IA5

Company A leases computer servers to Company B for five years. At the end of the five years, Company B will assume ownership of the servers. Company B will then send the servers to one of their international locations.

Which finance lease classification test does the scenario represent?

Transfer of ownership

Company A (lessee) has reached a lease agreement with Company B (lessor) to lease a new carpet weaving machine for five years beginning January 1, Year 1. The present value of the weaving machine is $47,945.18. The following amortization schedule was developed using the lease agreement.

Company A Lease Amortization Schedule ANNUITY-DUE-BASIS

Date	Annual Lease Payment	Interest	Reduction of Lease Liability	Lease Liability
Jan 1, Year 1				$47,945.16
Jan 1, Year 1	10,355.57	$0.00	$10,355.57	37,589.62
Jan 1, Year 2	10,355.57	1,503.58	8,851.98	28,737.64
Jan 1, Year 3	10,355.57	1,149.51	9,206.06	19,531.58
Jan 1, Year 4	10,355.57	781.26	9,574.30	9,957.27
Jan 1, Year 5	10,355.57	398.29	9,957.27	0.00
	$51.777.83	$3,832.64	$47,945.18

What is the journal entry that Company A (lessee) needs to record on December 31, Year 4 to record amortization?

Debit Amortization Expense for $9,589.04; Credit Right-to-Use Asset for $9,589.04

A Lessee leases a piece of equipment from a lessor, under lease terms that qualify as a finance lease. The Lessor had a total cost to continued the lease asset of $275,000. The present value of required rental payments is $300,000 and the present value of the estimated residual value, which is unguaranteed, is $20,000.

Which amount of lease liability should the lessee record?

$300,000

A lessor leases a piece of equipment to a lessee, under lease terms that qualify as a sales type lease. The lease terms call for total cash rental payments over the life of the lease of $200,000. The present value of those rental payments if $160,000. The estimated residual value of the leased asset, which is unguaranteed, is $20,000. The present value of the residual is $16,000.

Which amount of lease receivable should the lessor record?

$160,000

A lessor received a cash rental payment from a lessee at the end of the current period. The asset was leased at the beginning of the current period and was properly recorded as a sales-type lease.

Which journal entry should the lessor use to record the payment?

Debit Cash; Credit Interest Revenue; Credit Lease Receivable

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 non-cancelable with a term of three years. 

• The machinery has a cost and fair value at the start of the lease of $40,000; an estimated economic life of five years; and a residual value at the end of the lease of $7,500 (unguaranteed)

• The lease contains no renewal options, and the machinery reverts to Company A at the end of the lease. 

• The following amounts have been calculated in reference to this transaction:

- Present value of the residual is $6,478

- Lease payment based upon present value of annuity of $33,522 is $11,723

- Lease payment based upon present value of annuity of $32,500 is $11,366

How much should Company B record as please expense on December 31, Year 1?

$11,723

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 non-cancellable 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 $10,000 (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 is $8,396.

Which value should Company A use as the basis for determining an appropriate lease payment?

$51,604

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 has 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 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 

Which journal entry does Company B need to make to record revenue on December 31, Year 3?

Debit Unearned Leased Revenue for $10,213; Credit Lease Revenue for $10,213

A lessor engages in a sales-type lease with an unguaranteed residual value.

What is the sales price reduced by?

Present value of the estimated residual value

Company A, the lessee; has reached a finance lease agreement with Company B, the lessor, to lease a new automated bagging machine. The lease agreement contains the following information:

• The lease is for five years, requiring annual payments of $4,512 (annuity-due basis) at the beginning of the year.

• The bagging machine has a fair value at the beginning of th lease of $25,000; and estimated economic life of five years; and a guaranteed residual value of $5,000 (Company A expects that the residual value will be $4,000). 

• Present value of the bagging machine of the guaranteed residual value is $4,110.

• There are no renewal options and the machine will be returned to Company B

• Company A depreciates similar equipment that it purchases on a straight-line bases.

How does Company A treat the expected residual value of the automated bagging machine?

Include the present value of the difference between the expected the guaranteed residual value when computing the lease liability.

A company determines that a LIFO calculation contains a substantial oversight in ending inventory, resulting in a need to restate the financial statements.

Which accounting change was made by this company?

Errors in financial statements

On January 1 of Year 1, a company purchased a piece of equipment for $1,200,000 that had an estimated useful life of 8 years and no salvage value. The equipment was depreciated by the double-declining-balance (DDB) method.

On January 1 of Year 3, the company changes to the straight-line method. Accumulated depreciation at the end of Year 2 is $525,000. If the straight-line method had been used, the accumulated depreciation at the end of Year 2 would have been $300,000.

What is the retroactive adjustment to the accumulated depreciation account on January 1 of Year 3?

$0

A business purchases a piece of equipment at a cost of $100,000 with an estimated useful life of 6 years and a $10,000 salvage value. After 5 years, the useful life of the equipment is reevaluated to be 10 years with $0 salvage value.

What is the depreciation expense in Year 6 using straight-line depreciation?

$5,000

A business purchases a piece of equipment for $150,000 with an estimated useful life of 8 years and no salvage value. At the end of the 6 years, the equipment is reevaluated to have an estimated useful life of 10 years and a $10,000 salvage value.

Using straight-line depreciation, how much will the Year 7 annual depreciation expense be?

$6,875

Company A and wholly owned Subsidiary S currently file separate financial statements. Company A decides to report consolidated financial statements going forward. 

Which action must Company A take in this situation?

Restate the financial statements only for the periods presented in the financial statements

Last year, a company incorrectly expensed the purchase of machinery when it should have been capitalized and depreciated.

Which entry should the company record to correct this material error in single-period financial statements?

Debit Machinery; Credit Retained Earnings; Credit Accumulated Depreciation - Machinery

A small business recently discovered that a material error in payroll resulted in the company not recording overtime paid in the last year’s financial statement. The unpaid overtime was for $13,000. The company’s income tax rate is 20%.

What is a part of the current year’s journal entry to correct the material error on last year’s financial statements?

Debit Retained Earnings for $10,400

A company purchased $1,000 of inventory that was subsequently sold. The company incorrectly records the purchase for $10,000.

How does this error affect the company’s income statement?

Overstates cost of goods sold by $9,000 and understates income by $9,000

A company realizes the end of the year that it failed to recognize $3,000 in salaries earned by its employees. 

Which journal entry will correct his error?

Debit Salary Expense for $3,000; Credit Salaries Payable for $3,000

Which entity administers the assets of a pension?

Fund

Which variable may be considered when determining the employer’s level of contribution in a defined contribution plan?

The length of employment for each employee 

Which factor is a function of the defined benefit plan funding model for each employee’s benefit?

Employee’s years of service

A company purchases equipment in exchange for $50,000.

In which section of the statement of cash flows is this recorded?

Investing

A staff accountant is explaining the statement of cash flows to an intern. 

Which description accurately explains the statement of cash flows?

There are two allowable methods for preparation.

The chief financial officer (CFO) of a manufacturing company wants to know what the impact on cash is for the purchases and sals of stock in other companies. 

Which section of the statement of cash flows will provide this information?

Investing

A company is preparing a statement of cash flows and is reviewing which transactions must be included in the investing actives section.

Which type of transaction should be included?

Proceeds from the sale of a business

A company reports the following financial information:

Payment on accounts payable	$10,000
Gain on the sale of equipment	$4,000
Collection of accounts receivable	$20,000
Issuance of bonds payable for cash	$100,000
Purchase of treasury stock	$35,000
Purchase of investment stock	$43,000
Purchase of equipment	$40,000
Issuance of common stock for cash	$34,000
Receipt of cash dividends	$13,000
Receipt of cash interest	$23,000
Payment of cash interest	$16,000
Payment of cash dividends	$12,000
Cash proceeds from sale of equipment	$32,000

What is the cash flow from financing activities?

Increase of $87,000

The company is creating a Year 3 statement of cash flows using the indirect method. The company’s information is as follows:

Comparative Balance Sheets

Assets	Year 3	Year 2	Year 1
Cash	$35,000	$30,000	$25,000
Accounts receivable	45,000	40,000	50,000
Prepaid expenses	20,000	30,000	25,000
Equipment	70,000	80,000	100,000
Accumulated depreciation - equipment	(35,000)	(40,000)	(50,000)
Total assets	$135,000	140,000	$150,000

Liabilities and stockholders equity

Accounts payable	$100,000	$110,000	$115,000
Common stock ($5 par)	25,000	20,000	20,000
Retained earnings	10,000	10,000	15,000
Total liabilities and stockholders equity	$135,000	$140,000	$150,000

How does the change in accounts payable affect the statement of cash flows?

The change decreases cash flows from operating activities

A company reports the following information:

• Net income: $200,000

• Increase in accounts receivable: $82,000

• Purchase of equipment: $15,000

• Sale of property: $73,000

• Notes payable: $12,000

• Paid dividends: $9,000

What is the company’s cash flows from investments?

$58,000

A company is preparing its statement of cash flows for the prior year.

Which statement accurately characterizes how this task should be completed?

Comparative balance sheets are used to create the statement of cash flows

The company is receiving real estate for a significant discount from the parent company to expand its business.

Which disclosure is necessary for this transaction?

The nature of the relationship of each company

A company ends its fiscal year on December 31, Year 1, and learns that one of its clients filed for bankruptcy on January 11, Year 2, before issuance of its financial statements. The loss of the client’s accounts receivable is a material amount.

Which recognition or adjustment is required for this event?

Adjustment on the Year 1 financial statements

A company experiences a subsequent event.

Which description describes this type of event?

An event that occurs after the balance sheet date but before the insurance date

In January of Year 2, before issuing its financial statements for Year 1, a company learns that a major customer filed bankruptcy and will not be ordering any more goods. The customer’s accounts receivable is a significant amount to the company.

What effect will this have on the preparation of the company’s financial statements and disclosures?

An adjustment will need to be made to the financial statements to account for the customer’s bankruptcy