Question: What nonlease costs might be included as

> 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

> 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

> 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?

> 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

> 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 w

> 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