ACCT 302 Quiz 1 Leases, Investments, Pensions, and Other Post Retirement Benefits solutions answers

ACCT 302 Quiz 1 Leases, Investments, Pensions, and Other Post Retirement Benefits solutions complete answers 

 

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Turner Company owns 10% of the outstanding stock of ICA Company. During the current year, ICA paid a $4.30 million cash dividend on its common shares.

 

Jeremiah Corporation purchased debt securities during 2021 and classified them as securities available-for-sale:

 

All declines are considered to be temporary. How much gain will be reported by Jeremiah Corporation in the December 31, 2021, income statement relative to the portfolio?

 

The following incomplete (columns have missing amounts) pension spreadsheet is for the current year for First Republic Corporation (FRC).

 

What was the actuary's interest (discount) rate?

 

A lease agreement that qualifies as a finance lease calls for annual lease payments of $10,000 over a five-year lease term (also the asset’s useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 4%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 

a. Determine the present value of the lease upon the lease's inception.

 

b. Create a partial amortization through the first payment on January 1, 2017.

 

c. If the lessee’s fiscal year is the calendar year, what would be the pretax amounts related to the lease that the lessee would report in its income statement for the first year ended December 31 (ignore taxes)?

 

The following incomplete (columns have missing amounts) pension spreadsheet is for the current year for First Republic Corporation (FRC).

 

What was the prior service cost at the beginning of the year?

 

Lance Brothers Enterprises acquired $545,000 of 5% bonds, dated July 1, on July 1, 2021, as a long-term investment. Management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Lance Brothers paid $465,000 for the investment in bonds and will receive interest semiannually on June 30 and December 31.

 

Prepare the journal entries (a) to record Lance Brothers’ investment in the bonds on July 1, 2021, and (b) to record interest on December 31, 2021, at the effective (market) rate. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

 

Turner Company purchased 25% of the outstanding stock of ICA Company for $11,600,000 on January 2, 2021. Turner elects the fair value option to account for the investment. During 2021, ICA reports $910,000 of net income and on December 30 pays a dividend of $660,000. On December 31, 2021, the fair value of Turner’s investment has increased to $14,700,000.

 

Prepare the journal entries in the books of Turner to account for this investment during 2021. Assume that Turner will account for the investment using the fair value through net income approach. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

 

Fowler Inc. purchased $88,000 of bonds on January 1, 2021. The bonds pay interest semiannually and mature in 30 years, at which time the $88,000 principal will be paid. The bonds do not pay any amounts other than interest and principal. Fowler’s intention is to collect contractual cash flows and eventually sell the bonds within the next couple of years if the price is right. During 2021, the fair value of the bonds increased to $106,000. Fowler reports investments under IFRS No. 9.

 

How much unrealized gain or loss will Fowler include in 2021 net income with respect to the bonds? (Enter all amounts as positive values.)

 

The estimated medical costs are expected to be $9,500 during an employee's retirement. The retiree is expected to pay 10% of the cost and Medicare is expected to pay 50% of the cost. What is the company's estimated net cost of benefits?

 

The projected benefit obligation and plan assets were $60 million and $100 million, respectively, at the beginning of the year. Due primarily to favorable stock market performance in recent years, there also was a net gain of $25 million. On average, employees’ remaining service life with the company is 10 years.

 

As a result of the net gain, what was the increase or decrease in pension expense for the year? (Amounts to be deducted should be indicated with a minus sign.)

 

The projected benefit obligation was $100 million at the beginning of the year. Service cost for the year was $9 million. At the end of the year, pension benefits paid by the trustee were $5 million and there were no pension-related other comprehensive income accounts. The actuary’s discount rate was 5%.

 

What was the amount of the projected benefit obligation at year-end?

 

XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a finance lease to West but not as a result of a bargain purchase option or a title transfer. The present value of the lease payments is $690,000. The expected economic life of the asset is seven years. The lease term is five years. Using the straight-line method, what would West record as annual amortization?

 

Gerken Company concluded at the beginning of 2021 that the company's ownership interest in DillCo had increased to the point that it became appropriate to begin using the equity method to account for the investment. The balance in the investment account is $63,000 at the time of the change, and accountants working with company records determined that the balance would have been $77,000 if the account had been adjusted for investee net income and dividends as prescribed by the equity method. After implementing the change to the equity method, if financial statements were prepared:

 

Nichols Enterprises has an investment in 26,500 bonds of Elliott Electronics that Nichols accounts for as a security available-for-sale. Elliott bonds are publicly traded, and The Wall Street Journal quotes a price for those bonds of $15 per bond, but Nichols believes the market has not appreciated the full value of the Elliott bonds and that a more accurate price is $22 per bond. Nichols should carry the Elliott investment on its balance sheet at:

 

The following incomplete (columns have missing amounts) pension spreadsheet is for the current year for First Republic Corporation (FRC).

 

What was the PBO at the beginning of the year?

 

A lease agreement that qualifies as a finance lease calls for annual lease payments of $50,000 over a four-year lease term (also the asset’s useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 7%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 

a. Complete the amortization schedule for the first two payments.

 

b. If the lessee’s fiscal year is the calendar year, what would be the amount of the lease liability that the lessee would report in its balance sheet at the end of the first year? What would be the interest payable?

 

JDS Shipyard's projected benefit obligation, accumulated benefit obligation, and plan assets were $75 million, $65 million, and $46 million, respectively, at the end of the year.

 

a. What, if any, pension liability or pension asset must be reported in the balance sheet?

 

b. What, if any, pension liability or pension asset must be reported in the balance sheet if the plan assets were $100 million instead?

 

Pension plan assets were $240 million at the beginning of the year. The return on plan assets was 5%. At the end of the year, retiree benefits paid by the trustee were $10 million and cash invested in the pension fund was $14 million.

 

What was the amount of the pension plan assets at year-end?

 

The appropriate asset value reported in the balance sheet by the lessee for an operating lease is:

 

The projected benefit obligation was $420 million at the beginning of the year. Service cost for the year was $46 million. At the end of the year, pension benefits paid by the trustee were $24 million and there were no pension-related other comprehensive income (OCI) accounts requiring amortization. The actuary’s discount rate was 5%. The actual return on plan assets was $23 million although it was expected to be only $22 million.

 

What was the pension expense for the year?

 

On December 31, 2020, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2026. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.

 

At what amount would Reagan record the right-of-use asset at the beginning of the agreement?

 

One of the five criteria for a finance lease specifies that the present value of the lease payments be equal to or greater than:

 

Recording a sales-type lease with a selling profit is similar to recording:

 

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

 

Smith buys and sells equity securities. On December 15, 2021, Smith purchased $504,000 of Jones shares and elected the fair value option to account for the Jones investment. As of December 31, 2021, the Jones shares had a fair value of $589,000. In the 2021 financial statements, Smith will report (ignore taxes):

 

Durney Co. recorded a right-of-use asset of $810,000 in a ten-year finance lease. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset after two years will be:

 

S&L Financial buys and sells securities expecting to earn profits on short-term differences in price. On December 27, 2021, S&L purchased Coca-Cola bonds at par for $887,000 and sold the bonds on January 3, 2022, for $896,000. At December 31, the bonds had a fair value of $879,000.

 

Prepare journal entries to record (a) any unrealized gains or losses occurring in 2021 and (b) the sale of the bonds in 2022. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

 

On December 31, 2020, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2026. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.

 

At what amount would Reagan record the right-of-use asset at the beginning of the agreement?

 

Turner Company owns 10% of the outstanding stock of ICA Company. During the current year, ICA paid a $4.30 million cash dividend on its common shares.

 

What effect did this dividend have on Turner's 2021 financial statements? (Enter your answers in whole dollars, not in millions. Amounts to be deducted should be indicated with a minus sign. If there is no effect to an element of the financials statements, select "No effect.)

 

The projected benefit obligation was $120 million at the beginning of the year. Service cost for the year was $16 million. At the end of the year, pension benefits paid by the trustee were $9 million and there were no pension-related other comprehensive income (OCI) accounts requiring amortization. The actuary’s discount rate was 5%. The actual return on plan assets was $8 million although it was expected to be only $7 million.

 

What was the total pension expense for the year?

 

The Warren Group’s pension cost is $101 million. This amount includes a $66 million service cost, a $93 million interest cost, a $64 million reduction for the expected return on plan assets, and a $6 million amortization of a prior service cost.

 

Determine the components of pension expense that affects the net pension liability. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

 

Prepare the journal entry to record the pension cost. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions. (i.e., 10,000,000 should be entered as 10).)

 

A finance lease agreement calls for quarterly lease payments of $5,133 over a 15-year lease term, with the first payment on July 1, the beginning of the lease. The annual interest rate is 8%. Both the present value of the lease payments and the cost of the asset to the lessor are $182,000.

 

a. Prepare a partial amortization table up to the October 1 payment.

 

b. What would be the amount of interest expense (revenue) the lessee (lessor) would record in conjunction with the second quarterly payment on October 1?

 

LED Corporation owns $1,400,000 of Branch Pharmaceuticals bonds and classifies its investment as securities available-for-sale. The market price of Branch’s bonds fell by $850,000, due to concerns about one of the company’s principal drugs. The concerns were justified when the FDA banned the drug. $100,000 of that decline in value already had been included in OCI as a temporary unrealized loss in a prior period. LED views $520,000 of the $850,000 loss as related to credit losses, and the other $330,000 as noncredit losses. LED does not plan to sell the investment and does not think it is more likely than not that it will have to sell the investment before fair value recovers.

 

What journal entries should LED record to account for the decline in market value in the current period? How should the decline affect net income and comprehensive income?