Intermediate Accounting 2, Final

Bishop Co. began operations on January 1, 2012. Financial statements for 2012 and 2013 contained following error: December 31 2012- Ending Inventory $132,000 too high Depreciation Expense $84,000 too high Insurance Expense $60,000 too low Prepaid Insurance $60,000 too high December 31, 2013- Ending Inventory $166,000 too high Depreciation Expense none Insurance Expense $60,000 too low Prepaid Insurance none In addition, on December 31, 2013 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2014. No corrections have been made for any of the errors. Ignore income tax considerations. The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2013 is underrated by

$166,000 + $84,000 - $60,000 + $60,000 + $28,800= $278,800

On December 31, 2013, Grantham, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement and income tax purposes. The change will result in a $2,000,000 increase in the beginning inventory at January 1, 2013. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is

$2,000,000 * 30%= $600,000 $2,000,000- $600,000= $1,400,000

Which of the following would not be included in the Lease Receivable account? A. Guaranteed residual value B. Unguaranteed residual value C. A bargain purchase option D. All would be included

All would be included

On January 2, 2013, Hernandez, Inc. signed a ten-year non cancelable lease for a heavy duty drill press. The lease stipulated annual payments of $250,000 starting at the end of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plan assets. Aggregate lease payments were determined to have a present value of $1,5000,000, based on implicit interest of 10%. In its 2013 income statement, what amount of interest expense should Hernandez report from this lease transaction?

$1,5000,000 * 10%= $150,000

Torrey Co. manufactures equipment that is sold or leased. On December 31, 2013, Torrey leased equipment to Dalton for a five-year period ending December 31, 2018, at which date ownership of the leased asset with be transferred to Dalton. Equal payments under the lease are $440,000 (including $40,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2013. Collectibility of the remaining lease payment is reasonably assured, and Torrey has no material cost uncertainties. The normal sales price of the equipment is $1,540,000, and cost is $1,200,000. For the year ended December 31, 2013, what amount of income should Torrey realize from the lease transaction?

$1,540,000- $1,200,000= $340,000

Bishop Co. began operations on January 1, 2012. Financial statements for 2012 and 2013 contained following error: December 31 2012- Ending Inventory $132,000 too high Depreciation Expense $84,000 too high Insurance Expense $60,000 too low Prepaid Insurance $60,000 too high December 31, 2013- Ending Inventory $166,000 too high Depreciation Expense none Insurance Expense $60,000 too low Prepaid Insurance none In addition, on December 31, 2013 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2014. No corrections have been made for any of the errors. Ignore income tax considerations. The total effect of the errors on Bishop's 2013 net income is

$132,000 + $166,000 + $60,000 + $28,800= $386,800 Understated by $386,800

Change from straight-line to sum-of-the-years'-digits method of depreciation. A. Change in accounting principle. B. Change in accounting estimate. C. Change in reporting entity. D. Error correction.

Change in accounting estimate.

On December 31, 2013, Lang Corporation leased a ship from Fort Company for an eight-year period expiring December 30, 2021. Equal annual payments of $400,000 are due on December 31 of each year, beginning with December 31, 2013. The lease is properly classified as a capital lease on Lang's books. The present value at December 31, 2013 of the eight lease payments over the lease term discounted at 10% is $2,347,370. Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total obligation under capital leases on its December 31, 2014 balance sheet is

$2,347,370 - $400,000 = $1,947,370 $1,947,370 * 10% = 194,737 $1,947,370 - ($400,000 - $194,737)= $1,742,107

Langley Company's December 31 year-end Financial statements contained the following errors: December 31, 2012- Ending Inventory $15,000 Understated Depreciation Expense $4,000 Understated December 31, 2013- Ending Inventory $22,000 Overstated Depreciation Expense none An insurance premium of $36,000 was prepaid in 2012 covering the years 2012, 2013, and 2014. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2013, fully depreciated machinery was sold for $19,000 cash, but the sale was not recorded until 2014. There were no other errors during 2013 or 2014 and no corrections have been made for any of the errors. Ignore income tax considerations. What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2013?

$22,000+ $4,000- $12,000- $19,000= ($5,000) Retained earnings is understated by $5,000

Langley Company's December 31 year-end Financial statements contained the following errors: December 31, 2012- Ending Inventory $15,000 Understated Depreciation Expense $4,000 Understated December 31, 2013- Ending Inventory $22,000 Overstated Depreciation Expense none An insurance premium of $36,000 was prepaid in 2012 covering the years 2012, 2013, and 2014. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2013, fully depreciated machinery was sold for $19,000 cash, but the sale was not recorded until 2014. There were no other errors during 2013 or 2014 and no corrections have been made for any of the errors. Ignore income tax considerations. What is the total net effect of the errors on Langley's 2013 net income?

$36,000/ 3= $12,000 $15,000+ $22,000+ $12,000- $19,000= $30,000 Net income overstated by $30,000

Hayes Corp. is a manufacturer of truck trailers. On January 1, 2013, 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 $500,000. The cost of each trailer to Hayes Corp. is $450,000. 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. Calculate the annual lease payment. (Round to the nearest dollar.) Prepare the journal entries for the lessor for 2013 and 2014 to record the lease agreement, the receipt of the lease rents, and the recognition of income. (Assume the use of a perpetual inventory method and round all amounts to the nearest dollar).

$500,000/ 4.62288= $108,158 January 1, 2013- Lease Receivable $500,000 COGS $450,000 Sales Revenue $500,000 Inventory $450,000 December 31, 2013- Cash $108,158 Lease Receivable $68,158 Interest Revenue $40,000 December 31, 2014 Cash 108,158 Lease Receivable $73,611 Interest Revenue $34,547 Amortization Schedule-8% 1/1/13: Cash --- Interest --- Principle --- Balance $500,000 12/31/13: Cash $108, 158 Interest $40,000 ($500,000 * 8%) Principle $68,158 ($108,158- $40,000) Balance $431,842 ($500,000- $68,158) 12/31/14: Cash $108, 158 Interest $34,547 ($431,842 * 8%) Principle $73,611 ($108,158- $34,547) Balance $358,231 ($431,842- $73,611)

On January 1, 2008, Lake Co. purchased a machine for $792,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2011, Lake deterred that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $72,000. An accounting change was made in 2011 to reflect this additional data. The accumulated depreciation for this machine should have a balance at December 31, 2011 of

$792,000 * 3/8= $297,000 $297,000 +[ ($792,000 - $297,000 - $72,000) * 1/3]= $438,000

On January 2, 2013, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $80,000 each, payable beginning December 31, 2013. Brick Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease term. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What journal entry would Gold Star make at January 2, 2013 assuming this is a direct- financing lease? 8%, 5 periods- PV Annuity Due 4.31213 PV Ordinary Annuity 3.99271 PV Single Sum .68508 10%, 5 periods- PV Annuity Due 4.16968 PV Ordinary Annuity 3.79079 PV Single Sum .62092

$80,000* 4.31213= $344,970 Lease Receivable 344,970 Equipment 344,970

On December 31, 2016, Kuhn Corporation leased a plane from Bell Company for an eight-year period expiring December 30, 2024. Equal annual payments of $150,000 are due on December 31 of each year, beginning with December 31, 2016. The lease is properly classified as a capital lease on Kuhn's books. The present value at December 31, 2016 of the eight lease payments over the lease term discounted at 10% is $880,264. Assuming the first payment is made on time, the amount that should be reported by Kuhn Corporation as the lease liability on its December 31, 2016 balance sheet is

$880,264- $150,00= $730,264

Link Co. purchased machinery that cost $810,000 on January 4, 2014. The entire cost was recorded as an expense. Link Co. depreciates all of its machinery using straight-line depreciation. The machinery has a nine-year life and a $54,000 residual value. The error was discovered on December 20,1016. Ignore income tax considerations. Before the correction was made, and before the books were closed on December 20, 2016, retained earnings was understated by

($810,000-$54,000)/9= $84,000 $810,000-$84,000-$84,000= $642,000

Eubank Company, as lessee, enters into a lease agreement on July 1, 2012, for equipment. The following data are relevant to the lease agreement: A. The term of the non cancelable lease is 4 years, with no renewal option. Payments of $845, 378 are due on June 30 of each year. B. The fair value of the equipment on July 1, 2012 is $2,800,000. The equipment has an economic life of 6 years with no salvage value. C. Eubank depreciates similar machinery it owns on the sum-of-the-years'-digits basis. D. The lessee pays all executory costs. E. Eubank's incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3.31213; at 10%, 3.16986). Prepare the journal entries on Eubank's books that relate to the lease agreement for the following dates: (round all amounts to the nearest dollar.) 1. July 1, 2012. 2. December 31, 2012. 3. June 30, 2013. 4. December 31, 2013.

1. July 1, 2012: DR. Leased Equipment $2,800,000 CR. Lease Liability $2,800,000 2. December 31, 2012: DR. Depreciation Expense $560,000 Cr. Accumulated Depreciation- Capital Leases $560,000* *[($2,800,000 * 4/10) * 6/12] DR. Interest Expense $112,000** CR. Interest Payable $112,000 **([2,800,000* 8%]* 6/12) 3. June 30, 2013: DR. Interest Expense $224,000* DR. Lease Liability $621,378 CR. Cash $845,378** *2,800,000* 8% **Payment due 4.December 31, 2013: DR. Depreciation Expense $980,000 CR. Accumulated Depreciation- Capital Leases $980,000* *[(2,800,000* 4/10)* 6/12+ (2,800,00* 3/10)* 6/12] DR.Interest Expense $87,145** CR. Interest Payable $87,145 **(174,290* 6/12) -Make amortized schedule to get $174,290

Vance Company reported net incomes for a three-year period as follows: 2011- $191,000 2012- $199,000 2013- $180,000 In reviewing the accounts in 2014 after the books for the prior year have been closed, you find that the following errors have been made in summarizing activities: 2011- Overstatement of ending inventory $42,000 Understatement of accrued advertising expense $6,600 2012- Overstatement of ending inventory $51,000 Understatement of accrued advertising expense $12,000 2013- Overstatement of ending inventory $29,000 Understatement of accrued advertising expense $7,200 Determine corrected net incomes for 2011, 2012, and 2013. Give the entry to bring the books of the company up to date in 2014, assuming that the books have been closed for 2013.

2011- $191,000- $42,000- $6,600= $142,400 2012- $199,000+ $42,000- $51,000+ $6,600- $12,000= $184,600 2013- $180,000+ $51,000- $29,000+ $12,000- $7,200= $206,800 Retained Earnings $36,200 Advertising Expense $7,200 Inventory $29,000

Loire Co. has used the FIFO method since it began operations in 2014. Loire changed to the weighted- average method for inventory measurement at the beginning of 2017. In its 2017 financial statements, Loire included comparative statements for 2015 and 2016. Loire is subject to a 30% income tax rate. The following shows year-end inventory balances under the FIFO and weighted-average methods: Year 2014- FIFO $90,000 Weighted- Average $108,000 Year 2105- FIFO $156,000 Weighted- Average $142,000 Year 2016- FIFO $166,000 Weighted- Average $150,000

2015: $156,000- $142,000= $14,000 2016: $166,000- $150,000= $16,000 Adjustment: $16,000- $14,000= $2,000 $2,000 increase

Which of the following statements is correct? A. Changes in accounting principle are always handled in the current or prospective period. B. Prior statements should be restated for changes in accounting estimates. C. A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate. D. Correction of an error related to a prior period should be considered as an adjustment to current year net income.

A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate.

A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was omitted from the yea-end physical count. How will these errors affect assets, liabilities, and stockholders' equity at year end and net income for the year?

Assets: Underestimated Liabilities: Underestimated Stockholders' Equity: No effect Net Income: No effect

Change in amortization for an intangible asset. A. Change in accounting principle. B. Change in accounting estimate. C. Change in reporting entity. D. Error correction.

Change in accounting estimate.

Change in the loss rate on warranty costs. A. Change in accounting principle. B. Change in accounting estimate. C. Change in reporting entity. D. Error correction.

Change in accounting estimate.

Change from FIFO to LIFO inventory procedures. A. Change in accounting principle. B. Change in accounting estimate. C. Change in reporting entity. D. Error correction.

Change in accounting principle.

Change from one acceptable principle to another acceptable principle. A. Change in accounting principle. B. Change in accounting estimate. C. Change in reporting entity. D. Error correction.

Change in accounting principle.

Changing from presenting non consolidated to consolidated financial statements. A. Change in accounting principle. B. Change in accounting estimate. C. Change in reporting entity. D. Error correction.

Change in reporting entity.

Change due to changing a new asset directly to an expense account. A. Change in accounting principle. B. Change in accounting estimate. C. Change in reporting entity. D. Error correction.

Error correction.

Change due to failure to recognize an accrued (uncollected) revenue. A. Change in accounting principle. B. Change in accounting estimate. C. Change in reporting entity. D. Error correction.

Error correction.

Change due to failure to recognize and accrue income. A. Change in accounting principle. B. Change in accounting estimate. C. Change in reporting entity. D. Error correction.

Error correction.

Change from an unacceptable to an acceptable accounting principle. A. Change in accounting principle. B. Change in accounting estimate. C. Change in reporting entity. D. Error correction.

Error correction.

On January 1, 2013, Ogleby Corporation signed a five-year non cancelable lease for equipment. The terms of the lease called for Ogleby to make annual payments of $120,000 at the end of each year for five years with title to pass to Ogleby at the end of this period. The equipment has an estimated useful life of 7 ears and no salvage value. Ogleby uses the straight-libe method of depreciation for all of its fixed assets. Ogle by accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $454, 896 at an effective interest rate of 10%. With respect to this capitalized lease, for 2014 Ogleby should record Interest Expense and Depreciation Expense:

Interest Expense $454,896 * 10%= $45,490 [$454,896- ($120,000- $45,490)] * 10%= $38,039 Depreciation Expense: $454,896/7= $64,985

Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated ecumenic life of the lease property. Lease B does not transfer ownership of the property to the lees 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: Capital lease Lease B: Capital lease

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee? A. No impact as the option does not enter into the transaction until the end of the lease term. B. The lessee must increase the present value of the minimum lease payments by the present value of the option price. C. The lessee must decrease the present value of the minimum lease payments by the present value of the option price. D. The minimum, lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.

The lessee must increase the present value of the minimum lease payments by the present value of the option price.

Executory cost

include maintenance, property taxes, and insurance