American Movieplex, a large movie theater chain, leases most of its theater facilities. In conjunction with recent operating leases, the company spent $28 million for seats and carpeting. The question being discussed over breakfast on Wednesday morning was the length of the depreciation period for these leasehold improvements. The company controller, Sarah Keene, was surprised by the suggestion of Larry Person, her new assistant. Keene: Why 25 years? We’ve never depreciated leasehold improvements for such a long period. Person: I noticed that in my review of back records. But during our expansion to the Midwest, we don’t need expenses to be any higher than necessary. Keene: But isn’t that a pretty rosy estimate of these assets’ actual life? Trade publications show an average depreciation period of 12 years. Required: 1. How would increasing the depreciation period affect American Movieplex’s earnings? 2. Does revising the estimate pose an ethical dilemma? 3. Who would be affected if Person’s suggestion is followed?
> How is the price determined for a bond (or bond issue)?
> Universal Foods sold the entire bond issue described in the previous exercise to Wang Communications. Required: 1. Prepare the journal entry to record the purchase of the bonds by Wang Communications on January 1, 2018. 2. Prepare the journal entry to r
> The lessor’s initial direct costs often are substantial. What are initial direct costs?
> Universal Foods issued 10% bonds, dated January 1, with a face amount of $150 million on January 1, 2018. The bonds mature on December 31, 2032 (15 years). The market rate of interest for similar issues was 12%. Interest is paid semiannually on June 30 a
> The Gorman Group issued $900,000 of 13% bonds on June 30, 2018, for $967,707. The bonds were dated on June 30 and mature on June 30, 2038 (20 years). The market yield for bonds of similar risk and maturity is 12%. Interest is paid semiannually on Decembe
> Myriad Solutions, Inc., issued 10% bonds, dated January 1, with a face amount of $320 million on January 1, 2018, for $283,294,720. The bonds mature on December 31, 2027 (10 years). For bonds of similar risk and maturity the market yield is 12%. Interest
> The Bradford Company issued 10% bonds, dated January 1, with a face amount of $80 million on January 1, 2018. The bonds mature on December 31, 2027 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually
> Determine the price of a $1 million bond issue under each of the following independent assumptions: Maturity Interest Paid Stated Rate Effective (Market) Rate 1. 10 years 10 years 10 years 20 years 20 years annually semiannually 10% 12% 2. 10% 12% 3
> Your investment department has researched possible investments in corporate debt securities. Among the available investments are the following $100 million bond issues, each dated January 1, 2018. Prices were determined by underwriters at different times
> At January 1, 2018, Brainard Industries, Inc., owed Second BancCorp $12 million under a 10% note due December 31, 2020. Interest was paid last on December 31, 2016. Brainard was experiencing severe financial difficulties and asked Second BancCorp to modi
> At January 1, 2018, Transit Developments owed First City Bank Group $600,000, under an 11% note with three years remaining to maturity. Due to financial difficulties, Transit was unable to pay the previous year’s interest. First City Bank Group agreed to
> On March 1, 2018, Brown-Ferring Corporation issued $100 million of 12% bonds, dated January 1, 2018, for $99 million (plus accrued interest). The bonds mature on December 31, 2037, and pay interest semiannually on June 30 and December 31. Brown-Ferring’s
> On January 1, 2018, Brandon Electronics issued $85 million of 11.5% bonds, dated January 1. The market yield for bonds of maturity issued by similar firms in terms of riskiness is 12.25%. How can Brandon sell debt paying only 11.5% in a 12.25% market?
> What nonlease costs might be included as part of lease payments? How are they accounted for by the lessee in a finance lease when paid by the lessee? When paid by the lessor? Explain.
> On January 1, 2018, Essence Communications issued $800,000 of its 10-year, 8% bonds for $700,302. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. Essence Communications records interest at the effective ra
> On January 1, 2018, Rapid Airlines issued $200 million of its 8% bonds for $184 million. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. Rapid Airlines records interest at the effective rate and elected th
> Federal Semiconductors issued 11% bonds, dated January 1, with a face amount of $800 million on January 1, 2018. The bonds sold for $739,814,813 and mature on December 31, 2037 (20 years). For bonds of similar risk and maturity the market yield was 12%.
> On August 1, 2018, Limbaugh Communications issued $30 million of 10% nonconvertible bonds at 104. The bonds are due on July 31, 2038. Each $1,000 bond was issued with 20 detachable stock warrants, each of which entitled the bondholder to purchase, for $6
> On January 1, 2018, Madison Products issued $40 million of 6%, 10-year convertible bonds at a net price of $40.8 million. Madison recently issued similar, but nonconvertible, bonds at 99 (that is, 99% of face amount). The bonds pay interest on June 30 an
> Refer to the situation described in E 14–24. In E 14–24 On January 1, 2018, Gless Textiles issued $12 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of G
> On January 1, 2018, Gless Textiles issued $12 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Gless’s no par common stock. Bonds that are similar in all
> The balance sheet of Indian River Electronics Corporation as of December 31, 2017, included 12.25% bonds having a face amount of $90 million. The bonds had been issued in 2010 and had a remaining discount of $3 million at December 31, 2017. On January 1,
> Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org). Determine the specific citation for accounting for each of the following items: 1. Disclosure requirements for maturities of long-term debt. 2. How to estimate the valu
> LCD Industries purchased a supply of electronic components from Entel Corporation on November 1, 2018. In payment for the $24 million purchase, LCD issued a 1-year installment note to be paid in equal monthly payments at the end of each month. The paymen
> Compare the way a purchase option that is reasonably certain to be exercised and a lessee-guaranteed residual value are treated by the lessee and lessor when determining lease payments.
> What information is contained in a bond indenture? What purpose does it serve?
> American Food Services, Inc., acquired a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2018. In payment for the $4 million machine, American Food Services issued a four-year in
> FinanceCo lent $8 million to Corbin Construction on January 1, 2018, to construct a playground. Corbin signed a three-year, 6% installment note to be paid in three equal payments at the end of each year. Required: 1. Prepare the journal entry for Financ
> Refer to the situation described in E 14–17. In E 14–17 Amber Mining and Milling, Inc., contracted with Truax Corporation to have constructed a custom-made lathe. The machine was completed and ready for use on January 1, 2018. Amber paid for the lathe b
> In negotiating and effecting a troubled debt restructuring, the creditor usually incurs various legal costs. The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. Required
> At January 1, 2018, NCI Industries, Inc., was indebted to First Federal Bank under a $240,000, 10% unsecured note. The note was signed January 1, 2014, and was due December 31, 2019. Annual interest was last paid on December 31, 2016. NCI was experiencin
> On January 1, a company issued 3%, 20-year bonds with a face amount of $80 million for $69,033,776 to yield 4%. Interest is paid semiannually. What was the interest expense at the effective interest rate on the December 31 annual income statement?
> A company issued 5%, 20-year bonds with a face amount of $100 million. The market yield for bonds of similar risk and maturity is 4%. Interest is paid semiannually. At what price did the bonds sell?
> A company issued 6%, 15-year bonds with a face amount of $75 million. The market yield for bonds of similar risk and maturity is 6%. Interest is paid semiannually. At what price did the bonds sell?
> A company issued 5%, 20-year bonds with a face amount of $80 million. The market yield for bonds of similar risk and maturity is 6%. Interest is paid semiannually. At what price did the bonds sell?
> Occasionally, a lease agreement includes a guarantee by the lessee that the lessor will recover a specified residual value when custody of the asset reverts back to the lessor at the end of the lease term. Under what circumstance can the guaranteed resid
> Hoffman Corporation issued $60 million of 5%, 20-year bonds at 102. Each of the 60,000 bonds was convertible into one share of $1 par common stock. Prepare the journal entry to record the issuance of the bonds.
> How are bonds and notes the same? How do they differ?
> A company retired $60 million of its 6% bonds at 102 ($61.2 million) before their scheduled maturity. At the time, the bonds had a remaining discount of $2 million. Prepare the journal entry to record the redemption of the bonds.
> On January 1, a company borrowed cash by issuing a $300,000, 5%, installment note to be paid in three equal payments at the end of each year beginning December 31. What would be the amount of each installment? Prepare the journal entry for the second ins
> On January 1, Snipes Construction paid for earth-moving equipment by issuing a $300,000, 3-year note that specified 2% interest to be paid on December 31 of each year. The equipment’s retail cash price was unknown, but it was determined that a reasonable
> On January 1, 2018, Nantucket Ferry borrowed $14,000,000 cash from BankOne and issued a four-year, $14,000,000, 6% note. Interest was payable annually on December 31. Prepare the journal entries for both firms to record interest at December 31, 2018.
> On January 1, a company purchased 3%, 20-year corporate bonds for $69,033,776 as an investment. The bonds have a face amount of $80 million and are priced to yield 4%. Interest is paid semiannually. Prepare the journal entry to record revenue at the effe
> On January 1, a company issued 3%, 20-year bonds with a face amount of $80 million for $69,033,776 to yield 4%. Interest is paid semiannually. What was the straight-line interest expense on the December 31 annual income statement?
> The way a debtor accounts for the restructuring depends on the extent of the reductionin cash payments called for by the restructured arrangement. Describe, in general, the accounting procedure forthe two basic cases: when, under the new agreement, total
> Pratt Industries owes First National Bank $5 million but, due to financial difficulties, is unable to comply with the original terms of the loan. The bank agrees to settle the debt in exchange for land having a fair value of $3 million. The book value of
> What situations cause us to remeasure a lease liability and right-of-use asset? How is that accomplished?
> Target Corporation prepares its financial statements according to U.S. GAAP. Target’s financial statements and disclosure notes for the year ended January 30, 2016, are available in Connect. This material is also available under the Investor Relations li
> Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements according to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year ended December 31, 2015, are available in Connect. This m
> Security Devices Inc. (SDI) needs additional office space to accommodate expansion. SDI wants to avoid income statement effects that would disrupt its attempts to “smooth” income over time. Required: 1. Which lease classification would management prefer
> Walmart Stores, Inc. is the world’s largest retailer. A large portion of the premises that the company occupies are leased. Its financial statements and disclosure notes revealed the following information: Required: 1. Discuss some po
> On January 1, 2018, Allied Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Allied. The equipment cost Allied $956,000 and h
> When the original terms of a debt agreement are changed because of financial difficulties experienced by the debtor (borrower), the new arrangement is referred to as a troubled debt restructuring. Such a restructuring can take a variety of forms. For acc
> High Time Tours leased rock-climbing equipment from Adventures Leasing on January 1, 2018. High Time has the option to renew the lease at the end of two years for an additional three years for $8,000 per quarter. Adventures purchased the equipment at a c
> Universal Leasing leases electronic equipment to a variety of businesses. The company’s primary service is providing alternate financing by acquiring equipment and leasing it to customers under long-term leases. Universal earns interest under these arran
> Mid-South Auto Leasing leases vehicles to consumers. The attraction to customers is that the company can offer competitive prices due to volume buying and requires an interest rate implicit in the lease that is one percent below alternate methods of fina
> When a note’s stated rate of interest is unrealistic relative to the market rate, the concept of substance over form should be employed. Explain.
> Each of the four independent situations below describes a sales-type lease in which annual lease payments of $10,000 are payable at the beginning of each year. Each is a finance lease for the lessee. Determine the following amounts at the beginning of th
> On January 1, 2018, Rick’s Pawn Shop leased a truck from Corey Motors for a six-year period with an option to extend the lease for three years. Rick’s had no significant economic incentive as of the beginning of the lease to exercise the 3-year extension
> On January 1, 2018, National Insulation Corporation (NIC) leased equipment from United Leasing under a finance lease. Lease payments are made annually. Title does not transfer to the lessee and there is no purchase option or guarantee of a residual value
> On January 1, 2018, Sweetwater Furniture Company leased office space under a 21-year operating lease agreement. The contract calls for annual rent payments on December 31 of each year. The payments are $10,000 the first year and increase by $500 per year
> On January 1, 2018, Winn Heat Transfer leased office space under a three-year operating lease agreement. The arrangement specified three annual rent payments of $80,000 each, beginning December 31, 2018, and at each December 31 through 2020. The lessor,
> Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for $2,000,000 and leased it to Mid-South Urologists Group, Inc. on January 1, 201
> On January 1, 2018, Majestic Mantles leased a lathe from Equipment Leasing under a finance lease. Lease payments are made annually. Title does not transfer to the lessee and there is no purchase option or guarantee of a residual value by Majestic. Portio
> Why will bonds always sell at their price plus any interest that has accrued since the last interest date?
> As a general rule, how should long-term liabilities be reported on the debtor’s balance sheet?
> At the beginning of 2018, VHF Industries acquired a machine with a fair value of $6,074,700 by signing a four-year lease. The lease is payable in four annual payments of $2 million at the end of each year. Required: 1. What is the effective rate of inte
> Culinary Creations leased kitchen equipment under a five-year lease with an option to renew for three years at the end of five years and an option to renew for an additional three years at the end of eight years. The first three-year renewal option can b
> You are the new controller for Moonlight Bay Resorts. The company CFO has asked you to determine the company’s interest expense for the year ended December 31, 2018. Your accounting group provided you the following information on the company’s debt: 1. O
> To raise operating funds, North American Courier Corporation sold its building on January 1, 2018, to an insurance company for $500,000 and immediately leased the building back. The lease is for a 10-year period ending December 31, 2027, at which time ow
> NutraLabs, Inc. leased a protein analyzer to Werner Chemical, Inc. on September 30, 2018. NutraLabs manufactured the machine at a cost of $5 million. The five-year lease agreement calls for Werner to make quarterly lease payments of $391,548, payable eac
> Abbott Equipment leased a protein analyzer to Werner Chemical, Inc. on September 30, 2018. Abbott purchased the machine from NutraLabs, Inc. at a cost of $6 million. The five-year lease agreement calls for Werner to make quarterly lease payments of $391,
> Werner Chemical, Inc. leased a protein analyzer on September 30, 2018. The five-year lease agreement calls for Werner to make quarterly lease payments of $391,548, payable each September 30, December 31, March 31, June 30, with the first payment at Septe
> On January 1, 2018, Worchester Construction leased International Harvester equipment from Newton LeaseCorp. Newton LeaseCorp purchased the equipment from Wellesley Harvester at a cost of $958,158. Worchester borrowing rate for similar transactions is 10%
> On January 1, 2018, Harlon Consulting entered into a three-year lease for new office space agreeing to lease payments of: $7,000 in 2018, $6,000 in 2019 and $5,000 in 2020. Payments are due on December 31 of each year with the first payment being made on
> On January 1, 2018, Harlon Consulting entered into a three-year lease for new office space agreeing to lease payments of: $5,000 in 2018, $6,000 in 2019 and $7,000 in 2020. Payments are due on December 31 of each year with the first payment being made on
> On January 1, 2018, Nguyen Electronics leased equipment from Nevels Leasing for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Nevels. The equipment cost Nevels $824,368 and has an expected e
> If a company prepares its financial statements according to International Financial Reporting Standards, how would it account for convertible bonds it issues for $12.5 million? What is the conceptual justification?
> A six-year lease can be renewed for two additional three-year periods, and it also can be terminated after only three years. How do the lessee and lessor decide the lease term to be used in accounting for the lease?
> What are debt issue costs and how should they be reported?
> How is periodic interest determined for outstanding liabilities? For outstanding receivables? How does the approach compare from one form of debt instrument (say bonds payable) to another (say notes payable)?
> What must a company do in the long run to be able to provide a return to investors and creditors?
> What is meant by GAAP? Why should all companies follow GAAP in reporting to external users?
> Selected balance sheet information for the Wolf Company at November 30, and December 31, 2018, is presented below. The company uses the perpetual inventory system and all sales to customers are made on credit. The following cash flow information also is
> Define net operating cash flows. Briefly explain why periodic net operating cash flows may not be a good indicator of future operating cash flows.
> McGuire Corporation began operations in 2018. The company purchases computer equipment from manufacturers and then sells to retail stores. During 2018, the bookkeeper used a check register to record all cash receipts and cash disbursements. No other jour
> The unadjusted trial balance as of December 31, 2018, for the Bagley Consulting Company appears below. December 31 is the company’s fiscal year-end. Required: 1. Enter the account balances in T-accounts. 2. From the trial balance and in
> The Marchetti Soup Company entered into the following transactions during the month of June: (1) purchased inventory on account for $165,000 (assume Marchetti uses a perpetual inventory system); (2) paid $40,000 in salaries to employees for work perfor
> Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements according to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year ended December 31, 2015, are available in Connect. This m
> Distinguish between the revenue/expense and the asset/liability approaches to setting financial reporting standards.
> Excalibur Corporation sells video games for personal computers. The unadjusted trial balance as of December 31, 2018, appears below. December 31 is the company’s fiscal year-end. The company uses the perpetual inventory system. Informat
> Some theorists contend that companies that create pollution should report the social cost of that pollution in income statements. They argue that such companies are indirectly subsidized as the cost of pollution is borne by society while only production
> Briefly describe the inputs that companies should use when determining fair value. Organize your answer according to preference levels, from highest to lowest priority.
> Describe the purpose of each of the five primary financial statements.
> The information necessary for preparing the 2018 year-end adjusting entries for Vito’s Pizza Parlor appears below. Vito’s fiscal year-end is December 31. a. On July 1, 2018, purchased $10,000 of IBM Corporation bonds at face value. The bonds pay interest
> What are the four different approaches to implementing expense recognition? Give an example of an expense that is recognized under each approach.
> The December 31, 2018, adjusted trial balance for the Blueboy Cheese Corporation is presented below. Required: 1. Prepare an income statement for the year ended December 31, 2018, and a classified balance sheet as of December 31, 2018. 2. Prepare the ne
> Describe how revenue recognition relates to transferring goods or services.
> The Mazzanti Wholesale Food Company’s fiscal year-end is June 30. The company issues quarterly financial statements requiring the company to prepare adjusting entries at the end of each quarter. Assuming all quarterly adjusting entries were properly reco
> What are two advantages to basing the valuation of assets and liabilities on their historical cost?
