Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2018, Rhone-Metro leased equipment to Western Soya Co. for a four-year period ending December 31, 2022, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost $300,000 to manufacture and has an expected useful life of six years. Its normal sales price is $365,760. The expected residual value of $25,000 at December 31, 2022, is not guaranteed. Equal payments under the lease are $104,000 (including $4,000 maintenance costs) and are due on December 31 of each year. The first payment was made on December 31, 2018. Western Soya’s incremental borrowing rate is 12%. Western Soya knows the interest rate implicit in the lease payments is 10%. Both companies use straight-line depreciation. Required: 1. Show how Rhone-Metro calculated the $104,000 annual lease payments. 2. How should this lease be classified (a) By Western Soya Co. (the lessee) and (b) By Rhone-Metro Industries (the lessor)? Why? 3. Prepare the appropriate entries for both Western Soya Co. and Rhone-Metro on December 31, 2018. 4. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor. 5. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2019 (the second lease payment and amortization). 6. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2022, assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is $1,500.
> A lessee should classify a lease transaction as a finance lease if it is noncancelable and one or more of five classification criteria are met. Otherwise, it is an operating lease. What are these criteria?
> How are leases and installment notes the same? How do they differ?
> How does an installment note differ from a note for which the principal is paid as a single amount at maturity?
> On June 30, 2018, Georgia-Atlantic, Inc. leased warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $562,907 over a three-year lease term, payable each June 30 and December
> How is interest expense determined in a finance lease transaction? How does the approach compare to other forms of debt (such as bonds payable or notes payable)?
> The long-term liability section of Twin Digital Corporation’s balance sheet as of December 31, 2017, included 12% bonds having a face amount of $20 million and a remaining discount of $1 million. Disclosure notes indicate the bonds were issued to yield 1
> On August 31, 2015, Chickasaw Industries issued $25 million of its 30-year, 6% convertible bonds dated August 31, priced to yield 5%. The bonds are convertible at the option of the investors into 1,500,000 shares of Chickasaw’s common stock. Chickasaw re
> Terms of a lease agreement and related facts were: a. The lease asset had a retail cash selling price of $100,000. Its useful life was six years with no residual value (straight-line depreciation). b. Annual lease payments at the beginning of each year w
> EDGAR, the Electronic Data Gathering. Analysis, and Retrieval system, performs automated collection, validation, indexing, acceptance and forwarding of submissions by companies and others who are required by law to file forms with the U.S. Securities and
> AGF Foods Company is a large, primarily domestic, consumer Foods Company involved in the manufacture, distribution, and sale of a variety of food products. Industry averages are derived from Troy’s The Almanac of Business and Industrial
> The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assistant to the controller for Hunt Manufacturing, wore one of the gloomy faces that were just emerging from the conference room. “Wow, I knew it was bad, but n
> The Jaecke Group, Inc., manufactures various kinds of hydraulic pumps. In June 2018, the company signed a fouryear purchase agreement with one of its main parts suppliers, Hydraulics, Inc. Over the four-year period, Jaecke has agreed to purchase 100,000
> The basic concept of “substance over form” influences lease accounting. Explain.
> While reading a recent issue of Health & Fitness, a trade journal, Brandon Wilde noticed an ad for equipment he had been seeking for use in his business. The ad offered oxygen therapy equipment under the following terms: Model BL 44582 $204,000 zero inte
> A lease might specify that lease payments may be increased (or decreased) at some future time during the lease term depending on whether or not some specified event occurs such as revenues or profits exceeding some designated level. Under what circumstan
> The following appeared in the October 15, 2018, issue of the Financial Smarts Journal: This announcement is not an offer of securities for sale or an offer to buy securities. New Issue …………………………………………………………………………………………….. October 15, 2018 $750,000,000 C
> On January 1, 2018, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: Required: 1. What is the face amount of the bonds? 2. What is
> On January 1, 2018, Bradley Recreational Products issued $100,000, 9%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $96,768 to yield an annual return of 10%. Required: 1. Prepare an amortization sch
> Three years ago American Insulation Corporation issued 10%, $800,000, 10-year bonds for $770,000. American Insulation exercised its call privilege and retired the bonds for $790,000. The corporation uses the straight-line method to determine interest. R
> On January 1, 2018, Lesco Leasing leased equipment to Quality Services under a finance/sales-type lease designed to earn NRC a 12% rate of return for providing long-term financing. The lease agreement specified: a. Ten annual payments of $56,000 beginnin
> On January 1, 2018, Baddour, Inc., issued 10% bonds with a face amount of $160 million. The bonds were priced at $140 million to yield 12%. Interest is paid semiannually on June 30 and December 31. Baddour’s fiscal year ends September 30. Required: 1. W
> Compare the two commonly used methods of determining interest on bonds.
> On January 1, 2018, Instaform, Inc., issued 10% bonds with a face amount of $50 million, dated January 1. The bonds mature in 2037 (20 years). The market yield for bonds of similar risk and maturity is 12%. Interest is paid semiannually. Required: 1. De
> At January 1, 2018, Rothschild Chair Company, Inc., was indebted to First Lincoln Bank under a $20 million, 10% unsecured note. The note was signed January 1, 2015, and was due December 31, 2021. Annual interest was last paid on December 31, 2016. Rothsc
> On March 1, 2018, Baddour, Inc., issued 10% bonds, dated January 1, with a face amount of $160 million. The bonds were priced at $140 million (plus accrued interest) to yield 12%. Interest is paid semiannually on June 30 and December 31. Baddour’s fiscal
> On June 30, 2018, Georgia-Atlantic, Inc. leased a warehouse facility from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $562,907 over a three-year lease term, payable each June 30 and December
> The following transactions relate to bond investments of Livermore Laboratories. The company’s fiscal year ends on December 31. Livermore uses the straight-line method to determine interest. 2018 July 1 Purchased $16 million of Bracecourt Corporation 10%
> When a company sells an asset and simultaneously leases it back, what criteria must be met to apply sale-leaseback accounting rather than accounting for the transaction as a loan ?
> HP Inc. (formerly Hewlett-Packard Company) issued zero-coupon notes at the end of its 1997 fiscal year that mature at the end of its 2017 fiscal year. One billion, eight hundred million dollars face amount of 20-year debt sold for $968 million, a price t
> What is a purchase option? How does it affect accounting for a lease?
> Cordova Tools has bonds outstanding during a year in which the market rate of interest has risen. If Cordova has elected the fair value option for the bonds, will it report a gain or a loss on the bonds for the year? Explain.
> At January 1, 2018, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $25,000 beginning January 1, 2018, the beginning of the lease, and at each December 31
> Eye Deal Optometry leased vision-testing equipment from Insight Machines on January 1, 2018. Insight Machines manufactured the equipment at a cost of $200,000 and lists a cash selling price of $250,177. Appropriate adjusting entries are made quarterly. R
> Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2018, Rhone-Metro leased equipment to Western Soya Co. for a noncancelable stated lease term of four years ending December 31, 2022, at which time possession of the lea
> At times, companies try to induce voluntary conversion by offering an added incentive—maybe cash, stock warrants, or a more favorable conversion ratio. How is such an inducement accounted for? How is it measured?
> American Food Services, Inc. leased a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2018. The lease agreement for the $4 million (fair value and present value of the lease paym
> Listed below are several terms and phrases associated with long-term debt. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it. List A List B a. Straight-line method b. Discount c. Liquidati
> Each of the three independent situations below describes a finance lease in which annual lease payments are payable at the end of each year. The lessee is aware of the lessor’s implicit rate of return. Required: For each situation, det
> Each of the four independent situations below describes a lease requiring annual lease payments of $10,000. For each situation, determine the appropriate lease classification by the lessee and indicate why. Situation 1 4 Lease term (years) 4. 4 4 As
> To raise operating funds, National Distribution Center sold its office building to an insurance company on January 1, 2018, for $800,000 and immediately leased the building back. The operating lease is for the final 12 years of the building’s estimated 2
> To raise operating funds, Signal Aviation sold an airplane on January 1, 2018, to a finance company for $770,000. Signal immediately leased the plane back for a 13-year period, at which time ownership of the airplane will transfer to Signal. The airplane
> Access the FASB’s Codification Research System at the FASB website (www.fasb.org). Determine the specific citation for accounting for each of the following items: 1. Definition of initial direct costs. 2. When a modification to a contract is reported as
> The lease term is the noncancelable period for which a lessee has the right to use an underlying asset, modified by any renewal or termination options that are “reasonably certain” to be exercised, or not exercised. Options whose exercise is under the co
> Listed below are several terms and phrases associated with leases. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it. List A List B 1. Effective rate times balance a. PV of purchase option
> The following relate to an operating lease agreement: a. The lease term is 3 years, beginning January 1, 2018. b. The leased asset cost the lessor $800,000 and had a useful life of eight years with no residual value. The lessor uses straight-line depreci
> On December 31, 2018, Rhone-Metro Industries leased equipment to Western Soya Co. for a four-year period ending December 31, 2022, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost Rhone-Metro $365,760 and h
> The discount rate influences virtually every amount reported in connection with a lease by both the lessor and the lessee. What is the lessor’s discount rate when determining the present value of lease payments? What is the lessee’s discount rate?
> The lease agreement and related facts indicate the following: a. Leased equipment had a retail cash selling price of $300,000. Its useful life was five years with no residual value. b. The lease term is five years and the lessor paid $265,000 to acquire
> On January 1, 2018, NFB Visual Aids issued $800,000 of its 20-year, 8% bonds. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. NFB Visual Aids records interest expense at the effective rate and elected the
> Newton Labs leased chronometers from Brookline Instruments on January 1, 2018. Brookline Instruments manufactured the chronometers at a cost of $200,000. The chronometers have a fair value of $260,000. Appropriate adjusting entries are made quarterly. Re
> Could a finance lease under IFRS be classified as an operating lease under U.S. GAAP? Explain.
> Braxton Technologies, Inc., constructed a conveyor for A&G Warehousers that was completed and ready for use on January 1, 2018. A&G paid for the conveyor by issuing a $100,000, four-year note that specified 5% interest to be paid on December 31 of each y
> At the beginning of 2018, VHF Industries acquired a machine with a fair value of $6,074,700 by issuing a four-year, noninterest-bearing note in the face amount of $8 million. The note is payable in four annual installments of $2 million at the end of eac
> At January 1, 2018, Brant Cargo acquired equipment by issuing a five-year, $150,000 (payable at maturity), 4% note. The market rate of interest for notes of similar risk is 10%. Required: 1. Prepare the journal entry for Brant Cargo to record the purcha
> At the beginning of the year, Lambert Motors issued the three notes described below. Interest is paid at year-end. 1. The company issued a two-year, 12%, $600,000 note in exchange for a tract of land. The current market rate of interest is 12%. 2. Lamber
> On January 1, 2018, Darnell Window and Pane issued $18 million of 10-year, zero-coupon bonds for $5,795,518. Required: 1. Prepare the journal entry to record the bond issue. 2. Determine the effective rate of interest. 3. Prepare the journal entry to re
> The fiscal year ends December 31 for Lake Hamilton Development. To provide funding for its Moonlight Bay project, LHD issued 5% bonds with a face amount of $500,000 on November 1, 2018. The bonds sold for $442,215, a price to yield the market rate of 6%.
> McWherter Instruments sold $400 million of 8% bonds, dated January 1, on January 1, 2018. The bonds mature on December 31, 2037 (20 years). For bonds of similar risk and maturity, the market yield was 10%. Interest is paid semiannually on June 30 and Dec
> A zero-coupon bond pays no interest. Explain.
> On February 1, 2018, Cromley Motor Products issued 9% bonds, dated February 1, with a face amount of $80 million. The bonds mature on January 31, 2022 (4 years). The market yield for bonds of similar risk and maturity was 10%. Interest is paid semiannual
> 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 by issuing a $600,000, three-year note that specified 4% i
> When are initial direct costs recognized in an operating lease? In a sales-type lease with selling profit? In a sales-type lease with no selling profit? Why?
> Wilkins Food Products, Inc., acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2016. In payment for the machine Wilkins issued a three-year installment note to be paid in thre
> At the end of 2017, Majors Furniture Company failed to accrue $61,000 of interest expense that accrued during the last five months of 2017 on bonds payable. The bonds mature in 2031. The discount on the bonds is amortized by the straight-line method. The
> When companies offer new debt security issues, they publicize the offerings in the financial press and on Internet sites. Assume the following were among the debt offerings reported in December 2018: New Securities Issues Corporate National Equipment Tra
> 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 March 1, 2018, Stratford Lighting issued 14% bonds, dated March 1, with a face amount of $300,000. The bonds sold for $294,000 and mature on February 28, 2038 (20 years). Interest is paid semiannually on August 31 and February 28. Stratford uses the s
> On February 1, 2018, Strauss-Lombardi issued 9% bonds, dated February 1, with a face amount of $800,000. The bonds sold for $731,364 and mature on January 31, 2038 (20 years). The market yield for bonds of similar risk and maturity was 10%. Interest is p
> National Orthopedics Co. issued 9% bonds, dated January 1, with a face amount of $500,000 on January 1, 2018. The bonds mature on December 31, 2021 (4 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually
> When Patey Pontoons issued 6% bonds on January 1, 2018, with a face amount of $600,000, the market yield for bonds of similar risk and maturity was 7%. The bonds mature December 31, 2021 (4 years). Interest is paid semiannually on June 30 and December 31
> 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
