Chapters 14-15 Homework Assignment

1. On February 1, 2010, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for
$1,116,000. PWI retired all of these bonds on January 1, 2011, at 102. Unamortized bond
premium on that date was $92,800. How much gain or loss should be recognized on this
bond retirement? 
A. $0 gain. C. $72,800 gain.
B. $111,800 gain. D. $96,000 gain.

2. When bonds include detachable warrants, what is the appropriate accounting for the cash
proceeds from the bond issue? 
A. The proceeds from the bond issue are allocated between the bonds and the warrants on
the basis of their relative market values.
B. The proceeds from the bond issue are allocated between the bonds and the warrants on
the basis of their relative face values.
C. A nominal amount is allocated to the warrants.
D. All of the proceeds are allocated to the bonds.

3. Patrick Roch International issued 5% bonds convertible into shares of the company's
common stock. Roch applies International Financial Reporting Standards. Upon issuance,
Patrick Roch International should record 
A. the proceeds of the bond issue as part debt and part equity.
B. the proceeds of the bond issue entirely as debt.
C. the proceeds of the bond issue entirely as equity.
D. the proceeds of the bond issue entirely as debt if the bonds are mandatorily
redeemable.

4. GAAP requires that some lease agreements be accounted for as purchases. The
theoretical justification for this treatment is that a lease of this type: 
A. Complies with the concept of form over substance.
B. Reflects the relationship of cause and effect.
C. Satisfies the concept of historical cost.
D. Conveys most of the risks and benefits of property ownership.

5. 7. Distinguishing between operating and capital leases is due in large part to the
accounting concept of: 
A. Conservatism. C. Substance over form.
B. Materiality. D. Historical cost.
 
6. The four criteria provided in GAAP for distinguishing a capital lease from an operating
lease do not include: 
A. The agreement specifies that ownership transfers at the end of the lease term.
B. The collectibility of the lease payments must be reasonably predictable.
C. The agreement contains a bargain purchase option.
D. The noncancelable lease term is 75% or more of the useful life of the leased asset.
7. Which of the following is not among the criteria for classifying a lease as a capital lease? 
A. The agreement specifies that ownership of the asset transfers to the lessee.
B. The agreement contains a bargain purchase option.
C. The noncancelable lease term is equal to 90% or more of the expected economic life
of the asset.
D. The present value of the minimum lease payments is equal to or greater than 90% of
the fair value of the asset.

8. On February 1, 2011, Pearson Corporation became the lessee of equipment under a five-
year, noncancelable lease. The estimated economic life of the equipment is 8 years. The
fair value of the equipment was $600,000. The lease does not meet the definition of a
capital lease in terms of a bargain purchase option, transfer of title, or the lease term.
However, Pearson must classify this as a capital lease if the present value of the
minimum lease payments is at least 
A. $600,000.
B. $540,000.
C. $450,000.
D. $405,000.
9. Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company
on January 1, 2011. The manufacturing cost of the computers was $12 million.
This non-cancelable lease had the following terms:
 Lease payments: $2,466,754 semiannually; first payment at January 1, 2011; remaining
payments at June 30 and December 31 each year through June 30, 2015.
 Lease term: 5 years (10 semi-annual payments)
 No residual value; no bargain purchase option
 Economic life of equipment: 5 years
 Implicit interest rate and lessee's incremental borrowing rate: 5% semi-annually
 Fair value of the computers at January 1, 2011: $20 million
Collectibility of the rental payments is reasonably assured, and there are no lessor costs
yet to be incurred.

10. Technoid would account for this as: 

A. A capital lease. C. A sales-type lease.
B. A direct financing lease. D. An operating lease.
 
11. Lone Star Company would account for this as: 
A. A capital lease.
B. A direct financing lease.
C. A sales type lease.
D. An operating lease.

12. What is the net carrying value of the lease liability in Lone Star's June 30, 2011 balance
sheet? Round your answer to the nearest dollar. 
A. $15,943,154
B. $17,533,246
C. $21,000,000
D. None of the above is correct.

13. What is the interest revenue that Technoid would report on this lease in its 2011 income
statement? 
A. $0
B. $1,673,820
C. $876,662
D. None of the above is correct.

14. If the lessor records unearned rent at the beginning of a lease term, the lease must: 
A. Be a direct financing lease.
B. Be a sales-type lease.
C. Contain a bargain renewal option.
D. Be an operating lease.

15.
16. On September 1, 2011, Custom Shirts Inc. entered into a lease agreement appropriately
classified as an operating lease. The lease term is 3 years. The annual payments are (a)
$20,000 for year 1, (b) $24,000 for year 2, and (c) $28,000 for year 3. How much rent
expense will Custom Shirts recognize for 2011? 
A. $6,667.
B. $24,000.
C. $20,000.
D. $8,000.

17. The lessee normally measures the lease liability to be recorded as the: 
A. The future value of the minimum lease payments.
B. The sum of the cash payments over the term of the lease.
C. Present value of the minimum lease payments.
D. The fair market value of the leased asset.

18. Leasehold improvements usually are classified in a balance sheet as: 

A. Property, plant and equipment.
B. Other long-term assets.
C. Investments.
D. Expenses.

19. For a capital lease, an amount equal to the present value of the minimum lease payments
should be recorded by the lessee as a(n): 
A. Asset and a liability.
B. Asset and a different amount should be recorded as a liability.
C. Liability and a different amount should be recorded as an asset.
D. Expense.

20. Since the lease payments under a lease agreement are normally paid at the beginning of
each period, the appropriate compound interest table to be used to determine the amount
at which the leased asset should be recorded is the: 
A. Ordinary annuity table.
B. Present value of $1 table.
C. Present value of an annuity due table.
D. Future value of an annuity due table.
21. Determine the price of a $200,000 bond issue under each of the following independent
assumptions:

    

22. On January 1, 2011, Bishop Company issued 10% bonds dated January 1, 2011, with a
face amount of $20 million. The bonds mature in 2020 (10 years). For bonds of similar
risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and
December 31.
Required:
1. Determine the price of the bonds at January 1, 2011.
2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2011.
3. Prepare the journal entry to record interest on June 30, 2011, using the effective
interest method.
4. Prepare the journal entry to record interest on December 31, 2011, using the effective
interest method. 
23. On January 1, 2011. Boomer Universal issued 12% bonds dated January 1, 2011, with a
face amount of $200 million. The bonds mature in 2020 (10 years). For bonds of similar
risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and
December 31.
Required:
1. Determine the price of the bonds at January 1, 2011.
2. Prepare the journal entry to record their issuance by Boomer on January 1, 2011.
3. Prepare the journal entry to record interest on June 30, 2011, using the straight-line
method.
4. Prepare the journal entry to record interest on December 31, 2011, using the straight-
line method. 
24. DCL Industries purchased a supply of mechanical components from E Corporation on
November 1, 2011. In payment for the $48,000 purchase, DCL issued a 1-year
installment note to be paid in equal monthly payments at the end of each month. The
payments include interest at the rate of 12%.
Required:
1. Prepare the journal entry for DCL's purchase of the components on November 1, 2011.
2. Prepare the journal entry for the first installment payment on November 30, 2011.
3. What is the amount of interest expense that LCD will report in its income statement for
the year ended December 31, 2011? 
25. The December 31, 2010, balance sheet of Ming Inc. included 12% bonds with a face
amount of $100 million. The bonds were issued in 1998 and had a remaining discount of
$3,400,000 at December 31, 2010. On January 1, 2011, Ming called the bonds at a price
of 102.
Required: Prepare the journal entry by Ming to record the retirement of the bonds on
January 1, 2011. 
26. How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with
respect to debt and equity for preferred stock? 

27. On January 1, 2011, Salvatore Company leased several machines from Nola Corporation
under a 3-year operating lease agreement. The lease calls for semiannual payments of
$15,000 each, payable on June 30 and December 31 of each year. The machines were
acquired by Nola at a cost of $90,000 and are expected to have a useful life of 5 years
with no expected residual value.
Required: Prepare the appropriate journal entries for the lessee from the inception of
the lease through the end of 2011. 
28. Python Company leased equipment from Hope Leasing on January 1, 2011. Hope
purchased the equipment at a cost of $222,666.

   
There is no expected residual value.
Required: Prepare appropriate journal entries for Python for 2011. Assume straight-line
depreciation and a December 31 year-end.