On December 31, 20X1, Thomas Henley, financial vice president of Kingston Corporation, signed a no cancelable three-year lease for an excavator. The lease calls for annual payments of $41,635 per year due at the end of each of the next three years. The leased equipment’s expectedeconomic life is six years. No cash changed hands because the first payment wasn’t due until December 31, 20X2. Assume that the appropriate rate for discounting the lease payments is 12%. Kingston normally depreciates assets using the straight-line basis. Thomas has some concerns about how the lease will affect his financial statements. Required: 1. Prepare an amortization schedule for the lease. 2. Before the effects of the lease, Kingston Corporation had $2,000,000 of total assets and $1,000,000 in total debt. How will the new lease change its debt-to-assets ratio atDecember 31, 20X1? 3. Before the effects of the lease, Kingston had current assets of $500,000 and currentliabilities of $294,118. How will the new lease affect the current ratio at December 31,20X1? 4. Henley estimates that 20X2 pre-tax income before the effects of the new lease will beapproximately $267,000. What is the percentage change in pre-tax income from the newlease? 5. How would the answer to requirement 4 change if Kingston were using IFRS 16?
> Neighborhood Supermarkets is preparing to go public, and you are asked to assist the firm bypreparing its statement of cash flows for 20X1. Neighborhood’s balance sheets at December 31, 20X0, and December 31, 20X1, and its income statem
> The following are selected balance sheet accounts of Zach Corporation at December 31, 20X1and 20X0, as well as the increases or decreases in each account from 20X0 to 20X1. Also presented is selected income statement information for the year ended Decemb
> The Barden Corporation’s comparative balance sheets for 20X1 and 20X0 are presented below. Additional Information: a. On January 11, 20X1, Barden purchased land for $170,000 cash. b. On January 23, 20X1, Barden extinguished long-term bo
> Karr, Inc., reported net income of $300,000 for 20X1. Changes occurred in several balance sheet accounts as follows: Additional Information: a. During 20X1, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,
> The management of Banciu Corporation provides you with comparative balance sheets at December 31, 20X1, and December 31, 20X0, appearing below. Supplemental Information: a. The following table presents a comparative analysis of retained earnings as of De
> Recall the Rombaurer Metals example in the chapter: On October 1, 20X1, Rombaurer has 10 million pounds of copper inventory on hand at an average cost of $0.65 a pound. The spotprice for copper is $0.90 a pound. Instead of selling copper now, Rombaurer d
> On January 1, 20X1, Four Brothers Manufacturing borrowed $10 million from Guiffrie Bankby signing a three-year, 8.0% fixed-rate note. The note calls for interest to be paid annually on December 31. The company then entered into an interest rate swap agre
> Provided below are excerpts from The Walt Disney Company Form 10-K for the fiscal year ended October 3, 2015. Description of the Business and Segment Information The Walt Disney Company, together with the subsidiaries through which businesses are conduct
> Basie Business Forms borrowed $5 million on July 1, 20X1, from First Kansas City Bank. Theloan required annual interest payments at the LIBOR rate, reset annually each June 30. Theloan principal is due in five years. The LIBOR rate for the first year is
> Newton Grains plans to sell 100,000 bushels of corn from its current inventory in March 20X2. The company paid $1 million for the corn during the fall 20X1 harvest season. On October 1, 20X1, Newton writes a forward contract to sell 100,000 bushels of co
> Silverado Inc. buys titanium from a supplier that requires a six-month firm commitment on allpurchases. On January 1, 20X1, Silverado signs a contract with the supplier to purchase 10,000 pounds of titanium at the current forward rate of $310 per pound w
> Exhibit 19.1 describes Chalk Hill’s use of an interest rate swap to hedge its cash flow exposureto interest rate risk from variable rate debt. The journal entries in the exhibit illustrate howspecial “hedge accounting” rules apply to the swap. Suppose in
> On July 1, 20X1, Stan Getz, Inc., bought call option contracts for 500 shares of Selmer Manufacturing common stock. The contracts cost $200, expire on September 15, and have anexercise price of $40 per share. The market price of Selmer’s stock that day w
> George Corporation has a defined benefit pension plan for its employees. The following information is available for 20X1: Required: 1. What was the January 1, 20X1, fair value of the plan assets? 2. What is the expected dollar return on plan assets for 2
> The following information pertains to the pension plan of Beatty Business Group: Note that the information in Columns (2) and (3) are as of the beginning of the year, whereasthe information in Column (4) is measured over the year. The AOCIâ€&#
> The following information is based on an actual annual report. Different names and years are being used. Bond and some of its subsidiaries provide certain postretirement medical, dental, and visioncare and life insurance for retirees and their dependents
> Use the same set of facts as in P15-5. In addition, assume that based on ERISA rules, Magee Corporation must contribute the following amounts to the pension fund: Magee intends to fund the pension plan only to the extent required by ERISA rules. Assumeth
> On January 1, 20X1, Magee Corporation started doing business by hiring R. Walker as an employeeat an annual salary of $50,000, with an annual salary increment of $10,000. Based on his currentage and the company’s retirement program, Walker is required to
> Excerpts from IBM’s 2012 segment disclosures are given below. Business Segments and Capabilities The company’s major operations consist of five business segments: Global Technology Services and Global Business Services
> You have the following information related to Chalmers Corporation’s pension plan: a. Defined benefit, noncontributory pension plan. b. Plan initiation, January 1, 20X3 (no credit given for prior service). c. Retirement benefits paid at
> Puhlman Inc. provides a defined benefit pension plan to its employees. It’s a smoothrecognition of its gains and losses when computing its market-related value to compute expected return. Additional information follows: During 20X1, the
> Turner Inc. provides a defined benefit pension plan to its employees. The company has 150employees. The remaining amortization period at December 31, 20X0, for prior service cost is 5 years. The average remaining service life of employees is 11 years at
> Berle Corp. has a defined benefit pension plan that features the following data: January 1, 20X1 (beginning of fiscal year): The CFO of Berle Corp. devises a plan to inflate artificially net income by using an estimate for expected return on plan assets
> Selected pension information extracted from the retirement benefits note that appeared in Green’s 20X1 annual report follows. (These numbers have been modified but are based on theactivities of a real company whose name has been disguis
> On January 1, 20X1, Cello Co. established a defined benefit pension plan for its employees. At January 1, 20X1, Cello estimated the service cost for 20X1 to be $45,000. At January 1, 20X2,it estimated 20X2 service cost to be $49,000. On the plan inceptio
> The following information pertains to Sparta Company’s defined benefit pension plan for 20X1: Service cost for 20X1 was $90,000. The Sparta pension plan did not receive any employercontributions or pay any benefits during the year. Spar
> In 20X1, Phillips Company reported $10,000,000 of pre-tax book income and also had $10,000,000 of taxable income. It incurred a $1,000,000 book expense that it deducted on itstax return. Assuming a 21% tax rate, this deduction results in a $210,000 tax b
> Mozart Inc.’s $98,000 taxable income for 20X1 will be taxed at the 21% corporate tax rate. Fortax purposes, its depreciation expense exceeded the depreciation used for financial reportingpurposes by $27,000. Mozart has $45,000 of purchased goodwill on it
> Bryan Trucking Corporation began business on January 1, 20X1, and consists of the parententity, domiciled and operating in Country X, and a subsidiary operating in Country Y. Bryanis required, as a listed company in Country X, to prepare financial statem
> The following is an excerpt from McDonald’s Corporation’s 2015 Management Discussion and Analysis. The MD&A, which is included in the Form 10-K annual report to the SEC, provides insight into the financial statemen
> On January 1, 20X1, the Dolan Company purchased a new office building in Las Vegas for $6,100,000, which it holds for rentals and capital appreciation. Dolan estimated the buildingwould have a useful life of 25 years and a residual value of $1,100,000. D
> Metge Corporation’s worksheet for calculating taxable income for 20X1 follows: The enacted tax rate for 20X1 is 21%, but it is scheduled to increase to 25% in 20X2 and subsequent years. All temporary differences are originating differen
> Nelson Inc. purchased machinery at the beginning of 20X1 for $90,000. Management used thestraight-line method to depreciate the cost for financial reporting purposes and the sum-of the years’ digits method to depreciate the cost for tax purposes. The lif
> For financial statement reporting, Lexington Corporation recognizes royalty income accordingto GAAP. However, royalties are taxed when collected. At December 31, 20X0, deferred royaltyincome of $400,000 was included in Lexington’s balance sheet. All of t
> Early in 2017, Altuve Corporation forecasted that it would report a deferred tax liability of $70million at December 31, 2017, representing the additional tax that would be due to U.S. authorities if its un repatriated foreign earnings were to be repatri
> The following information pertains to Ramesh Company for 20X1: The company has one permanent difference and one temporary difference between book andtaxable income. Required: 1. Calculate the amount of temporary difference for 20X1 and indicate whether
> In early 2017, Quintana Corporation prepared the following forecast of its earnings for 2017and 2018: Quintana’s pre-tax income forecasts include $40 million of nontaxable income in 2017 and $30million of nontaxable income in 2018. Thes
> Current tax law limits the amount of interest expense that corporations may deduct to the sumof (a) taxable interest income and (b) 30% of taxable income (excluding taxable interestincome) before any deductions for interest, depreciation, amortization, o
> Bortles Corporation’s U.S. operations have been in “steady state” for several years, whereby itspre-tax income has been constant (at $400 million each year) and its originating temporarydifferences and reversing temporary differences exactly offset. At D
> Trevathan Corporation has only one source of temporary differences—warranties. At December 31,2016, 2017, and 2018, the amounts of cumulative temporary differences were as follows: Temporary differences related to warranties arise becau
> The disclosure rules for business combinations complicate financial analysis. Trend analysis becomes difficult because comparative financial statements are not retroactively adjusted to include data for the acquired company for periods prior to the acqui
> Devers Corporation began operations in 20X1 and had the following partial income statements, which are complete only down to pre-tax income. Devers had no book-tax differences except for the effects of its net operating loss carryforward. The corporate t
> Cishek Corporation sold $100 million of gift cards in 20X1. The gift cards may be used to purchase goods from Cishek in the future. The gift cards never expire, and Cishek expects that none of the gift cards will go unused. Cishek projects the gift cards
> Goff Corporation has only one temporary difference, which is related to the use of accelerateddepreciation for income tax purposes and straight-line depreciation for financial reporting. Goff had the following amounts of cumulative temporary difference a
> Boers Corporation and Bernstein, Inc. both project pre-tax income of $100 million in 20X1. Both also expect there to be no change in their cumulative temporary differences during the year. However, the two companies are in very different deferred tax pos
> Flower Company started doing business on January 1, 20X0. For the year ended December 31, 20X1, it reported $450,000 pre-tax book income on its income statement. Flower is subject toa 21% corporate tax rate for this year and the foreseeable future. Addit
> In 20X1, MB Inc. is subject to a 21% tax rate. For book purposes, it expenses $1,500,000 ofexpenditures. MB intends to deduct these expenditures on its 20X1 tax return despite tax lawprecedent that makes it less than 50% probable that the deduction will
> Moss Inc. follows GAAP for financial reporting purposes and appropriately uses the installment method of accounting for income tax purposes. It reported $250,000 of pre-tax incomeunder GAAP, but it will report the corresponding taxable income in the foll
> On July 1, 20X1, Burgundy Studios leases camera equipment from Corning stone Corporation. Corning stone had to make significant changes to the equipment to meet Burgundy’s needs, andit would be significantly costly to modify the equipment for alternative
> Using the data in P13–6, prepare the journal entries required by Coleman Inc. on January 1, 20X1, assuming that (a) Trask does not guarantee the residual value and (b) Trask doesguarantee it. Coleman paid $325,000 to acquire the office equipment several
> The following information is based on a real company whose name has been disguised. Opus One operates in a single business segment, the retailing and servicing of home audio, car audio, and video equipment. Its operations are conducted in Texas through 2
> On January 1, 20X1, Trask Co.signs an agreement to lease office equipment from Coleman Inc. forthree years with payments of $193,357 beginning December 31, 20X1. The equipment’s fair value is$500,000 with an expected useful life of four years. At the end
> On January 1, 20X1, Bare Trees Company signed a three-year non cancelable lease with Dreams Inc. The lease calls for three payments of $62,258.09 to be made at each year-end. The leasepayments include $3,000 of executory costs related to service. The lea
> On January 1, 20X1, Bill Inc. leases manufacturing equipment from Beatrix Corporation. The lease covers seven years and requires annual lease payments of $51,000, beginning on January 1, 20X1. The unguaranteed residual value at the end of seven years is
> On January 1, 20X1, Seven Wonders Inc. signed a five-year non cancelable lease with Moss Company. The lease calls for five payments of $277,409.44 to be made at the end of each year. The leased asset has a fair value of $1,200,000 on January 1, 20X1. Sev
> Mason Company has a machine with a cost and fair value of $100,000. On January 1, 20X1, itleases the machine for a 10-year period to Drake Company. The machine has a 12-year expectedeconomic life. Payments are received at the beginning of each year. The
> On January 1, 20X1, Bonduris Company leases warehouse space in Oakland, CA. The lease isfor six years with payments to be made at the beginning of each year. The lease calls for Bonduris to pay $15,000 on January 1, 20X1. The lease calls for subsequent l
> On January 1, 20X1, Dwyer Company leases space for a donut shop. The lease is for five yearswith payments to be made at the beginning of each year. The lease calls for Dwyer to pay $10,000 on January 1, 20X1; $11,000 on January 1, 20X2; $12,500 on Januar
> On October 1, 20X1, Brady Consulting leases unmodified equipment from Damon Corporation. The lease covers four years and requires lease payments of $73,046, beginning on September 30, 20X2. The unguaranteed residual value is $200,000. On October 1, 20X1,
> On January 1, 20X1, Merchant Co. sold a tractor to Swanson Inc. and simultaneously leased itback for five years. The tractor’s fair value is $300,000, but its carrying value on Merchant’sbooks prior to the transaction was $200,000. The tractor has a seve
> On January 1, 20X1, Overseas Leasing Inc. (the lessor) purchased five used oil tankers from Seven Seas Shipping Company at a price of $99,817,750. Overseas immediately leased the oiltankers to Pacific Ocean Oil Company (the lessee) on the same date. The
> The income statement for the year ended December 31, 20X1, as well as the balance sheets asof December 31, 20X1, and December 31, 20X0, for Lucky Lady Inc. follow. This informationis taken from the financial statements of a real company whose name has be
> Assume that on January 1, 20X1, Trans Global Airlines leases two used Boeing 737s from Aircraft Lessors Inc. The eight-year lease calls for payments of $10,000,000 at each year-end. On January 1, 20X1, the Boeing 737s have a total fair value of $60,000,0
> Moore Company sells and leases its computers. Moore’s cost and sales price per machine are $1,200 and $3,000, respectively. At the end of three years, the expected residual value is $400,which is guaranteed by the lessee. Moore leases 20 of these machine
> Refer to the information in P13–10. Assume that at the commencement of the lease, collectability of the payments is not probable and the lessor uses the straight-line depreciation method. Required: 1. Prepare the necessary journal entries for Railcar fo
> On January 1, 20X1, Railcar Leasing Inc. (the lessor) purchased 10 used boxcars from Railroad Equipment Consolidators at a price of $8,749,520. Railcar leased the boxcars to the Reading Railroad Company (the lessee) on the same date. The lease is for eig
> Bunker Company negotiated a lease with Gilbreth Company that begins on January 1, 20X1. The lease term is three years, and the asset’s economic life is five years. The equipment wascustomized, and it would be of little use to the lessor at the end of the
> Clovis Company recently issued $500,000 (face value) bonds to finance a new constructionproject. The company’s chief accountant prepared the following bond amortization schedule: Required: 1. Compute the discount or premium on the sale
> You have the following information for Brophy, Inc. Required: 1. How much interest expense did the company record during Year 2 on the 7% debentures? How much of the original issue discount was amortized during Year 2? 2. How much interest expense did th
> The following information appeared in the 20X4 annual report of Rumours, Inc.: Rumours, Inc. issued $10 million, 10% coupon bonds on January 1, 20X1, due on December 31,20X5. The prevailing market interest rate on January 1, 20X1, was 12%, and the bonds
> In 20X5, Kahn Financial Group used the fair value option for some of its own debt. During thefirst quarter of 20X5, the fair value of its debt declined by $2.7 billion. Its reported net incomefor the quarter was $1.6 billion. Required: 1. Suppose Kahn F
> On January 1, 20X1, Tango-In-The-Night, Inc., issued $75 million of bonds with an 8% couponinterest rate. The bonds mature in 10 years and pay interest semiannually on June 30 and December 31 of each year. The market rate of interest on January 1, 20X1,
> Mattel, Inc., develops and manufacturers toys that it sells globally. Presented below are excerptsfrom its Form 10-K for the year ended December 31, 2018. NOTE 10—DERIVATIVE INSTRUMENTS Mattel seeks to mitigate its exposure to foreign c
> Avenet Inc., a U.S. company, is a global provider of electronic parts, enterprise computing and storage products, and supply chain and logistics services for the electronic components industry. The company’s 2009 annual report contained the following not
> On January 1, 20X1, Mason Manufacturing borrows $500,000 and uses the money to purchasecorporate bonds for investment purposes. Interest rates were quite volatile that year and sowere the fair values of Mason’s bond investment (an asset
> On January 1, 20X1, Newell Manufacturing purchased a new drill press that had a cash purchase price of $6,340. Newell decided instead to pay on an installment basis. The installmentcontract calls for four annual payments of $2,000 each beginning in one y
> On January 1, 20X1, Fleetwood Inc. issued bonds with a face amount of $25 million and astated interest rate of 8%. The bonds mature in 10 years and pay interest semiannually on June 30 and December 31 of each year. The market rate of interest on January
> On July 1, 20X1, Heflin Corporation (a fictional company) issued $20 million of 12%, 20-yearbonds. Interest on the bonds is paid semiannually on December 31 and June 30 of each year,and the bonds were issued at a market interest rate of 8%. Required: 1.
> On January 1, 20X0, Korman, Inc., issued $1.0 billion of 3% zero coupon subordinated debentures, which were issued at a price of $553.68 per $1,000 principal amount at maturity. Thebonds were priced to yield 3% per annum, computed on an annual basis. The
> On January 1, 20X1, Chain Corporation issued $5 million of 7% coupon bonds at par. The bondsmature in 20 years and pay interest semiannually on June 30 and December 31 of each year. On December 31, 20Y1, the market interest rate for bonds of similar risk
> On January 1, 20X1, Nicks Corporation issued $250 million of floating-rate debt. The debtcarries a contractual interest rate of “LIBOR plus 5.5%,” which is reset annually on January 1of each year. The LIBOR rates on January 1, 20X1, 20X2, and 20X3, were
> On July 1, 20X1, McVay Corporation issued $15 million of 10-year bonds with an 8% statedinterest rate. The bonds pay interest semiannually on June 30 and December 31 of each year. The market rate of interest on July 1, 20X1, for bonds of this type was 10
> National Sweetener Company owns the patent to the artificial sweetener known as Supersweet. Assume that National Sweetener acquired the patent on January 1, 20X1, at a cost of $300 million;expected the patent to have an economic useful life of 12 years;
> Refer to the facts in Problem 11-8. Repeat requirements 2 through 5 using the cost model (asopposed to the revaluation model) under IFRS.
> In 20X0, the cereal division of Bloom Company (a fictional company) decided to test marketin 20X1 an organic corn-based cereal to be called Healthcrisp. The business plan calls for production to begin in late May 20X1, with retail store delivery starting
> Yachting in Paradise, Inc., was founded late in 20X0 by retired Admiral Andy Willits to provideexecutive retreats aboard a luxury yacht with ports of call scattered around the South Pacific. Yachting in Paradise is a U.S. firm and follows U.S. GAAP. On J
> Fly-by-Night is an international airline company. Its fleet includes Boeing 757s, 747s, and 737sand McDonnell Douglas MD-83s and MD-80s. Assume that Fly-by-Night made the followingexpenditures related to these aircraft in 20X1: a. New jet engines were in
> On April 23, 20X1, Starlight Department Stores, Inc., acquired a 75-acre tract of land by paying $25,000,000 in cash and by issuing a six-month note payable for $5,000,000 and 1,000,000shares of its common stock. On April 23, 20X1, Starlight’s common sto
> Crews Cable Company provides phone, internet, television, and security services to its customers. Crews offers a promotion where current customers can add phone and security services foran additional $60 per month if they sign a two-year contract. Custom
> Hopkins Co. often partners with other companies to deliver technology solutions to its clients. Because of these working relationships, Hopkins offers a sales incentive program to these companies for work that is brought to Hopkins. Hopkins agrees to pay
> On June 30, 20X1, Macrosoft Company acquired a 10-acre tract of land. On the tract was a warehouse that Macrosoft intended to use as a distribution center. At the time of purchase, theland had an assessed tax value of $6,300,000, and the building had an
> IceCap Hotels operates a series of northern European hotels and reports under IFRS. On June 30, 20X0, IceCap purchased a hotel for €2,100,000. IceCap reports hotel values on the balancesheet under Property, plant, and equipment. The esti
> White Ski Resorts operates a series of ski resorts in northern Europe and reports under IFRS. On June 30, 20X0, White purchased land for €3,000,000. White reports land values on thebalance sheet under Property, plant, and equipment. The
> 1. Contrast the economic sacrifice and expected benefit approaches to long-lived assetvaluation. 2. GAAP requires firms to use historical cost (in most cases) to report the value of long-livedassets. As a statement reader, do you think that firms should
> Prescott Co. management has committed to a plan to dispose of a group of assets associatedwith the manufacture of railroad cars. This group of assets qualifies as a component of anentity for financial reporting purposes. As of December 31, 20X1, manageme
> Refer to The Kroger Co. information in Case 15-3. Required: Explain how net benefit cost and OCI would change if The Kroger Co. were using IAS 19.
> Gardenia Co. and Lantana Co. both operate in the same industry. Gardenia began its operations in 20X1 with a $20 million initial investment in plant and equipment with an expectedlife of 10 years. Lantana’s net asset base is also $20 million, but its ass
> The 20X0 income statement and other information for Mallard Corporation, which is about to purchase a new machine at a cost of $500 and a new computer system at a cost of $300, follow. Additional Information: • The two new assets are ex
> Assume that Major Motors Corporation, a large automobile manufacturer, reported in a recentannual report to shareholders that its buildings had an original cost of $4,694,000,000. a. Major Motors uses the straight-line depreciation method to depreciate t
> Consider the following two scenarios: Scenario I: Over the 20X1–20X5 period, Micro Systems, Inc., spends $10 million a year todevelop patents on new computer hardware manufacturing technology. While some of itsprojects failed, the firm did develop severa
