Question 1:
Jones Corp. enters into an agreement with McFee Inc. to lease manufacturing equipment used in its business. The lease payment is $200,000 on January 1 of each year for the next 3 years with an effective interest rate of 10%. McFee Inc. provides a bargain purchase option (BPO) for the leased equipment for $10,000. The machine's useful life is 4 years. The present value factor for an ordinary annuity at 10% for 3 periods is 2.486 and the present value of $1 at 10% for 3 periods is .7513.
A. Is this lease a capital lease or operating lease? Why?
B. What is the amount of the lease obligation recorded for Year 1?
C. How much is recognized as the reduction in the lease obligation at the end of year 1 for item #B
D. Compute the lease obligation assuming McFee guaranteed a residual value of the equipment for $50,000 instead of the BPO?
E. List the criteria for a lease to be classifed as a capital lease?
F. According to ASC 840, how will leases currently classifed as capital leases be classified once the new lease standard is fully implemented?
G. According to the SEC, the new lease standard must be implemented by publically traded corporations by what date?
Question 2: Wonder World, Inc. is a new startup business that decided to raise capital by issuing stock.
1. Wonder World issued 5,000 shares of Common Stock, par value $10 on January 1, 20X1. The market value of the stock on the date of issuance was $20 per share. Wonder also issued 10,000 shares, 6% preferred stock, cummulative, with a par value of $50 per share. The market price of the preferred stock was $60 per share when it was issued. Record all necessary journal entries.
2. On Jan 1, 20X1, Wonder exchanged 2,000 shares of Common Stock for rent for a year. On January 2, 20X1, the fair market value of the rent was $50,000. Record all necessary journal entries.
3. Wonder issued a stock split on the Common Stock to holders of record at Dec 31, 20X1. Record all necessary journal entries.
4. The Board of Directors did not declare dividends in 20X1. However, on Jan 1, 20X2, the Board of Directors of Wonder, Inc. declared $50,000 in dividends to shareholders of record on Dec. 1 20X1. The dividend will be disbursed to the shareholders on February 1, 20X2.
Calculate the allocation of dividends between the preferred and common shareholders and prepare the journal entry."
"5. The Board of Directors declared $140,000 in dividends on January 8, 20X3 to shareholders of record on December 8, 20X2. The dividend will be paid on February 8, 20X3.
Calculate the allocation of dividends between the preferred and common shareholders and prepare the journal entry."
Question 3:
On 1/1/18, ABC Corp. granted employees 200,000 stock options. Additional information is presented below:
| Option Price |
$30 per share |
| Share Price on 1/1/18 |
$30 per share |
| Par Value of Stock |
$1 per share |
| Option Value on 1/1/18 |
$900,000 |
| Vesting/Service Period |
3 years |
| Expiration Date |
12/31/2022 |
On 1/1/20, employees holding 20,000 options resigned from the company, thus forfeiting their options.
On 1/1/22, 60,000 options were exercised when the market price was $45/share.
On 12/31/22, the remaining options expired.
1) Provide the journal entry on 1/1/18.
2) Provide the journal entry to be made on both 12/31/18 and 12/31/19.
3) Determine the amount of compensation expense to be reported in 2020.
4) Provide the journal entry to record the exercise of the options on 1/1/22.
5) Provide the journal entry to record the expiration of the options on 12/31/22.
Question 4:
"Using the information below, prepare a 2017 Statement of Cash Flows in good form, using the indirect method.
Information from the December 31, 2016 and December 31, 2017 balance sheets of Liz Corporation are presented below."
Liz Corporation Balance Sheets At December 31
|
Year 2017 |
Year 2016 |
| Cash |
$ 30,000 |
$ 50,000 |
| Accounts Receivable, Net |
410,000 |
460,000 |
| Inventory |
300,000 |
320,000 |
| Prepaid Expenses |
20,000 |
15,000 |
| Long-Term Investments |
50,000 |
25,000 |
| Land |
560,000 |
300,000 |
| Buildings and Equipment |
2,000,000 |
1,900,000 |
| Accumulated Depreciation |
(800,000) |
(770,000) |
|
$ 2,570,000 |
$ 2,300,000 |
|
|
|
|
|
|
| Accounts Payable |
$ 300,000 |
$ 120,000 |
| Accrued Liabilities |
40,000 |
50,000 |
| Bonds Payable |
500,000 |
800,000 |
| Long-Term Notes Payable |
150,000 |
- |
| Common Stock, $2 par vale |
200,000 |
160,000 |
| Paid in Capital in Excess of Par Value |
710,000 |
550,000 |
| Retained Earnings |
670,000 |
620,000 |
|
$ 2,570,000 |
$ 2,300,000 |
Additional Information about the 2017 transactions and events:
1 - 2017 Net Income was $110,000
2 - Depreciation expense on buildings and equipment was $60,000
3 - The corporation sold equipment with a cost of $50,000 and accumulated depreciation of $30,000 for $17,000 cash
4 - The Board of Directors declared and paid cash dividends of $60,000
5 - The corporation issued a $150,000 long-term note payable for buildings and equipment
6 - Liz, Inc. purchased long-term investments for $25,000
7 - The corporation paid $300,000 on the bonds payable
8 - Liz, Inc. issued 20,000 shares of common stock with a par value of $2/share for $200,000
9 - The corporation purchased land for $260,000
Question 5:
On January 1, 2018, Swan Company issued bonds with the following characteristics:
| Face Value (per bond) |
$ 1,000 |
|
| Number of bonds issued |
2,000 |
|
| Coupon (stated) rate |
7% |
|
| Maturity date |
5 |
Years (on January 1, 2023) |
| Interest payments |
Annually |
(every December 31) |
| Prevailing rate of interest in the market on January 1, 2018 |
8% |
|
1) Determine the total value of the bonds on January 1, 2018
2) Provide an amortization schedule with the following columns:
Date Interest Payment
1/1/2018
12/31/2018
12/31/2019
12/31/2020
12/31/2021
12/31/2022
3) Provide the January 1, 2018 journal entry
4) Provide the December 31, 2021 journal entry
Attachment:- EXAM.rar