financial accounting vol 2
DESCRIPTION
CHAPTER 2 AND 3TRANSCRIPT
18 CHAPTER 2
Problem 2-1 Problem 2-2
1. A 1. A 6. D2. B 2. D 7. A3. A 3. A 8. D4. C 4. D 9. D5. A 5. B 10. B
Problem 2-3Requirement 1
2008April 1 Cash (7,000,000 x 106%) 7,420,000
Bonds payable 7,000,000Premium on bonds payable 420,000
Oct. 1 Interest expense (7,000,000 x 12% x 6/12) 420,000Cash 420,000
Dec. 31 Interest expense (7,000,000 x 12% x 3/12) 210,000Accrued interest payable 210,000
31 Premium bonds payable 31,500
Interest expense (420,000 / 10 x 9/12) 31,500
2009Jan. 1 Accrued interest payable 210,000
Interest expense 210,000
April 1 Interest expense 420,000Cash 420,000
Oct. 1 Interest expense 420,000Cash 420,000
Dec. 31 Interest expense 210,000Accrued interest payable 210,000
31 Premium on bonds payable 42,000Interest expense (420,000 / 10)
42,000
19
Requirement 2
Noncurrent liabilities:Bonds payable
7,000,000Premium on bonds payable
346,500Book value
7,346,500
Problem 2-4Requirement 1
2008Jan. 1 Unissued bonds payable 8,000,000
Authorized bonds payable 8,000,000
1 Cash (5,000,000 x 95%) 4,750,000Discount on bonds payable 250,000
Unissued bonds payable 5,000,000
June 30 Interest expense (5,000,000 x 12% x 6/12) 300,000
Cash 300,000
Dec. 31 Interest expense 300,000Cash 300,000
31 Interest expense (250,000 / 10) 25,000Discount on bonds payable 25,000
2009June 30 Interest expense 300,000
Cash 300,000
Sept. 1 Cash 2,100,000Unissued bonds payable 2,000,000Premium on bonds payable 60,000Interest expense (2,000,000 x 12% x 2/12)
40,000
Dec. 31 Interest expense 420,000Cash (7,000,000 x 12% x 6/12)
420,000
31 Interest expense 25,000Discount on bonds payable 25,000
31 Premium on bonds payable 2,400Interest expense 2,400
20
120 months – 20 = 100 months remaining 60,000 / 100 = 600 monthly
600 x 4 = 2,400
Requirement 2
Noncurrent liabilities:Authorized bonds payable
8,000,000Less: Unissued bonds payable
1,000,000Issued bonds payable
7,000,000Premium on bonds payable
57,600Total
7,057,600Discount on bonds payable
( 200,000)Book value
6,857,600
Problem 2-5Requirement 1
2008April 1 Cash 4,850,000
Discount on bonds payable 100,000 Bond issue cost 50,000
Bonds payable 5,000,000
Oct. 1 Interest expense 300,000 Cash (5,000,000 x 12% x 6/12)
300,000 Dec. 31 Interest expense 150,000 Accrued interest payable (5,000,000 x 12% x 3/12) 150,000
Interest expense 22,500Discount on bonds payable (100,000 / 5 x 9/12)
15,000Bond issue cost (50,000 / 5 x 9/12)
7,500
2009Jan. 1 Accrued interest payable 150,000
Interest expense 150,000
April 1 Interest expense 300,000 Cash
300,000
July 1 Interest expense 15,000Discount on bonds payable (20,000 x 6/12)
10,000Bond issue cost (10,000 x 6/12)
5,00021
Retirement price (2,000,000 x 99%)
1,980,000 Add: Accrued interest from April 1 to July 1, 2008(2,000,000 x 12% x 3/12)
60,000 Total payment 2,040,000
Bonds payable retired 2,000,000 Less: Applicable discount (2/5 x 75,000) 30,000
Applicable issue cost (2/5 x 37,500) 15,000 45,000 Book value of bonds retired 1,955,000 Less: Retirement price 1,980,000 Loss on early retirement ( 25,000)
July 1 Bonds payable 2,000,000 Interest expense 60,000
Loss on early retirement of bonds 25,000 Cash
2,040,000 Discount on bonds payable 30,000 Bond issue cost
15,000
Oct. 1 Interest expense 180,000
Cash (3,000,000 x 12% x 6/12) 180,000 Dec. 31 Interest expense 90,000
Accrued interest payable (3,000,000 x 12% x 3/12)
90,000
31 Interest expense 9,000 Discount on bonds payable (12,000 x 6/12)
6,000 Bond issued cost (6,000 x 6/12)
3,000
Revised annual amortization:Discount (3/5 x 20,000)
12,000Issue cost (3/5 x 10,000)
6,000
Requirement 2
Noncurrent liabilities:Bonds payable 3,000,000Discount on bonds payable
( 39,000)Bond issue cost ( 19,500)Book value 2,941,500
22Problem 2-6
Requirement 12008
Jan. 1 Cash 4,200,000 Bonds payable 4,000,000 Premium on bonds payable 200,000
Dec. 31 Interest expense 480,000 Cash (4,000,000 x 12%)
480,000
31 Premium on bonds payable 40,000 Interest expense (200,000 / 5)
40,000
31 Bonds payable 1,000,000 Premium on bonds payable 40,000
Cash 950,000 Gain on early retirement of bonds 90,000
Face of bonds payable retired 1,000,000 Add: Applicable premium (1/4 x 160,000)
40,000 Book value 1,040,000 Less: Retirement price (1,000,000 x 95%)
950,000 Gain on retirement 90,000
2009Dec. 31 Interest expense 360,000
Cash (3,000,000 x 12%) 360,000
31 Premium on bonds payable 30,000 Interest expense (40,000 x 3/4) 30,000
Requirement 2
Noncurrent liabilitiesBonds payable 3,000,000Premium on bonds payable 90,000Book value 3,090,000
Problem 2-7
1. Total bonds payable issued 6,000,000 Less: Face value bonds payable retired 3,000,000 Bonds payable – December 31, 2008 3,000,000
23
Discount on bonds payable 300,000 Less: Amortization from 2001 to 2007 (300,000 / 10 x 7) 210,000 Balance – January 1, 2008 90,000 Less: Discount applicable to bonds retired (3/6 x 90,000) 45,000 Adjusted balance 45,000 Less: Amortization for 2008 (3/6 x 30,000) 15,000 Discount on bonds payable – December 31, 2008 30,000
2. Interest (3,000,000 x 12%) 360,000 Amortization of discount for 2008 15,000 Interest expense for 2008 375,000
3. Adjusting entries on December 31, 2008:
a. Retained earnings 210,000Discount on bonds payable 210,000
b. Bonds payable 300,000 Discount on bonds payable 45,000 Gain on early retirement of bonds 255,000
Bonds payable retired
3,000,000 Less: Applicable discount
45,000 Book value
2,955,000 Less: Retirement price
2,700,000 Gain on early retirement
255,000
c. Interest expense 15,000 Discount on bonds payable
15,000
Amortization for 2008.
d. Interest expense 180,000 Accrued interest payable (3,000,000 x 12% x 1/2)
180,000
Problem 2-8Requirement 1
Jan. 1 Cash 6,737,000 Bonds payable
6,000,000 Premium on bonds payable 737,000
24
Dec. 31 Interest expense (6,000,000 x 12%) 720,000 Accrued interest payable 720,000
31 Premium on bonds payable 46,300 Interest expense (90,000 / 9)
46,300
Interest paid 720,000 Interest expense (10% x 6,737,000)
673,700 Premium amortization
46,300Requirement 2
Noncurrent liabilities:Bonds payable 6,000,000Premium on bonds payable (737,000 – 46,300)
690,700Book value 6,690,700
Problem 2-9
1. Cash (5,000,000 x 103) 5,150,000 Discount on bonds payable (5,000,000 x 5%) 250,000
Bonds payable 5,000,000 Share warrants outstanding
400,000
2. Interest expense (5,000,000 x 12%) 600,000 Cash 600,000
3. Interest expense 25,000 Discount on bonds payable (250,000 / 10) 25,000
4. Cash (20,000 shares x 30) 600,000 Share warrants outstanding 400,000
Share capital (20,000 x 25) 500,000
Share premium 500,000
Problem 2-10
Jan. 1 Cash 5,100,000 Discount on bonds payable 343,000
Bonds payable 5,000,000
Share warrants outstanding 443,000 25
Dec. 31 Interest expense (5,000,000 x 12%) 600,000 Cash 600,000
31 Interest expense 51,980 Discount on bonds payable 51,980
Interest paid 600,000 Interest expense (14% x 4,657,000)
651,980 Discount amortization 51,980
31 Cash (25,000 x 100) 2,500,000 Share warrants outstanding 443,000
Share capital (25,000 x 50) 1,250,000 Share premium
1,693,000 Problem 2-11
Jan. 1 Cash 9,600,000Bonds payable 8,000,000Premium on bonds payable 585,600Share warrants outstanding 1,014,400
(6% x FV) (5% x BV) Interest Interest Premium
BookDate paid expense amortization
value01/01/2008 8,585,60006/30/2008 480,000 429,280 50,720
8,534,88012/31/2008 480,000 426,744 53,256
8,481,624
PV pf principal (8,000,000 x .61) 4,880,000
PV of interest (480,000 x 7.72) 3,705,600
Total PV of bonds payable 8,585,600
June 30 Interest expense 429,280 Premium on bonds payable 50,720
Cash 480,000
Dec. 31 Interest expense 426,744 Premium on bonds payable 53,256
Cash 480,000
26
Dec. 31 Cash (16,000 x 150) 2,400,000 Share warrants outstanding 1,014,400
Share capital (16,000 x 100) 1,600,000
Share premium 1,814,400
Problem 2-12
Present value of principal (2,000,000 x 0.77) 1,540,000Present value of interest payments (120,000 x 2.53) 303,600Total present value 1,843,600Face value 2,000,000Discount on bonds payable 156,400
1. Cash 2,200,000 Discount on bonds payable 156,400
Bonds payable 2,000,000 Share premium
356,400
2. Interest expense 120,000Cash (6% x 2,000,000)
120,000
3. Interest expense 45,924Discount on bonds payable 45,924
Interest paid 120,000Interest expense (9% x 1,843,600)165,924Discount amortization 45,924
Problem 2-13
1. Cash (5,000,000 x 105%) 5,250,000Discount on bonds payable 300,000 Bonds payable 5,000,000
Share premium – conversion privilege 550,000
2. Interest expense (14% x 4,700,000) 658,000 Discount on bonds payable 58,000
Cash (12% x 5,000,000) 600,000
27
3. Bonds payable 5,000,000 Share premium – conversion privilege 550,000 Discount on bonds payable 242,000
Share capital 4,000,000
Share premium - issuance 1,308,000
Bonds payable 5,000,000 Discount on bonds payable ( 242,000) Share premium – conversion privilege 550,000
Total consideration 5,308,000 Share capital issued (40,000 shares x 100) 4,000,000 Share premium - issuance 1,308,000
Problem 2-14
Bonds payable 5,000,000Share premium – conversion privilege 500,000
Discount on bonds payable 250,000Share capital 2,500,000Share premium – issuance
2,750,000
Share premium - issuance 200,000Cash 200,000
Problem 2-15
1. Cash 3,900,000
Discount on bonds payable 100,000 Bonds payable - new 4,000,000
2. Bonds payable - old 3,000,000 Premium on bonds payable 50,000 Accrued interest payable 180,000 Loss on early retirement of bonds 10,000
Cash 3,240,000
Bonds payable - old 3,000,000 Premium on bonds payable 50,000 Book value 3,050,000 Less: Retirement price (3,000,000 x 102) 3,060,000 Loss on early retirement ( 10,000)
28
Retirement price 3,060,000 Add: Accrued interest payable 180,000 Total payment 3,240,000
Problem 2-16
a. Amortization table
Bond Discount Interest Interest
Year outstanding Fraction amortization paid expense
2009 8,000,000 8/40 64,000 960,000 1,024,000 2010 8,000,000 8/40 64,000 960,000 1,024,000
2011 7,000,000 7/40 56,000 840,000 896,000
2012 6,000,000 6/40 48,000 720,000 768,000
2013 5,000,000 5/40 40,000 600,000 640,000
2014 4,000,000 4/40 32,000 480,000 512,000
2015 2,000,000 2/40 16,000 240,000 256,000
40,000,000 320,000 4,800,000 5,120,000
b. Journal entries
2008Dec. 31 Cash 7,680,000
Discount on bonds payable 320,000 Bonds payable
8,000,000
2009Dec. 31 Interest expense 960,000
Cash 960,000
31 Interest expense 64,000 Discount on bonds payable 64,000
2010Dec. 31 Interest expense 960,000
Cash 960,000
31 Interest expense 64,000 Discount on bonds payable 64,000
31 Bonds payable 1,000,000
Cash 1,000,000
292011
Dec. 31 Interest expense 840,000 Cash 840,000
31 Interest expense 56,000 Discount on bonds payable 56,000
31 Bonds payable 1,000,000
Cash 1,000,000Problem 2-17
Amortization table
Bond Premium Interest Interest
Year outstanding Fraction amortization paid expense
2009 7,000,000 7/28 105,000 840,000 735,000 2010 6,000,000 6/28 90,000 720,000 630,000
2011 5,000,000 5/28 75,000 600,000 525,000
2012 4,000,000 4/28 60,000 480,000 420,000
2013 3,000,000 3/28 45,000 360,000 315,000
2014 2,000,000 2/28 30,000 240,000 210,000
2015 1,000,000 1/28 15,000 120,000 105,000
28,000,000 420,000 3,360,0002,940,000
2008Dec. 31 Cash 7,420,000
Bonds payable 7,000,000 Premium on bonds payable 420,000
2009Dec. 31 Interest expense 840,000
Cash 840,000
31 Premium on bonds payable 105,000 Interest expense 105,000
31 Bonds payable 1,000,000
Cash 1,000,000
2010Dec. 31 Interest expense 720,000
Cash 720,00030
Dec. 31 Premium on bonds payable 90,000 Interest expense 90,000
31 Bonds payable 1,000,000 Cash 1,000,000
31 Bonds payable 1,000,000 Premium on bonds payable 30,000
Loss on early retirement of bonds 20,000 Cash (1,000,000 x 105)
1,050,000
420,000 / 28,000,000 = .015 per year 1,000,000 x .015 x 2 = 30,000
Problem 2-18
a. Amortization table
Interest Interest Discount BookDate paid expense amortization value
01/01/2008 2,738,682 06/30/2008 240,000 273,868 33,868
2,772,55012/31/2008 240,000 277,255 37,2552,809,80506/30/2009 240,000 280,980 40,9802,850,78512/31/2009 240,000 285,078 45,0782,895,86306/30/2010 240,000 289,586 49,5862,945,44912/31/2010 240,000 294,551 54,5513,000,000
b. Journal entries
2008Jan. 1 Cash 2,738,682
Discount on bonds payable 261,318 Bonds payable
3,000,000
June 30 Interest expense 273,868 Cash 240,000 Discount on bonds payable 33,868
312010
Dec. 31 Interest expense 294,551 Cash 240,000 Discount on bonds payable 54,551
Jan. 1 Bonds payable 3,000,000
Cash 3,000,000
Problem 2-19
1. Amortization tableInterest Interest Discount Book
Date paid expense amortization value04/01/2008 2,101,520
10/01/2008 120,000 105,076 14,9242,086,59604/01/2009 120,000 104,330 15,6702,070,92610/01/2009 120,000 103,546 16,4542,054,47204/01/2010 120,000 102,724 17,2762,037,19610/01/2010 120,000 101,860 18,1402,019,05604/01/2011 120,000 100,944 19,0562,000,000
2. Journal entries
2008Apr. 1 Cash 2,101,520
Bonds payable 2,000,000
Premium on bonds payable 101,520
Oct. 1 Interest expense 105,076 Premium on bonds payable 14,924
Cash 120,000
Dec. 31 Interest expense 60,000 Accrued interest payable
60,000
Premium on bonds payable 7,835 Interest expense (15,670 x 1/2)
7,835
2009Jan. 1 Accrued interest payable 60,000
Interest expense 60,000
32 2009Apr. 1 Interest expense 120,000
Cash 120,000
1 Premium on bonds payable 7,835 Interest expense 7,835
Oct. 1 Interest expense 103,546 Premium on bonds payable 16,454
Cash 120,000
Dec. 31 Interest expense 60,000 Accrued interest payable
60,000
31 Premium on bonds payable 8,638 Interest expense (17,276 x 3/6)
8,638
Problem 2-20Requirement 1
Interest expense for 2008 (3,805,600 x 10%) 380,560Interest paid for 2008 320,000Discount amortization 60,560
Bonds payable 4,000,000Issue price – proceeds from issuance 3,805,600Discount on bonds payable – 12/31/2007 194,400Amortization for 2008 60,560Balance – 12/31/2008 133,840
Bonds payable 4,000,000Payment on 12/31/2008 ( 800,000)
Balance – 12/31/2008 3,200,000Discount on bonds payable ( 133,840)Carrying value – 12/31/2008 3,066,160
Requirement 2
1. Cash 3,805,600Discount on bonds payable 194,400
Bonds payable 4,000,000
33
2. Interest expense 320,000Cash
320,000
3. Interest expense 60,560Discount on bonds payable
60,560
4. Bonds payable 800,000Cash
800,000 Problem 2-21
1. December 31, 2008Principal payment
2,000,000Interest payment (6,000,000 x 6%)
360,000Total payment – 12/31/2008
2,360,000
December 31, 2009Principal payment
2,000,000Interest payment (4,000,000 x 6%)
240,000Total payment – 12/31/2009
2,240,000
December 31, 2010
Principal payment2,000,000
Interest payment (2,000,000 x 6%) 120,000
Total payment – 12/31/20102,120,000
Present valueDecember 31, 2008 (2,360,000 x .9259)
2,185,124December 31, 2009 (2,240,000 x .8573)
1,920,352 December 31, 2010 (2,120,000 x .7938) 1,682,856 Total present value 5,788,332
2. Cash 5,788,332Discount on bonds payable 211,668
Bonds payable 6,000,000
Interest expense 360,000Cash (6% x 6,000,000)
360,000
Interest expense 103,067Discount on bonds payable 103,067
34
Interest expense (8% x 5,788,332) 463,067 Interest paid
360,000 Discount amortization103,067
Bonds payable 2,000,000Cash 2,000,000
3. Bonds payable – 1/1/2008 6,000,000Discount on bonds payable ( 108,601)Principal payment on 12/31/2008 (2,000,000)Book value – 12/31/2008
3,891,399
Problem 2-22Requirement 1
PV of interest payment on 6/30/2008 (240,000 x .9615)230,760
PV of principal and interest payment on 12/31/2008 (2,000,000 + 240,000 x .9246)
2,071,104PV of interest payment on 6/30/2009 (120,000 x .8890)
106,680PV of principal and interest payment on 12/31/2009
(2,000,000 + 120,000 x .8548) 1,812,176Total present value 4,220,720
Requirement 2
Interest Interest Premium PrincipalBookDate paid expense amortization paymentvalue
01/01/2008 4,220,72006/30/2008 240,000 168,829 71,171 4,149,54912/31/2008 240,000 165,982 74,018 2,000,000 2,075,53106/30/2009 120,000 83,021 36,979 2,038,55212/31/2009 120,000 81,448 38,552 2,000,000 -
Requirement 3
01/01/2008 Cash 4,220,720 Bonds payable 4,000,000 Premium on bonds payable 220,720
06/30/2008 Interest expense 240,000 Cash 240,000
35
06/30/2008 Premium on bonds payable 71,171 Interest 71,171
12/31/2008 Interest expense 240,000 Cash 240,000
Premium on bonds payable 74,018Interest 74,018
Bonds payable 2,000,000Cash 2,000,000
06/30/2009 Interest expense 120,000Cash 120,000
Premium on bonds payable 36,979Interest expense 36,979
12/31/2009 Interest expense 120,000Cash 120,000
Premium on bonds payable 38,552Interest expense 38,552
Bonds payable 2,000,000Cash 2,000,000
Problem 2-23
PV of principal (7,000,000 x 456) 3,192,000PV of interest (350,000 x 13.59) 4,756,500Total issue price 7,948,500
Interest Interest PremiumBookDate paid expense amortizationvalue
03/01/2008 7,948,50009/01/2008 750,000 317,940 32,060 7,916,44003/01/2009 350,000 316,658 33,342 7,883,098
2008March 1 Cash 7,948,500
Bonds payable 7,000,000Premium on bonds payable 948,500
36
2008Sept. 1 Interest expense 317,900
Premium on bonds payable 32,060
Cash 350,000
Dec. 31 Interest expense 233,333Accrued interest payable
233,333(7,000,000 x 10% x 4/12)
Premium on bonds payable 22,228Interest expense 22,228
(33,342 x 4/6)
Problem 2-24
PV of principal (6,000,000 x .57)3,420,000
PV of interest (600,000 x 3.60)2,260,000
Total issue price5,580,000
Interest Interest PremiumBookDate paid expense amortizationvalue
06/01/20085,580,000
06/01/2009 600,000 669,600 69,6005,649,600
06/01/2010 600,000 667,952 77,9525,727,552
2008June 1 Cash 5,580,000
Discount on bonds payable 420,000Bonds payable
6,000,000
Dec. 31 Interest expense 350,000Accrued interest payable
350,000(600,000 x 7/12)
Interest expense 40,600Discount on bonds payable 40,600
(69,600 x 7/12)
2009Jan. 1 Accrued interest payable 350,000
Interest expense 350,000
37
2009June 1 Interest expense 600,000
Cash 600,000
Interest expense 29,000Discount on bonds payable 29,000
(69,600 x 5/12)
Dec. 31 Interest expense 350,000Accrued interest payable
350,000
Interest expense 45,472Discount on bonds payable 45,472
(77,952 x 7/12)
Problem 2-25 Problem 2-26
Sinking fund bonds 1,100,000 9% Registered bonds3,500,000
Industrial revenue bonds 900,000 11% Collateral trust bonds3,000,000
Total serial bonds 2,000,000 Total terms bonds6,500,000
Problem 2-27 Answer A Serial bonds Debenture
bonds 9% Registered bonds 2,750,000 2,750,00011% Convertible bonds 1,250,00010% Commodity backed bonds 2,000,000 _________Total 4,750,000 4,000,000
Problem 2-28 Answer A Problem 2-29 Answer C
Issue price (5,000,000 x 110) 5,500,000 Issue price (4,000,000 x 99%)3,960,000
Accrued interest from Accrued interest from July 1 to October 1, 2008 January 1 to April 1, 2008
(5,000,000 x 12% x 3/12) 150,000 (4,000,000 x 8% x 3/12) 80,000Total 5,650,000 Total
4,040,000Less: Bond issue cost 200,000 Less: Bond issue cost 140,000Net cash received 5,450,000 Net cash received 3,900,000
Problem 2-30 Answer A
All costs are treated as bond issue cost to be amortized as interest expense over the life of the bonds.
38
Problem 2-31 Answer B
Bonds payable 5,000,000Premium on bonds payable (4% x 5,000,000) 200,000Bond issue cost ( 125,000)Bond liability 5,075,000
Problem 2-32 Answer D
Issue price (4,000,000 x 99%) 3,960,000
Bonds payable 4,000,000Discount on bonds payable ( 40,000)Bond issue cost ( 340,000)Bond liability 3,620,000
Problem 2-33 Answer B
Interest:5,000,000 x 12% 600,0002,000,000 x 14%280,000
Amortization of premium (200,000 / 10) ( 20,000)Amortization of discount and issue cost (130,000 / 5) 26,000Total interest expense
886,000
Problem 2-34 Answer B
Accrued interest payable from October 1 to December 31, 2008(4,000,000 x 8% x 3/12)
80,000
The nominal interest of 8% is used in determining the accrued interest payable.
Problem 2-35 Answer D
Accrued interest payable from July 1 to September 30, 2008(3,000,000 x 12% x 3/12)
90,000
39Problem 2-36 Answer B
Bonds payable 5,000,000Add: Premium on bonds payable 30,000Total 5,030,000Less: Bond issue cost 50,000Book value 4,980,000Less: Retirement price (5,000,000 x 98%) 4,900,000Gain on retirement 80,000
Problem 2-37 Answer D
Bonds payable 8,000,000Less: Bond issue cost 430,000Book value 7,570,000
Book value retired (4,000,000 / 8,000,000 x 7,570,000) 3,785,000Less: Retirement price (4,000,000 + 100,000) 4,100,000Loss on early extinguishment ( 315,000)
Problem 2-38 Answer A
Discount on bonds payable (2% x 5,000,000) 100,000Less: Amortization from January 1, 1996 to January 1, 2008
(100,000 x 12/15) 80,000Balance – January 1, 2008 20,000
Bond issue cost 200,000Less: Amortization from January 1, 1996 to January 1, 2008
(200,000 x 12/15) 160,000Balance – January 1, 2008 40,000
Bonds payable 5,000,000Less: Discount on bonds payable 20,000
Bond issue cost 40,000 60,000Book value – January 1, 2008 4,940,000Less: Retirement price (5,000,000 x 102) 5,100,000Loss on retirement
( 160,000)
Problem 2-39 Answer A
Book value – December 1, 2005 5,300,000Book value – December 31, 2007 5,150,000Amortization for 25 months 150,000
40
Monthly amortization (150,000 / 25) 6,000
Book value – December 31, 2007 5,150,000Less: Amortization of premium from January 1 to September 1, 2008
(6,000 x 8) 48,000Book value – September 1, 2008 5,102,000Less: Retirement price at face 5,000,000
Gain on early retirement 102,000
Problem 2-40 Answer A
Date Interest paid Interest expense Discount amortizationBook value
1/1/2008 4,580,0007/1/2008 250,000 274,800 24,800 4,604,8001/1/2009 250,000 276,288 26,288 4,631,088
551,088
Problem 2-41 Answer A Problem 2-42 Answer B
Interest expense (10% x 3,756,000) 375,600 Interest expense (5,675,000 x 8%)454,000
Interest paid (9% x 4,000,000) 360,000 Interest paid (5,000,000 x 10%) 500,000
Discount amortization 15,600 Premium amortization 46,000
Discount on bonds payable 244,000 Premium on bonds payable675,000
Less: Amortization for 2008 15,600 Less: Amortization for 2008 46,000Balance – December 31, 2008 228,400 Balance – December 31, 2008
629,000
Problem 2-43 Answer B
Interest expense (4,695,000 x 10% x 6/12) 234,750Interest paid (5,000,000 x 9% x 6/12) 225,000Amortization of discount, January 2 to June 30, 2008 9,750
Bonds payable 5,000,000Discount on bonds payable (305,000 – 9,750) 295,250Book value – June 30, 2008 4,704,750
Problem 2-44 Answer B
Issue price (5,000,000 x 98)4,900,000
41
Bonds payable5,000,000
Discount on bonds payable ( 100,000)Bond issue cost ( 140,000)Book value
4,760,000
Interest expense (12% x 4,760,000) 571,200Interest paid (10% x 5,000,000) 500,000Amortization of discount and issue cost 71,200
Bonds payable5,000,000
Bond discount and issue cost (240,000 – 71,200) ( 168,000)Book value – 12/31/2008
4,831,200
Note that under the effective interest method, the discount on bonds payable and bond issue cost must be “lumped” together.
Problem 2-45 Answer C
Issue price (5,000,000 x 110)5,500,000
Bonds payable5,000,000
Premium on bonds payable 500,000Bond issue cost ( 80,000)Book value
5,420,000
Interest expense (6% x 5,420,000) 325,200
Interest paid (8% x 5,000,000) 400,000Amortization of discount and issue cost 74,800
Bonds payable5,000,000
Premium on bonds payable (420,000 – 74,800) 345,200Carrying amount – 12/31/2008
5,345,200
Note that under the effective interest method, the bond issue cost must be “netted” against the premium on bonds payable
Problem 2-46 Answer B
Interest expense (10% x 4,757,000) 475,700Interest expense (8% x 5,000,000) 400,000Discount amortization 75,700
42Bonds payable 5,000,000Payment on December 31, 2008 (1,000,000)Discount on bonds payable (243,000 – 75,700) ( 167,300)Book value – December 31, 2008 3,832,700Problem 2-47 Answer B
Present value of principal (5,000,000 x 0.52) 2,600,000Present value of interest payments (600,000 x 3.43) 2,058,000Issue price of bonds 4,658,000Face value 5,000,000Discount on bonds payable 342,000
Problem 2-48 Answer A
PAS 39 requires that an amount is allocated to the bonds payable equal to the market value of the bonds ex-warrants and any residual amount is allocated to the warrants.
Problem 2-49 Answer A
PV of principal (5,000,000 x .57) 2,850,000PV of interest (550,000 x 3.60) 1,980,000PV of bonds payable 4,830,000
Issue price (5,000,000 x 109) 5,450,000PV of bonds payable 4,830,000Share warrants outstanding 620,000
Problem 2-50 Answer A
Issue price of bonds with conversion privilege (5,000,000 x 110) 5,500,000Market value of bonds without conversion privilege (5,000,000 x 103) 5,150,000Residual amount allocated to conversion privilege 350,000
Problem 2-51 Answer C
PV of principal (5,000,000 x .77) 3,850,000PV of interest (300,000 x 2.53) 759,000PV of bonds payable 4,609,000
43
Issue price (5,000,000 x 110) 5,500,000PV of bonds payable 4,609,000Share premium 891,000
Problem 2-52 Answer B
Face value 5,000,000Premium on bonds payable 300,000Book value 5,300,000
Book value converted (2,000 / 5,000 x 5,300,000) 2,120,000
Par value of share capital (2,000 x 50 x 10) 1,000,000
1,120,000Conversion expenses 20,000Share premium 1,100,000
Problem 2-53 Answer D
Book value of bonds converted (9,500,000 x 5/10) 4,750,000Applicable share premium – conversion privilege (2,000,000 x 5/10) 1,000,000Total consideration 5,750,000 Par value of shares issued (200,000 x 20) 4,000,000Share premium – issuance 1,750,000
44
CHAPTER 3
Problem 3-1 Problem 3-2 Problem 3-3
1. A 6. C 1. C 6. B 1. D 6. B2. D 7. A 2. C 7. B 2. B 7. A3. D 8. C 3. A 8. A 3. A 8. D
4. D 9. D 4. B 9. D 4. A 9. A5. C 10. C 5. C 10. D 5. B 10. D
Problem 3-4
Book of Marian Company (Lessor)
Jan. 1 Machinery 2,400,000Cash 2,400,000
Mar. 1 Cash 600,000Rent income 600,000
Dec. 31 Repair and maintenance 30,000Cash
30,000
31 Rent income 100,000Unearned rent income (600,000 x 2/12)
100,000
31 Depreciation (2,400,000 / 6) 400,000Accumulated depreciation 400,000
Book of Delia Company (Lessee)
Mar. 1 Rent expense 600,000 Cash 600,000
Dec. 31 Prepaid rent 100,000 Rent expense 100,000
45Problem 3-5
Requirement 1
Books of Lessor
1. Equipment 3,000,000Cash 3,000,000
2. Cash (40,000 x 9) 360,000Rent income 360,000
3. Cash 120,000Unearned rent income 120,000
4. Repairs 20,000Cash 20,000
5. Unearned rent income 30,000Rent income (120,000 / 3 = 40,000 x 9/12)
30,000
6. Depreciation 300,000 Accumulated depreciation (3,000,000 / 10)
300,000
Books of Lessee
1. Rent expense 360,000Cash 360,000
2. Prepaid rent 120,000Cash 120,000
3. Rent expense 30,000Prepaid rent 30,000
Requirement 2
Rent income (360,000 + 30,000)390,000
Less: Repairs 20,000Depreciation 300,000
320,000Net income of lessor 70,000
46Problem 3-6
Books of Lessor1. Tractor 1,600,000
Cash1,600,000
2. Cash 600,000 Rent income
600,000
3. Repairs 15,000 Transportation 5,000
Cash 20,000
4. Rent income 150,000 Unearned rent income (50,000 x 3) 150,000
5. Depreciation 300,000 Accumulated depreciation (1,500,000 / 5)
300,000
Books of Lessee
1. Rent expense 600,000Cash
600,000
2. Prepaid rent 150,000Rent expense
150,000
Problem 3-7Books of Lessor
1. Machinery 2,400,000 Cash2,400,000
2. Cash (36,000 x 9) 324,000 Rent income
324,000
3. Machinery 120,000 Cash
120,000
4. Amortization of initial direct costs 22,500 Machinery (120,000 / 4 = 30,000 x 9/12)22,500
5. Depreciation 180,000 Accumulated depreciation (2,400,000 / 10 x 9/12)
180,000
47
Books of Lessee
1. Rent expense 324,000 Cash
324,000
Problem 3-8
1. Rent expense 60,000 Prepaid rent 60,000 Rent deposit 80,000 Leasehold improvement 360,000
Cash 560,000
2. Depreciation 6,000 Accumulated depreciation (360,000 / 5 x 1/12)
6,000
Problem 3-9
1. Rent expense 900,000 Cash
900,000
2. Cash 6,000,000 Sales6,000,000
3. Prepaid rent 250,000Cash
250,000
4. Rent expense (5% X 1,000,000) 50,000 Accrued rent payable
50,000
5. Rent expense 25,000Prepaid rent (250,000 / 10)
25,000
Problem 3-10
1. Machinery 4,800,000 Cash4,800,000
2. Cash 850,000 Rent income
850,000
3. Cash 300,000 Unearned rent income
300,000 48
4. Insurance 80,000 Cash 80,000
5. Depreciation 400,000 Accumulated depreciation (4,800,000 / 12)
400,000
6. Unearned rent income 100,000 Rent income (300,000 / 3)
100,000
Problem 3-11
20081. Equipment 375,000
Cash 375,000
2. Equipment 75,000 Cash 75,000
20091. Cash 180,000
Rent income 180,000
2. Repairs 7,000 Transportation 3,000
Cash 10,000
3. Depreciation 90,000
Accumulated depreciation (450,000 / 5) 90,000
4. Rent income 45,000 Unearned rent income (15,000 x 3)
45,000
Problem 3-12
2007Jan. 1 Building (800,000 x 4.17) 3,336,000
Lease liability3,336,000
1 Building 100,000
Cash 100,000
1 Lease liability 800,000Cash
800,00049
2007
Dec. 31 Depreciation (3,436,000 / 10) 343,600Accumulated depreciation
343,600
31 Interest expense 253,600Accrued interest payable
253,600
Year Payment 10% interest Principal Present value
01/01/2008 3,336,000
01/01/2008 800,000 - 800,000 2,536,000
01/01/2009 800,000 253,600 546,400 1,989,600
01/01/2010 800,000 198,960 601,040 1,388,560
31 Taxes 40,000Cash
40,000
2009Jan. 2 Accrued interest payable 253,600
Lease liability 546,400Cash
800,000
Dec. 31 Depreciation 343,600Accumulated depreciation
343,600
31 Interest expense 198,960Accrued interest payable
198,960
31 Taxes 40,000Cash
40,000
Problem 3-13
20081. Building (1,000,000 x 3.79) 3,790,000
Lease liability 3,790,000
2. Interest expense 379,000 Lease liability 621,000
Cash 1,000,000
50
Year Payment 10% interest Principal Present value
01/01/2008 3,790,00012/31/2008 1,000,000 379,000 621,000
3,169,00012/31/2009 1,000,000 316,900 683,100
2,485,900
3. Taxes 75,000 Insurance 125,000
Cash 200,000
4. Depreciation (3,790,000 / 10) 379,000Accumulated depreciation 379,000
20091. Interest expense 316,900 Lease liability 683,100
Cash 1,000,0002. Taxes 75,000 Insurance 125,000
Cash 200,000
3. Depreciation 379,000Accumulated depreciation 379,000
Problem 3-14
2007Jan. 1 Machinery 6,392,400
Lease liability 6,392,400
Present value of rentals (1,000,000 x 6.328) 6,328,000
Present value of bargain option (200,000 x .322) 64,400
Total cost 6,392,400
1 Lease liability 1,000,000Cash 1,000,000
Dec. 31 Depreciation (6,392,400 / 15) 426,160Accumulated depreciation 426,160
31 Interest expense 647,088Accrued interest payable 647,088
51
Year Payment 12% interest Principal Present value
01/01/20086,392,400
01/01/2008 1,000,000 - 1,000,0005,392,400
01/01/2009 1,000,000 647,088 352,9125,039,488
01/01/2010 1,000,000 604,739 395,2614,644,277
2009Jan. 1 Accrued interest payable 647,088
Lease liability 352,912Cash
1,000,000
Dec. 31 Depreciation 426,160Accumulated depreciation 426,160
31 Interest expense 604,739Accrued interest payable 604,739
Problem 3-15
1. Building (1,000,000 x 7.606) 7,606,000Lease liability
7,606,000
2. Depreciation 507,067Accumulated depreciation 507,067
The term of the lease is at least 75% of the life of the asset (15/20). Since this is the basis of the finance lease, the depreciation is computed using the term of the lease, which is shorter than the life of the asset.
3. Interest expense (10% x 7,606,000) 760,600Lease liability 239,400
Cash 1,000,000
Problem 3-16Requirement 1
Present value of rentals (1,000,000 x 3.2743) 3,274,300Present value of guaranteed residual value (474,060 x .4761) 225,700Total present value 3,500,000
52
The lease is accounted for as finance lease because the present value of rentals is 100% of the fair value of the leased asset.
Year Payment 16% interest Principal Present value
01/01/2008 3,500,00012/31/2008 1,000,000 560,000 440,000
3,060,00012/31/2009 1,000,000 489,600 510,400
2,549,60012/31/2010 1,000,000 407,936 592,064
1,957,53612/31/2011 1,000,00 0 313,206 686,794
1,270,74212/31/2012 1,000,000 203,318 796,682
474,060
Requirement 22008
Jan. 1 Equipment 3,500,000 Lease liability
3,500,000 Dec. 31 Interest expense 560,000
Lease liability 440,000 Cash
1,000,000
31 Depreciation 605,188 Accumulated depreciation
605,188(3,500,000 – 474,060 / 5)
2009Dec. 31 Interest expense 489,600
Lease liability 510,400 Cash
1,000,000
31 Depreciation 605,188 Accumulated depreciation
605,188
Requirement 3
Accumulated depreciation (605,188 x 5) 3,025,940Lease liability 474,060
Equipment3,500,000
53Requirement 4
Accumulated depreciation 3,025,940Lease liability 474,060
Equipment 3,500,000
Loss on finance lease 174,060Cash (474,060 – 300,000)
174,060
Problem 3-17
1. Lease receivable 5,000,000Sales
3,072,500Unearned interest income
1,927,500
2. Cost of sales 2,000,000Inventory
2,000,000
3. Cash 500,000Lease receivable
500,000
4. Unearned interest income 307,250Interest income (10% x 3,072,500)
307,250
Problem 3-18
2008Jan. 1 Lease receivable 500,000
Machinery 403,700
Unearned interest income 96,300
1 Cash 100,000 Lease receivable
100,000
Dec. 31 Unearned interest income 36,444
Interest income 36,444
Year Payment 12% interest Principal Present value
01/01/2008 403,700 01/01/2008 100,000 - 100,000
303,700 01/01/2009 100,000 36,444 63,556
240,144 01/01/2010 100,000 28,817 71,183
168,961
542009
Jan. 1 Cash 100,000 Lease receivable
100,000
Dec. 31 Unearned interest income 28,817 Interest income 28,817
Problem 3-19
1. Lease receivable (600,000 x 8) 4,800,000Sales
3,520,000Unearned interest income 1,280,000
2. Initial direct costs 50,000Cash 50,000
3. Cash 600,000Lease receivable 600,000
4. Unearned interest income 292,000Interest income
292,000
Year Payment 10% interest Principal Present value
01/01/2008 3,520,000 01/01/2008 600,000 - 600,000
2,920,000 01/01/2009 600,000 292,000 308,000
2,612,000
Problem 3-20
Books of Fox Company (Lessor)2008
Jan. 1 Lease receivable (500,000 x 10) 5,000,000 Sales 3,165,000 Unearned interest income 1,835,000
1 Cost of sales 2,675,000 Inventory
2,675,000
1 Cash 500,000 Lease receivable 500,000
Dec. 31 Unearned interest income 319,800 Interest income
319,800
55
Year Payment 12% interest Principal Present value
01/01/2008 3,165,000 01/01/2008 500,000 - 500,000
2,665,000 01/01/2009 500,000 319,800 180,200
2,484,800 01/01/2010 500,000 298,176 201,824
2,282,976
2009Jan. 1 Cash 500,000
Lease receivable 500,000
Dec. 31 Unearned interest income 298,176 Interest income 298,176
Books of Tiger Company (Lessee)2008
Jan. 1 Equipment 3,165,000 Lease liability 3,165,000
1 Lease liability 500,000 Cash 500,000
Dec. 31 Depreciation (3,165,000 / 10) 316,500 Accumulated depreciation 316,500
31 Interest expense 319,800 Accrued interest payable
319,800
2009Jan. 1 Accrued interest payable 319,800
Lease liability 180,200 Cash 500,000
Dec. 31 Depreciation 316,500 Accumulated depreciation 316,500
31 Interest expense 298,176 Accrued interest payable
298,176
56Problem 3-21
1. Equipment 2,330,000Lease liability
2,330,000
Interest expense (12% x 2,330,000) 279,600Lease liability 320,400
Cash 600,000
Depreciation 406,000Accumulated depreciation (2,330,000 – 300,000 / 5)
406,000
2. Lease liability 300,000Accumulated depreciation (406,000 x 5) 2,030,000
Equipment2,330,000
3. Lease liability 300,000Accumulated depreciation 2,030,000
Equipment2,330,000
Loss on finance lease 120,000Cash (300,000 – 180,000)
120,000
Problem 3-22Books of Universal Company (Lessor)
Gross rentals (700,000 x 8)5,600,000
Unguaranteed residual value 400,000Lease receivable
6,000,000Present value:
Gross rentals (700,000 x 4.968) 3,477,600Unguaranteed RV (400,000 x .404) 161,6003,639,200
Unearned interest income2,360,800
Cost of equipment sold2,000,000
Less: PV of unguaranteed RV 161,600Cost of sales
1,838,400
1. Lease receivable 6,000,000Cost of sales 1,838,400
Sales (equal to PV of rentals only) 3,477,600Unearned interest income 2,360,800Inventory 2,000,000
57
2. Cash 700,000Lease receivable 700,000
3. Unearned interest income 436,704Interest income (12% x 3,639,200)
436,704
Books of National Company (Lessee)
1. Equipment 3,477,600
Lease liability 3,477,600
The residual value is unguaranteed, so it is not included in the computation of the lessee’s lease liability.
2. Interest expense (12% x 3,477,600) 417,312Lease liability 282,688
Cash 700,000
3. Depreciation 434,700Accumulated depreciation (3,477,600 / 8)
434,700
Problem 3-23
Gross rentals (3,000,000 x 5) 15,000,000Residual value – guaranteed 1,000,000Gross investment 16,000,000Present value:
Rentals (3,000,000 x 3.60) 10,800,000Residual value (1,000,000 x .57) 570,000
11,370,000Total unearned financial revenue 4,630,000
Sales11,370,000
Cost of sales:Cost of machinery
( 8,000,000)Initial direct costs
( 300,000)Gross income 3,070,000
58
Books of Vanderbilt Company
1. Lease receivable 16,000,000Cost of sales 8,000,000
Sales11,370,000
Unearned interest income 4,630,000Inventory 8,000,000
2. Cost of sales (Initial direct costs) 300,000Cash 300,000
3. Cash 3,000,000Lease receivable 3,000,000
4. Unearned interest income 1,364,400Interest income (12% x 11,370,000)
1,364,400
Books of Thunder Company
1. Machinery 11,370,000Lease liability
11,370,000
2. Interest expense 1,364,400Lease liability 1,635,600
Cash 3,000,000
3. Depreciation 2,074,000Accumulated depreciation 2,074,000
(11,370,000 – 1,000,000 / 5)
Problem 3-24
1. Gross rentals (600,000 x 10) 6,000,000
Net investment in the lease:Cost of equipment
(3,390,000) Initial direct costs( 143,400)
Total financial revenue 2,466,600
2. Equipment 143,400Cash 143,400
59
Lease receivable 6,000,000Equipment 3,533,400Unearned interest income 2,466,600
Cash 600,000
Lease receivable 600,000
Unearned interest income 388,674Interest income (11% x 3,533,400)
388,674
PV factor (3,533,400 / 600,000) 5.889
This factor is applicable to 11%. Thus, this is the new implicit rate in computing
interest income.
Problem 3-24
1. Lease receivable (3,328,710 x 5) 16,643,550
PV of gross rentals (3,328,710 x 3.605) 12,000,000
Total unearned financial revenue 4,643,550
The residual value of P500,000 is ignored by the lessor because ownership of the asset is transferred to the lessee at the end of the lease term.
2. Sales price (equal to present value of rentals) 12,000,000
Cost of sales:Cost of equipment
( 8,000,000)Initial direct costs
( 200,000)Manufacturer’s profit
3,800,000
3. Interest income for first year (12% x 12,000,000) 1,440,000
Problem 3-26
Books of German Company
1. Cash 1,100,000Accumulated depreciation 1,500,000
Equipment 2,500,000Gain on sale and leaseback 100,000
2. Rent expense 40,000 Cash 40,000
60
Books of Sterling Company
1. Equipment 1,100,000Cash
1,100,000
2. Cash 40,000Rent income 40,000
3. Depreciation (1,100,000 / 10) 110,000Accumulated depreciation 110,000
Problem 3-27Books of Canada Company
1. Cash 500,000Accumulated depreciation 450,000Loss on sale and leaseback 50,000
Machinery 1,000,000
2. Rent expense 90,000Cash 90,000
Books of Saigon Company
1. Machinery 500,000Cash 500,000
2. Cash 90,000Rent income 90,000
3. Depreciation (500,000 / 10) 50,000Accumulated depreciation 50,000
Problem 3-28Books of Cuba Company
1. Cash 2,415,000Accumulated depreciation 3,400,000
Building 5,000,000
Deferred gain on sale and leaseback 815,000
61
2. Building 2,415,000Lease liability
2,415,000
3. Depreciation (2,415,000 / 15) 161,000Accumulated depreciation 161,000
4. Deferred gain on sale and leaseback 81,500Gain on sale and leaseback (815,000 / 10)
81,500
5. Interest expense (16% x 2,415,000) 386,400 Lease liability 113,600
Cash 500,000Books of Mexico Company
1. Building 2,415,000 Cash 2,415,000
2. Lease receivable (500,000 x 10) 5,000,000 Building
2,415,000 Unearned interest income 2,585,000
3. Cash 500,000 Lease receivable 500,000
4. Unearned interest income 386,400 Interest income 386,400
Problem 3-29 Answer B
Rent for June 200,000Amortization of bonus (prepaid rent)[600,000 / 5 x 1/12] 10,000Rent expense for the month of June 210,000
Problem 3-30 Answer B
Annual rent (15,000 x 12) 180,000Additional rent
6% x 3,000,000 180,000
5% x 3,000,000 150,000Property taxes 120,000Insurance 50,000Total expenses 680,000
62
Problem 3-31 Answer A
Total rent expense (200,000 x 51 remaining months) 10,200,000
Average annual rent expense, July 1, 2006 to June 30, 2007 (10,200,000 / 5)
2,040,000
Problem 3-32 Answer B
Total rent expense (600,000 x 117 remaining months) 70,200,000
Average annual rent (70,200,000 / 10) 7,020,000
Rent expense from October 1 to December 31, 2008 (7,020,000 x 3/12)
1,755,000
Problem 3-33 Answer C
First year (1,200 x 1,000) 1,200,000Second year (3,000 x 1,000) 3,000,000Third year (3,000 x 1,000) 3,000,000Total rental revenue 7,200,000
Average annual rental (7,200,000 / 3) 2,400,000
Rental revenue from January1 to September 30, 2008 (2,400,000 x 9/12)
1,800,000
Problem 3-34 Answer C
First year (800,000 x 6/12) 400,000Second year 1,250,000Third year 1,250,000Fourth year 1,250,000Fifth year 1,250,000Total rental revenue 5,400,000
Average annual rental revenue (5,400,000 / 5) 1,080,000
63Problem 3-35 Answer C
Average annual rental revenue (360,000 / 3) 120,000
Rent revenue from July 1, 2006 to June 30, 2008 (120,000 x 2) 240,000Less: Rentals received:
First 12 months 60,000Second 12 months 90,000
150,000Rent receivable, June 30, 2008 90,000
Problem 3-36 Answer A
Rent income 500,000Less: Amortization of initial direct costs (150,000 / 10) 15,000
Depreciation 120,000Insurance and property tax 90,000 225,000
Net rent income 275,000
Problem 3-37 Answer C
Annual rental 900,000Amortization of lease bonus (500,000 / 5) 100,000Total rent revenue 1,000,000
Problem 3-38 Answer D
This is not a finance lease and therefore no liability is recorded because:
1. There is no transfer of ownership or title to the lessee at the end of the lease term.
2. There is no a bargain purchase option.
3. The term is only 66 2/3% of the life of the asset (10 / 15 equals 66 2/3%).
4. The present value of the rental of P3,380,000 (500,000 x 6.76) is only 84.5% of the fair value of P4,000,000.
Problem 3-39 Answer B
Cost of leased property (100,000 x 6.145) 614,500
The lease is treated as a finance lease because the term is 83 1/3% of the life of the asset (10 years / 12 years).
64Problem 3-40 Answer B
Problem 3-41 Answer B
Present value of rentals (400,000 x 5.95) 2,380,000
The purchase option of P500,000 is not included in the computation of the lease liability because it approximates the fair value of the asset at the end of the lease term and therefore is not a bargain purchase option. Again, the lease is a finance lease because the term is 83 1/3% of the life of the asset (10/12).
Problem 3-42 Answer D
Cost of leased property 2,400,000Less: Residual value 200,000Depreciable cost 2,200,000
Depreciation (2,200,000 / 8) 275,000
Problem 3-43 Answer B
Depreciation (1,080,000 / 12) 90,000
If the “transfer of ownership criterion” is used in qualifying a finance lease, the depreciation is based on the life of the asset.
Problem 3-44
Question 1 – Answer C Question 2 – Answer B Question 3 - Answer C
1. Date Payment 10% interest Principal Present value
01/01/2007 1,352,00001/01/2007 200,000 - 200,000 1,152,00001/01/2008 200,000 115,200 84,800 1,067,200
Lease liability – December 31, 2008 1,152,000
Current portion 84,800Noncurrent liability
1,067,200
2. Interest expense for 2008 115,200
3. Depreciation for 2008 (1,352,000 / 20) 67,600
65Problem 3-45 Answer B
Present value (using implicit rate of 10%) 3,165,000Less: Payment on December 31, 2007 (all applicable to principal) 500,000Balance – December 31, 2007 2,665,000Less: Principal payment on December 31, 2008
Payment 500,000Interest (10% x 2,665,000) 266,500
233,500Lease liability – December 31, 2008 2,431,500
Problem 3-46 Answer B
Present value, January 1, 2008 1,125,000Less: First payment on December 30, 2008 100,000
Interest for 2008 (8% x 1,125,000) ( 90,000) 10,000Lease liability, December 31, 2008 1,115,000
Problem 3-47 Answer A
Interest expense for 2008 (10% x 3,790,000) 379,000
Problem 3-48 Answer B
Present value, January 1, 2008 1,350,000Less: First payment on January 1, 2008 (all applicable to principal) 200,000Lease liability, January 1, 2008 1,150,000
Interest expense for 2008 (10% x 1,150,000) 115,000
Problem 3-49 Answer A
Present value of rentals (1,300,000 x 4.24) 5,512,000Present value of guaranteed residual value (1,000,000 x 0.65) 650,000Total lease liability – 1/1/2008 6,162,000Less: First payment on January 1, 2008 (all applicable to principal) 1,300,000Lease liability – 12/31/2008 4,862,000
The present value of an “annuity due” factor is used in the computation because the rental is payable in advance.
Problem 3-50 Answer B
Lease liability, January 1, 2007 (1,000,000 x 6.14) 6,140,000
66
The minimum lease payments shall include the guaranteed residual if guaranteed by the lessee. In this case, the residual value is guaranteed by a third party and therefore excluded in computing the lease liability.
Problem 3-51 Answer B
Present value – 12/31/20081,350,000
Less: First payment on December 31, 2008 (all applicable to principal) 200,000Lease liability – 12/31/2008
1,150,000Less: Second payment on December 31, 2009:
Payment 200,000Interest for 2009 (10% x 1,150,000) 115,000Principal payment
85,000Lease liability – 12/31/2009
1,065,000
Problem 3-52 Answer A
Problem 3-53 Answer A
Cash payment1,440,000
Book value of leased asset (2,000,000 – 800,000)1,200,000
Total consideration2,640,000
Balance of lease liability1,300,000
Cost of machinery purchased1,340,000
The entry to record the actual purchase of the leased asset is:
Machinery (purchased) 1,340,000Lease liability 1,300,000Accumulated depreciation 800,000
Cash1,440,000
Machinery (leased)2,000,000
Problem 3-54
Question 1 – Answer A
Question 2 – Answer B
1. Gain on sale (3,520,000 – 2,800,000) 720,000
672. Date Payment 10% interest Principal Present value
07/01/2008 3,520,00007/01/2008 600,000 - 600,000 2,920,00007/01/2009 600,000 292,000 308,000 2,612,000
July 1 to December 31, 2008 (292,000 x 1/2) 146,000
Problem 3-55 Answer B
Date Payment 10% interest Principal Present value01/01/2008 2,400,00001/01/2008 355,080 - 355,080 2,044,92001/01/2009 355,080 204,492 150,588 1,894,332
Selling price or fair value2,400,000
Less: Cost to Gallant Company2,000,000
Dealer’s profit 400,000Add: Interest income – 2008 204,492Total income before tax 604,492
Problem 3-56 Answer C
This is mathematical. The procedure is to determine the annual rental payment which is equal to the “cost of the asset divided by the present value factor of annuity of 1”. Accordingly, the annual rental is equal to P323,400 divided by 4.312 or P75,000.
Lease receivable (75,000 x 5) 375,000
Present value of rentals (fair value) 323,400Total interest revenue 51,600Problem 3-57 Answer A
Cost of equipment 4,361,200Present value of residual value (200,000 x .466) ( 93,200)Net investment to be recovered 4,268,000
Annual rental (4,268,000 / 5.335) 800,000
Problem 3-58 Answer B
Interest income (5,250,000 – 900,000 x 12%) 522,000
68
Problem 3-59 Answer A
Problem 3-60 Answer B
Problem 3-61 Answer D
Problem 3-62
Question 1 - Answer A
Gross rentals (1,500,000 x 20)30,000,000
Present value or fair value of asset (1,500,000 x 8.37)12,555,000
Unearned financial revenue 17,445,000
Observe that the present value of rentals is the same as the fair value of the asset. Note also that the residual value is ignored because the ownership of the asset will transfer to the lessee at the end of the lease term.
Question 2 - Answer B
Fair value of asset12,555,000
Cost of asset 8,000,000
Profit on sale 4,555,000
Question 3 – Answer C
PV of rentals equals to the fair value of asset12,555,000
Payment of January 1, 2008 – all applicable to principal 1,500,000Balance – January 1, 2008 11,055,000
Interest income for 2008 (11,055,000 x 12%) 1,326,600
Problem 3-63
Question 1 – Answer B
Interest income for 2008 (10% x 4,850,000)485,000
69Question 2 – Answer A
Sales price 3,250,000Book value of lease receivable:
Lease receivable 5,850,000Unearned interest income (1,000,000 – 485,000) ( 515,000)
5,335,000Loss on sale of machinery (2,085,000)
1. To recognize the interest income for 2008:
Unearned interest income 485,000Interest income
485,000
2. To record the sale of the machinery:
Cash 3,250,000Unearned interest income 515,000Loss on sale of machinery 2,085,000
Lease receivable 5,850,000
Problem 3-64 Answer D
Problem 3-65 Answer B
Problem 3-66 Answer C
Problem 3-67 Answer C
Problem 3-68 Answer B
Sales price 1,500,000Cost of equipment sold 1,000,000Deferred gain on sale and leaseback 500,000Less: Realized gain in 2008 (500,000 / 10) 50,000Deferred gain – December 31, 2008 450,000
Problem 3-69 Answer A
Sales price 480,000Carrying amount 360,000Deferred revenue 120,000
The gain is deferred because the leaseback is a finance lease (12 / 15 equals 80%).
70Problem 3-70 Answer A
Sales price7,800,000
Carrying amount5,850,000
Deferred gain – 12/31/20081,950,000
Problem 3-71 Answer D
Sales price 360,000
Carrying amount 330,000Gain on sale and leaseback 30,000
The gain is not deferred but recognized immediately because the leaseback is an operating lease.
Problem 3-72 Answer C
Sales price6,000,000
Fair value5,000,000
Deferred gain1,000,000
Fair value5,000,000
Carrying amount3,500,000
Gain on sale and leaseback to be recognized immediately1,500,000