The effective rate of interest implicit in the agreement

Assignment Help Financial Accounting

Reference no: EM131178641

1. At the beginning of 2016, 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:
a. What is the effective rate of interest implicit in the agreement?

b. Prepare the lessee's journal entry at the inception of the lease.

c. Prepare the journal entry to record the first lease payment at December 31, 2016.

d. Prepare the journal entry to record the second lease payment at December 31, 2017.

e. Suppose the fair value of the machine and the lessor's implicit rate were unknown at the time of the lease, but that the lessee's incremental borrowing rate of interest for notes of similar risk was 11%. Prepare the lessee's entry at the inception of the lease.

(Note: You may wish to compare your solution to Problem 15-4 with that of Problem 14-12, which deals with a parallel situation in which the machine was acquired with an installment note.)

2. Times-Roman Publishing Company reports the following amounts in its first three years of operation:
($ in 000s) 2016 2017 2018

•Pretax accounting income $250 $240 $230
•Taxable income 290 220 260

The difference between pretax accounting income and taxable income is due to subscription revenue for one-year magazine subscriptions being reported for tax purposes in the year received, but reported in the income statement in later years when earned. The income tax rate is 40% each year. Times-Roman anticipates profitable operations in the future.

Required:
a. What is the balance sheet account for which a temporary difference is created by this situation?

b. For each year, indicate the cumulative amount of the temporary difference at year-end.

c. Determine the balance in the related deferred tax account at the end of each year. Is it a deferred tax asset or a deferred tax liability?

d. How should the deferred tax amount be classified and reported in the balance sheet?

3. Sachs Brands' defined benefit pension plan specifies annual retirement benefits equal to: 1.6% 3 service years 3 final year's salary, payable at the end of each year. Angela Davenport was hired by Sachs at the begin- ning of 2002 and is expected to retire at the end of 2036 after 35 years' service. Her retirement is expected to span 18 years. Davenport's salary is $90,000 at the end of 2016 and the company's actuary projects her salary to be $240,000 at retirement. The actuary's discount rate is 7%.

Required:
a. Draw a time line that depicts Davenport's expected service period, retirement period, and a 2016 measure- ment date for the pension obligation.

b. Estimate by the accumulated benefits approach the amount of Davenport's annual retirement payments earned as of the end of 2016.

c. Whatisthecompany'saccumulatedbenefitobligationattheendof2016withrespecttoDavenport?

d. If no estimates are changed in the meantime, what will be the accumulated benefit obligation at the end of 2019 (three years later) when Davenport's salary is $100,000?

4. Part A:
During its first year of operations, the McCollum Corporation entered into the following transactions relating to shareholders' equity. The corporation was authorized to issue 100 million common shares, $1 par per share.

Required:
Prepare the appropriate journal entries to record each transaction.

Jan. 9 Issued 40 million common shares for $20 per share.

Mar. 11 Issued 5,000 shares in exchange for custom-made equipment. McCollum's shares have traded recently on the stock exchange at $20 per share.

Part B:
A new staff accountant for the McCollum Corporation recorded the following journal entries during the second year of operations. McCollum retires shares that it reacquires (restores their status to that of authorized but unissued shares).
($ in millions)

•Jan. 12 Land ................................. 2
•Paid-in capital-donation of land ........ 2
•Sept. 1 Common stock .................... 2
•Retained earnings ..........................48
•Cash ...........................................50
•Dec 1 Cash ..................................26
•Common stock .............................. 1
•Gain on sale of previously issued shares .. 25

Required:
Prepare the journal entries that should have been recorded for each of the transactions.

Reference no: EM131178641

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