The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee, for a computer system.

P21-6 The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee, for a computer system.

Inception date: January 1, 2014

Lease term: 6 years

Economic life of lease equipment: 6 years

Fair value of asset at January 1, 2014: $600,000

Residual value of equipment at end of lease term, guaranteed by the lessee $50,000

Lessor's implicit rate: 12%

Lessee's incremental borrowing rate: 12%

Annual lease payment due at the beginning of each year, beginning with January 1, 2014 $124,798

The Lessee assumes responsibility for all executory costs, which are expected to amount to $5,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straight-line depreciation method for all equipment.

Instructions: (Round to whole dollars.)

(a) Prepare an amortization schedule that would be suitable for the lessee for the lease term. The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-finance lease by the lessor.

Date: Annual lease Payment / Receipt: Interest (12%) on Unpaid Liability / Receivable: Reduction of Lease Liability / Receivable: Balance of Lease Liability / Receivable:

10/01/14 600,000.00

10/01/14 124,798.00 124,798.00 475,202.00

10/01/15 124,798.00 57,024.24 67,773.76 407,428.24

10/01/16 124,798.00 48,891.39 75,906.61 331,521.63

10/01/17 124,798.00 39,782.60 85,015.40 246,506.22

10/01/18 124,798.00 29,580.75 95,217.25 151,288.97

10/01/19 124,798.00 -26,490.97 151,288.97 0.00

748,788.00 148,788.00 600,000.00

(b) Prepare all of the journal entries for the lessee for 2014 and 2015 to record the lease agreement, the lease payments, and all expenses related to the lease.  Assume the lessee's annual accounting period ends on December 31 and reversing entries are used when appropriate.

(1) What items and amounts will appear on the lessor's income statement for the year ending September 30, 2015?

(b) Prepare all of the journal entries for the lessee for 2014 and 2015 to record the lease agreement, the lease payments, and all expenses related to the lease.  Assume the lessee's annual accounting period ends on December 31 and reversing entries are used when appropriate.

(1) What items and amounts will appear on the lessor's income statement for the year ending September 30, 2015?
(2) What items and amounts will appear on the lessor's balance sheet at September 30, 2015?
(3) What items and amounts will appear on the lessor's income statement for the year ending September 30, 2016?
(4) What items and amounts will appear on the lessor's balance sheet at September 30, 2016?
                                                                              
Assuming the lessor's accounting period ends on December 31, answer the following questions with respect to this lease agreement:
(1) What items and amounts will appear on the lessor's income statement for the year ending December 31, 2014?
(2) What items and amounts will appear on the lessor's balance sheet at December 31, 2014?
(3) What items and amounts will appear on the lessor's income statement for the year ending December 31, 2015?
(4) What items and amounts will appear on the lessor's balance sheet at December 31, 2015?

TUTORIAL PREVIEW

(2) What items and amounts will appear on the lessor's balance sheet at September 30, 2015?

Current assets:
Lease receivable	$67,774
Interest receivable	$57,024

File name: P21-6 The following facts.xls File type: xls PRICE: $12

The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics

P21-4 The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system.

Inception date: October 1, 2014

Lease term: 6 years

Economic life of lease equipment: 6 years

Fair value of asset at October 1, 2014: $300,383

Residual value at end of lease term: 0

Lessor's implicit rate: 10%

Lessee's incremental borrowing rate: 10%

Annual lease payment due at the beginning of each year, beginning with October 1, 2014: $62,700

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs, which amount to $5,500 per year, and are paid each October 1, beginning October 1, 2014. (This $5,500 is not included in the rental payment of $62,700.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment.

The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-finance lease by the lessor.

Date: Annual lease Payment / Receipt: Interest (10%) on Unpaid Liabililty / Receivable: Reduction of Lease Liability / Receivable: Balance of Lease Liability / Receivable:

10/01/14 300,383

10/01/14 62,700 62,700 237,683

10/01/15 62,700 23,768 38,932 198,751

10/01/16 62,700 19,875 42,825 155,926

10/01/17 62,700 15,593 47,107 108,819

10/01/18 62,700 10,882 51,818 57,001

10/01/19 62,700 5,699 57,001 0

376,200 75,817 300,383

*Rounding error is $1 at 10/01/19 for Interest on Unpaid Liability/Receivable.

Instructions: (Round to whole dollars.)              

(a) Assuming the lessee's accounting period ends on September 30, answer the following questions with respect to this lease agreement:
(1) What items and amounts will appear on the lessee's income statement for the year ending September 30, 2015?
(2) What items and amounts will appear on the lessee's balance sheet at September 30, 2015?
(3) What items and amounts will appear on the lessee's income statement for the year ending September 30, 2016?
(4) What items and amounts will appear on the lessee's balance sheet at September 30, 2016?

(b) Assuming the lessee's accounting period ends on December 31, answer the following questions with respect to this lease agreement:

(1) What items and amounts will appear on the lessee's income statement for the year ending December 31, 2014?
(2) What items and amounts will appear on the lessee's balance sheet at December 31, 2014?
(3) What items and amounts will appear on the lessee's income statement for the year ending December 31, 2015?
(4) What items and amounts will appear on the lessee's balance sheet at December 31, 2015?

TUTORIAL PREVIEW
(1) What items and amounts will appear on the lessee's income statement for the year ending
     September 30, 2015?

Interest expense (See amortization schedule)	$23,768
Lease executory expense	$5,500
Depreciation expense ($300,383 ÷ 6)	$50,064

File name: P21-4 The following facts.xls File type: xls PRICE: $12

On December 31, 2014, Mercantile Corp. had a $10,000,000 8.00% fixed-rate note outstanding, payable in 2 years.

P17-16 (Fair Value Hedge Interest Rate Swap) On December 31, 2014, Mercantile Corp. had a $10,000,000 8.00% fixed-rate note outstanding, payable in 2 years. It decides to enter into a 2-year swap with Chicago First Bank to convert the fixed-rate debt to variable-rate debt. The terms of the swap indicate that Mercantile will receive interest at a fixed rate of 8.00% and will pay a variable rate equal to the 6-month LIBOR rate, based on the $10,000,000 amount. The LIBOR rate on December 31, 2014, is 7.00%. The LIBOR rate will be reset every 6 months and will be used to determine the variable rate to be paid for the following 6-month period.

Mercantile Corp. designates the swap as a fair value hedge. Assume that the hedging relationship
meets all the conditions necessary for hedge accounting. The 6-month LIBOR rate and the swap and debt fair values are as follows. Date 6-Month LIBOR Rate Swap Fair Value Debt Fair Value

December 31, 2014 7.00% - $10,000,000

June 30, 2015 7.50% ($200,000) $9,800,000

December 31, 2015 6.00% $60,000 $10,060,000

Instructions

(a)(1) Present the journal entries to record the entry, if any, swap on December 31, 2014.

(a)(2) Present the journal entries to record the semiannual debt interest payment on June 30, 2015.

(a)(3) Present the journal entries to record the settlement of the semiannual swap amount receivables

(a)(4) Present the journal entries to record the change in the fair value of the debt on June 30, 2015.

(a)(5) Present the journal entries to record the change in the fair value of the swap at June 30, 2015.

(b) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on December 31, 2014

(c) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on June 30, 2015.

(d) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on December 31, 2015.

TUTORIAL PREVIEW

No entry necessary at the date of the swap because the fair value of the swap at inception is zero.

File name: P17-16 Mercantile Corp.xls File type: xls PRICE: $10

The treasurer of Miller Co. has read on the Internet that the stock price of Wade Inc.

P17-13 (Derivative Financial Instrument) The treasurer of Miller Co. has read on the Internet that the stock price of Wade Inc. is about to take off. In order to profit from this potential development, Miller Co. purchased a call option on Wade common shares on July 7, 2014, for $240.00 The call option is for 200 shares (notional value), and the strike price is $70.00. (The market price of a share of Wade stock on that date is $70.00) The option expires on January 31, 2015. The following data are available with respect to the call option

Date  Market Price of Wade Shares Time Value of Call Option

September 30, 2014 $77.00 per share $180.00

December 31, 2014 $75.00 per share $65.00

January 4, 2015 $76.00 per share $30.00

Instructions

(a) Prepare the journal entry for Miller Co. for July 7, 2014—Investment in call option on Wade shares.

(b) Prepare the journal entry for Miller Co. for September 30, 2014—Miller prepares financial statements.

(c) Prepare the journal entry for Miller Co. for December 31, 2014—Miller prepares financial statements.

(d) Prepare the journal entry for Miller Co. for January 4, 2015—Miller settles the call option on the Wade shares.

TUTORIAL PREVIEW

(a) Prepare the journal entry for Miller Co. for July 7, 2014—Investment in call option on Wade shares.

Jul 7, 14	Call Option	240
	Cash		240

File name: P17-13 Miller Co.xls File type: xls PRICE: $8

Castleman Holdings, Inc. had the following available-for-sale investment portfolio at January 1, 2014.

P17-11 Castleman Holdings, Inc. had the following available-for-sale investment portfolio at January 1, 2014.

1,000 shares of Evers Company at $15.00 per share $15,000

900 shares of Rogers Company at $20.00 per share $18,000

500 shares of Chance Company at $9.00 per share $4,500

 Available-for-sale securities at cost: $37,500

Securities fair value adjustment-Available-for-sale - Credit balance ($7,500)

Available-for-sale securities at fair value: $30,000

During 2014, the following transactions took place:

1. On March 1, Rogers Company paid a $2.00 per share dividend.
2. On April 30, Castleman Holdings, Inc. Sold 300 shares of Chance Company for $11.00 per share
3. On May 15, Castleman Holding, Inc. Purchased 100 more shares of Evers Co. stock at $16.00 per share
4. At December 31, 2014, the stocks had the following price per share values:

Evers Company $17.00

Rogers Company $19.00

Chance Company $8.00

During 2015 the following transactions took place:

5. On February 1, Castleman Holding, Inc. sold the remaining Chance shares for $8 per share.
6. On March 1, Rogers Company paid a $2 per share dividend.
7. On December 21, Evers Company declared a cash dividend of $3 per share to be paid in the next month.
8. At December 31, 2015, the stocks had the following price per share values:

Evers Company $19.00

Rogers Company $21.00

Instructions

(a) Prepare journal entries for each of the above transactions.

(b) Prepare a partial balance sheet showing the Investments account at December 31, 2014, and 2015.

TUTORIAL PREVIEW

(a) Prepare journal entries for each of the above transactions.

1	Mar 1, 14	Cash	1,800
		Dividend Revenue ($2.00 × 900 shares)		1,800

 File name: P17-11 Castleman Holdings.xls File type: xls PRICE: $12

Parnevik Company has the following securities in its investment portfolio on December 31, 2014

P17-5 Parnevik Company has the following securities in its investment portfolio on December 31, 2014 (all securities were purchased in 2014):

3,000 shares of Anderson Co. common stock which cost $58,500

10,000 shares of Munter Ltd. common stock which cost $580,000

6,000 shares of King Company preferred stock which cost $255,000

The Securities Fair Value Adjustment account shows a credit of $10,100 at the end of 2014. In 2015, Parnevik completed the following securities transactions.

1. On January 15, sold 3,000 shares of Anderson’s common stock at $22 per share less fees of $2,150

2. On April 17, purchased 1,000 shares of Castle’s common stock at $33.50 per share plus fees of $1,980 On December 31, 2015, the market values per share of these securities were:

Munter Ltd. $61.00

King Co. $40.00

Castle Co. $29.00

In addition, the accounting supervisor of Parnevik told you that, even though all these securities have readily determinable fair values, Parnevik will not actively trade these securities because the top management intends to hold them for more than one year.

Instructions

(a) Prepare the entry for the security sale on January 15, 2015.
(b) Prepare the journal entry to record the security purchase on April 17, 2015.
(c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on December 31, 2015.
(d) How should the unrealized gains or losses be reported on Parnevik’s balance sheet?

TUTORIAL PREVIEW

(a) Prepare the entry for the security sale on January 15, 2015.

Gross selling price of 3,000 shares at $22	$66,000
Less:  Commissions, taxes, and fees	-2,150

File name: P17-5 Parnevik Company.xls File type: xls PRICE: $10

Crosley Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2014.

E21-6 (Lessor Entries, Sales-Type Lease) Crosley Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2014. The lease is for an 8-year period and requires equal annual payments of $35,013 at the beginning of each year. The first payment is received on January 1, 2014. Wadkins had purchased the machine during 2013 for $160,000 Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Crosley. Crosley set the annual rental to ensure an 11% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Crosley at the termination of the lease.

Instructions

(a) Compute the amount of the lease receivable. (Use the Excel Present Value formula "=PV(" to solve.)

(b) Prepare all necessary journal entries for Crosley for 2014.

 

 

File name: E21-6 Crosley Company.xls File type: xls PRICE: $5

Assume that on January 1, 2014, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement to lease a

E21-3 Assume that on January 1, 2014, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement to lease a storage building from Trevino Storage Company. The following information pertains to this lease agreement.
1. The agreement requires equal rental payments of $72,000 beginning on January 1, 2014.
2. The fair value of the building on January 1, 2014, is $440,000
3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of $10,000 Kimberly-Clark depreciates similar buildings on the straight-line method.
4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
5. Kimberly-Clark's incremental borrowing rate is 12%  per year. The lessor's implicit rate is not known by Kimberly-Clark.
6. The yearly rental payment includes $2,471.00 of executory costs related to taxes on the property.

Instructions
Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2012 and 2015. Kimberly-Clark’s corporate year end is December 31.

TUTORIAL PREVIEW

Capitalized amount of the lease:
Yearly payment	72,000.00
Executory costs	2,471.00
Minimum annual lease payment	69,529.00

 

 File name: E21-3 Kimberly-Clark Corp.xls File type: xls PRICE: $6

Sarazan Company issues a 4 -year, 7.50% fixed-rate interest only, non-prepayable $1,000,000 note payable on December 31, 2013.

E17-25 (Fair Value Hedge) Sarazan Company issues a 4 -year, 7.50% fixed-rate interest only, non-prepayable $1,000,000 note payable on December 31, 2013. It decides to change the interest rate from a fixed rate to variable rate and enters into a swap agreement with M&S Corp. The swap agreement specifies that Sarazan will receive a fixed rate at 7.50% and pay variable with settlement dates that match the interest payments on the debt. Assume that interest rates have declined during 2014 and that Sarazan received $13,000 as an adjustment to interest expense for the settlement at December 31, 2014. The loss related to the . debt (due to interest rate changes) was $48,000. The value of the swap contract increased $48,000

Instructions

(a) Prepare the journal entry to record the payment of interest expense on December 31, 2014.

(b) Prepare the journal entry to record the receipt of the swap settlement on December 31, 2014.

(c) Prepare the journal entry to record the change in the fair value of the swap contract on
     December 31, 2014.

(d) Prepare the journal entry to record the change in the fair value of the debt on December 31, 2014.

 

 

TUTORIAL PREVIEW

Instructions

(a) Prepare the journal entry to record the payment of interest expense on December 31, 2014.

Interest Expense	75,000
Cash ($100,000 × 7.5%)		75,000

 

File name: E17-25 Sarazan Company.xls File type: xls PRICE: $4