,000
C. dr. Pension Plan Assets 19,000, cr. OCI - Actuarial Gains/Losses 19,000 $140,000 - $121,000 = $19,000
Which of the following is not a factor in calculating employee benefits for a pension? A. percentage B. current salary level C. return on plan assets D. credits for years of service
C. return on plan assets
If the lessor meets any one of the five Group I criteria, then the lessor classifies the lease as a(n) ________. If the lessor meets both of the Group II criteria, but none of the Group I criteria, then the lessor classifies the lease as a(n) ________. If the transaction does not meet either the Group I or Group II criteria, then the lessor classifies the lease as a(n) ________. A. operating lease; direct financing lease; sales-type lease B. direct financing lease; operating lease; sales-type lease C. sales-type lease; direct financing lease; operating lease D. standalone price lease; sales-type lease; direct financing lease
C. sales-type lease; direct financing lease; operating lease
The net investment in the lease for a sales-type lease reflects the assets related to the lease transaction and is comprised of the following: ________. A. the lease receivable and the future value of any guaranteed residual asset B. the lease receivable and the present value of any guaranteed residual asset C. the lease receivable and the present value of any unguaranteed residual asset D. the lease receivable and the future value of any unguaranteed residual asset
C. the lease receivable and the present value of any unguaranteed residual asset
Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $4,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 9%. Initial direct costs of $1,000 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $29,035. Collection of all lease payments is reasonably assured. What is the value of the right-of-use asset to Nace at the lease's commencement? A. $26,981 B. $30,035 C. $26,671 D. $28,981
D. $28,981 Initial measurement of the lease liability $27,981 + Initial direct costs incurred by the lessee $1,000 = Initial measurement of the right-of-use asset $28,981 (The lease liability is calculated as the present value of the future payments. Using Excel, the present value of the future lease payments, based on a rate of 9%, 10 periods, and payments at the beginning of each period of $4,000, is $27,981. Using Excel, the formula is =PV(0.09,10,-4000,0,1) = $27,981.)
Merciful Industries has a beginning PBO balance of $500,000 and a settlement rate of 6%. As a result of an amendment to the current union contract, there are prior service costs of $49,000. What is the journal entry to record the change to the current union contract? A. dr. Pension Expense 2,940, cr. Projected Benefit Obligation 2,940 B. dr. Pension Expense 30,000, cr. Other Comprehensive Income 30,000 C. dr. Pension Expense 46,060, cr. Other Comprehensive Income 46,060 D. dr. Other Comprehensive Income-Prior Service Costs 49,000, cr. Projected Benefit Obligation 49,000
D. dr. Other Comprehensive Income-Prior Service Costs 49,000, cr. Projected Benefit Obligation 49,000
Merciful Industries has a beginning PBO balance of $500,000 and a settlement rate of 7%. As a result of an amendment to the current union contract, there are prior service costs of $46,500. What is the journal entry to record amortization of the prior service costs for the second year, assuming that the company uses a 5-year amortization period? A. dr. Pension Expense 3,255, cr. Projected Benefit Obligation 3,255 B. dr. Pension Expense 35,000, cr. Other Comprehensive Income 35,000 C. dr. Other Comprehensive Income-Prior Service Costs 9,300, cr. Projected Benefit Obligation 9,300 D. dr. Pension Expense 9,300, cr. Other Comprehensive Income-Prior Service Costs 9,300
D. dr. Pension Expense 9,300, cr. Other Comprehensive Income-Prior Service Costs 9,300 Prior service costs are amortized over 5 years, so $46,500/5 = $9,300 per year