Solution manual financial accounting by valix ch2 3

18 CHAPTER Problem 2-1 A B A C A Problem 2-2 A D A D B 10 D A D D B Problem 2-3 Requirement 2008 April Oct Dec 31 31 Cash (7,000,000 x 106%) Bonds payable Premium on bonds payable Interest expense (7,000,000 x 12% x 6/12) Cash Interest expense (7,000,000 x 12% x 3/12) Accrued interest payable Premium bonds payable Interest expense (420,000 / 10 x 9/12) 7,420,000 7,000,000 420,000 420,000 420,000 210,000 210,000 31,500 31,500 2009 Jan April Oct Dec 31 31 42,000 Accrued interest payable Interest expense 210,000 Interest expense Cash 420,000 Interest expense Cash Interest expense Accrued interest payable Premium on bonds payable Interest expense (420,000 / 10) 210,000 420,000 420,000 420,000 210,000 210,000 42,000 19 Requirement Noncurrent liabilities: Bonds payable 7,000,000 Premium on bonds payable 346,500 Book value 7,346,500 Problem 2-4 Requirement 2008 Jan Unissued bonds payable Authorized bonds payable 8,000,000 8,000,000 Cash (5,000,000 x 95%) Discount on bonds payable Unissued bonds payable 4,750,000 250,000 5,000,000 June 30 Dec 31 31 2009 June 30 Sept Interest expense (5,000,000 x 12% x 6/12) Cash Interest expense Cash Interest expense (250,000 / 10) Discount on bonds payable Interest expense Cash Cash Unissued bonds payable Premium on bonds payable Interest expense (2,000,000 x 12% x 2/12) 300,000 300,000 300,000 300,000 25,000 25,000 300,000 300,000 2,100,000 2,000,000 60,000 40,000 Dec 31 420,000 Interest expense Cash (7,000,000 x 12% x 6/12) 420,000 31 31 Interest expense Discount on bonds payable 25,000 Premium on bonds payable Interest expense 2,400 25,000 2,400 20 120 months – 20 = 100 months remaining 60,000 / 100 = 600 monthly 600 x = 2,400 Requirement Noncurrent liabilities: Authorized bonds payable 8,000,000 Less: Unissued bonds payable 1,000,000 Issued bonds payable 7,000,000 Premium on bonds payable 57,600 Total 7,057,600 Discount on bonds payable ( 200,000) Book value 6,857,600 Problem 2-5 Requirement 2008 April Cash Discount on bonds payable Bond issue cost Bonds payable 5,000,000 Oct Interest expense Cash (5,000,000 x 12% x 6/12) 4,850,000 100,000 50,000 300,000 300,000 Dec 31 Interest expense 150,000 Accrued interest payable (5,000,000 x 12% x 3/12) 150,000 Interest expense Discount on bonds payable (100,000 / x 9/12) 22,500 15,000 Bond issue cost (50,000 / x 9/12) 7,500 2009 Jan Accrued interest payable Interest expense 150,000 April Interest expense Cash 300,000 July Interest expense Discount on bonds payable (20,000 x 6/12) 10,000 Bond issue cost (10,000 x 6/12) 5,000 150,000 300,000 15,000 21 Retirement price (2,000,000 x 99%) 1,980,000 Add: Accrued interest from April to July 1, 2008 (2,000,000 x 12% x 3/12) 60,000 Total payment 2,040,000 Bonds payable retired 2,000,000 Less: Applicable discount (2/5 x 75,000) Applicable issue cost (2/5 x 37,500) 45,000 Book value of bonds retired 1,955,000 Less: Retirement price 1,980,000 Loss on early retirement ( 25,000) July Bonds payable Interest expense Loss on early retirement of bonds Cash 2,040,000 Discount on bonds payable Bond issue cost 15,000 Oct Interest expense 30,000 15,000 2,000,000 60,000 25,000 30,000 180,000 Cash (3,000,000 x 12% x 6/12) 180,000 Dec 31 Interest expense Accrued interest payable (3,000,000 x 12% x 3/12) 90,000 31 Interest expense Discount on bonds payable (12,000 x 6/12) 90,000 9,000 6,000 Bond issued cost (6,000 x 6/12) 3,000 Revised annual amortization: Discount (3/5 x 20,000) 12,000 Issue cost (3/5 x 10,000) 6,000 Requirement Noncurrent liabilities: Bonds payable Discount on bonds payable ( 39,000) Bond issue cost Book value 3,000,000 ( 19,500) 2,941,500 22 Problem 2-6 Requirement 2008 Jan Cash Bonds payable Premium on bonds payable Dec 31 Interest expense Cash (4,000,000 x 12%) 480,000 31 Premium on bonds payable Interest expense (200,000 / 5) 40,000 31 Bonds payable Premium on bonds payable 4,200,000 4,000,000 200,000 480,000 40,000 1,000,000 40,000 Cash Gain on early retirement of bonds 950,000 90,000 Face of bonds payable retired Add: Applicable premium (1/4 x 160,000) 1,000,000 Book value Less: Retirement price (1,000,000 x 95%) 1,040,000 40,000 950,000 Gain on retirement 90,000 2009 Dec 31 Interest expense Cash (3,000,000 x 12%) 360,000 31 Premium on bonds payable Interest expense (40,000 x 3/4) 30,000 360,000 30,000 Requirement Noncurrent liabilities Bonds payable Premium on bonds payable Book value 3,000,000 90,000 3,090,000 Problem 2-7 Total bonds payable issued 6,000,000 Less: Face value bonds payable retired Bonds payable – December 31, 2008 3,000,000 3,000,000 23 Discount on bonds payable Less: Amortization from 2001 to 2007 (300,000 / 10 x 7) 210,000 Balance – January 1, 2008 Less: Discount applicable to bonds retired (3/6 x 90,000) 45,000 Adjusted balance Less: Amortization for 2008 (3/6 x 30,000) 15,000 Discount on bonds payable – December 31, 2008 300,000 90,000 45,000 30,000 Interest (3,000,000 x 12%) 360,000 Amortization of discount for 2008 15,000 Interest expense for 2008 375,000 Adjusting entries on December 31, 2008: a Retained earnings Discount on bonds payable 210,000 210,000 b Bonds payable Discount on bonds payable Gain on early retirement of bonds 300,000 45,000 255,000 Bonds payable retired 3,000,000 Less: Applicable discount 45,000 Book value 2,955,000 Less: Retirement price 2,700,000 Gain on early retirement 255,000 c Interest expense Discount on bonds payable 15,000 15,000 Amortization for 2008 d Interest expense Accrued interest payable (3,000,000 x 12% x 1/2) 180,000 180,000 Problem 2-8 Requirement Jan Cash Bonds payable 6,000,000 Premium on bonds payable 737,000 6,737,000 24 Dec 31 Interest expense (6,000,000 x 12%) Accrued interest payable 31 Premium on bonds payable Interest expense (90,000 / 9) 46,300 720,000 720,000 46,300 Interest paid Interest expense (10% x 6,737,000) 720,000 673,700 Premium amortization 46,300 Requirement Noncurrent liabilities: Bonds payable Premium on bonds payable (737,000 – 46,300) 690,700 Book value 6,000,000 6,690,700 Problem 2-9 Cash (5,000,000 x 103) Discount on bonds payable (5,000,000 x 5%) Bonds payable Share warrants outstanding 400,000 Interest expense (5,000,000 x 12%) Cash Interest expense Discount on bonds payable (250,000 / 10) Cash (20,000 shares x 30) Share warrants outstanding Share capital (20,000 x 25) 500,000 Share premium 5,150,000 250,000 5,000,000 600,000 600,000 25,000 25,000 600,000 400,000 500,000 Problem 2-10 Jan Cash Discount on bonds payable Bonds payable 5,100,000 343,000 5,000,000 Share warrants outstanding 443,000 25 Dec 31 Interest expense (5,000,000 x 12%) Cash 31 Interest expense Discount on bonds payable 600,000 600,000 51,980 51,980 Interest paid Interest expense (14% x 4,657,000) 600,000 651,980 Discount amortization 51,980 31 Cash (25,000 x 100) Share warrants outstanding Share capital (25,000 x 50) Share premium 1,693,000 Problem 2-11 2,500,000 443,000 1,250,000 Jan Cash Bonds payable Premium on bonds payable Share warrants outstanding (6% x FV) Interest 9,600,000 8,000,000 585,600 1,014,400 (5% x BV) Interest Premium Book Date paid expense amortization value 01/01/2008 06/30/2008 480,000 429,280 8,585,600 50,720 12/31/2008 480,000 426,744 53,256 8,534,880 8,481,624 PV pf principal (8,000,000 x 61) 4,880,000 PV of interest (480,000 x 7.72) 3,705,600 Total PV of bonds payable June 30 Interest expense Premium on bonds payable Cash 8,585,600 429,280 50,720 480,000 Dec 31 Interest expense Premium on bonds payable Cash 426,744 53,256 480,000 26 Dec 31 Cash (16,000 x 150) Share warrants outstanding Share capital (16,000 x 100) 1,600,000 Share premium 2,400,000 1,014,400 1,814,400 Problem 2-12 Present value of principal (2,000,000 x 0.77) 1,540,000 Present value of interest payments (120,000 x 2.53) 303,600 Total present value Face value Discount on bonds payable Cash Discount on bonds payable Bonds payable Share premium 356,400 Interest expense Cash (6% x 2,000,000) 120,000 Interest expense Discount on bonds payable 1,843,600 2,000,000 156,400 2,200,000 156,400 2,000,000 120,000 45,924 45,924 Interest paid Interest expense (9% x 1,843,600) 165,924 Discount amortization 120,000 45,924 Problem 2-13 Cash (5,000,000 x 105%) Discount on bonds payable Bonds payable 5,250,000 300,000 5,000,000 Cost of sales Cash (Initial direct costs) 300,000 300,000 Cash Lease receivable 3,000,000 Unearned interest income Interest income (12% x 11,370,000) 1,364,400 1,364,400 3,000,000 Books of Thunder Company Machinery Lease liability 11,370,000 Interest expense Lease liability Cash Depreciation Accumulated depreciation (11,370,000 – 1,000,000 / 5) 11,370,000 1,364,400 1,635,600 3,000,000 2,074,000 2,074,000 Problem 3-24 Gross rentals (600,000 x 10) 6,000,000 Net investment in the lease: Cost of equipment (3,390,000) Initial direct costs ( 143,400) Total financial revenue Equipment Cash 2,466,600 143,400 143,400 59 Lease receivable Equipment Unearned interest income Cash Lease receivable 6,000,000 3,533,400 2,466,600 600,000 600,000 Unearned interest income Interest income (11% x 3,533,400) 388,674 388,674 PV factor (3,533,400 / 600,000) 5.889 This factor is applicable to 11% Thus, this is the new implicit rate in computing interest income Problem 3-24 Lease receivable (3,328,710 x 5) 16,643,550 PV of gross rentals (3,328,710 x 3.605) 12,000,000 Total unearned financial revenue 4,643,550 The residual value of P500,000 is ignored by the lessor because ownership of the asset is transferred to the lessee at the end of the lease term Sales price (equal to present value of rentals) 12,000,000 Cost of sales: Cost of equipment ( 8,000,000) Initial direct costs ( 200,000) Manufacturer’s profit 3,800,000 Interest income for first year (12% x 12,000,000) 1,440,000 Problem 3-26 Books of German Company Cash Accumulated depreciation Equipment Gain on sale and leaseback Rent expense Cash 1,100,000 1,500,000 2,500,000 100,000 40,000 40,000 60 Books of Sterling Company Equipment Cash 1,100,000 1,100,000 Cash Rent income 40,000 40,000 Depreciation (1,100,000 / 10) Accumulated depreciation 110,000 110,000 Problem 3-27 Books of Canada Company Cash Accumulated depreciation Loss on sale and leaseback Machinery Rent expense Cash 500,000 450,000 50,000 1,000,000 90,000 90,000 Books of Saigon Company Machinery Cash 500,000 500,000 Cash Rent income 90,000 90,000 Depreciation (500,000 / 10) Accumulated depreciation 50,000 50,000 Problem 3-28 Books of Cuba Company Cash Accumulated depreciation Building 5,000,000 Deferred gain on sale and leaseback 2,415,000 3,400,000 815,000 61 Building Lease liability 2,415,000 Depreciation (2,415,000 / 15) Accumulated depreciation Deferred gain on sale and leaseback Gain on sale and leaseback (815,000 / 10) 81,500 Interest expense (16% x 2,415,000) Lease liability Cash Books of Mexico Company 2,415,000 161,000 161,000 81,500 386,400 113,600 500,000 Building Cash 2,415,000 Lease receivable (500,000 x 10) Building 2,415,000 Unearned interest income 2,585,000 5,000,000 2,415,000 Cash Lease receivable 500,000 Unearned interest income Interest income 386,400 500,000 386,400 Problem 3-29 Answer B Rent for June Amortization of bonus (prepaid rent)[600,000 / x 1/12] 10,000 Rent expense for the month of June 200,000 210,000 Problem 3-30 Answer B Annual rent (15,000 x 12) Additional rent 6% x 3,000,000 180,000 5% x 3,000,000 150,000 Property taxes 180,000 120,000 Insurance Total expenses 50,000 680,000 62 Problem 3-31 Answer A Total rent expense (200,000 x 51 remaining months) 10,200,000 Average annual rent expense, July 1, 2006 to June 30, 2007 (10,200,000 / 5) 2,040,000 Problem 3-32 Answer B Total rent expense (600,000 x 117 remaining months) 70,200,000 Average annual rent (70,200,000 / 10) 7,020,000 Rent expense from October to December 31, 2008 (7,020,000 x 3/12) 1,755,000 Problem 3-33 Answer C First year (1,200 x 1,000) 1,200,000 Second year (3,000 x 1,000) Third year (3,000 x 1,000) 3,000,000 Total rental revenue 3,000,000 7,200,000 Average annual rental (7,200,000 / 3) 2,400,000 Rental revenue from January1 to September 30, 2008 (2,400,000 x 9/12) 1,800,000 Problem 3-34 Answer C First year (800,000 x 6/12) 400,000 Second year Third year 1,250,000 1,250,000 Fourth year Fifth year Total rental revenue 1,250,000 1,250,000 5,400,000 Average annual rental revenue (5,400,000 / 5) 1,080,000 63 Problem 3-35 Answer C Average annual rental revenue (360,000 / 3) 120,000 Rent revenue from July 1, 2006 to June 30, 2008 (120,000 x 2) 240,000 Less: Rentals received: First 12 months 60,000 Second 12 months 90,000 150,000 Rent receivable, June 30, 2008 90,000 Problem 3-36 Answer A Rent income Less: Amortization of initial direct costs (150,000 / 10) Depreciation Insurance and property tax Net rent income 500,000 15,000 120,000 90,000 225,000 275,000 Problem 3-37 Answer C Annual rental 900,000 Amortization of lease bonus (500,000 / 5) 100,000 Total rent revenue 1,000,000 Problem 3-38 Answer D This is not a finance lease and therefore no liability is recorded because: There is no transfer of ownership or title to the lessee at the end of the lease term There is no a bargain purchase option The term is only 66 2/3% of the life of the asset (10 / 15 equals 66 2/3%) The present value of the rental of P3,380,000 (500,000 x 6.76) is only 84.5% of the fair value of P4,000,000 Problem 3-39 Answer B Cost of leased property (100,000 x 6.145) 614,500 The lease is treated as a finance lease because the term is 83 1/3% of the life of the asset (10 years / 12 years) 64 Problem 3-40 Answer B Problem 3-41 Answer B Present value of rentals (400,000 x 5.95) 2,380,000 The purchase option of P500,000 is not included in the computation of the lease liability because it approximates the fair value of the asset at the end of the lease term and therefore is not a bargain purchase option Again, the lease is a finance lease because the term is 83 1/3% of the life of the asset (10/12) Problem 3-42 Answer D Cost of leased property 2,400,000 Less: Residual value 200,000 Depreciable cost 2,200,000 Depreciation (2,200,000 / 8) 275,000 Problem 3-43 Answer B Depreciation (1,080,000 / 12) 90,000 If the “transfer of ownership criterion” is used in qualifying a finance lease, the depreciation is based on the life of the asset Problem 3-44 Question – Answer C Answer C Date value 01/01/2007 01/01/2007 01/01/2008 Question – Answer B Payment 200,000 200,000 10% interest 115,200 Question - Principal 200,000 84,800 Present 1,352,000 1,152,000 1,067,200 Lease liability – December 31, 2008 1,152,000 Current portion Noncurrent liability 1,067,200 84,800 Interest expense for 2008 115,200 Depreciation for 2008 (1,352,000 / 20) 67,600 65 Problem 3-45 Answer B Present value (using implicit rate of 10%) 3,165,000 Less: Payment on December 31, 2007 (all applicable to principal) 500,000 Balance – December 31, 2007 2,665,000 Less: Principal payment on December 31, 2008 Payment 500,000 Interest (10% x 2,665,000) 266,500 233,500 Lease liability – December 31, 2008 2,431,500 Problem 3-46 Answer B Present value, January 1, 2008 1,125,000 Less: First payment on December 30, 2008 Interest for 2008 (8% x 1,125,000) 10,000 100,000 ( 90,000) Lease liability, December 31, 2008 1,115,000 Problem 3-47 Answer A Interest expense for 2008 (10% x 3,790,000) 379,000 Problem 3-48 Answer B Present value, January 1, 2008 1,350,000 Less: First payment on January 1, 2008 (all applicable to principal) 200,000 Lease liability, January 1, 2008 1,150,000 Interest expense for 2008 (10% x 1,150,000) 115,000 Problem 3-49 Answer A Present value of rentals (1,300,000 x 4.24) 5,512,000 Present value of guaranteed residual value (1,000,000 x 0.65) 650,000 Total lease liability – 1/1/2008 6,162,000 Less: First payment on January 1, 2008 (all applicable to principal) 1,300,000 Lease liability – 12/31/2008 4,862,000 The present value of an “annuity due” factor is used in the computation because the rental is payable in advance Problem 3-50 Answer B Lease liability, January 1, 2007 (1,000,000 x 6.14) 6,140,000 66 The minimum lease payments shall include the guaranteed residual if guaranteed by the lessee In this case, the residual value is guaranteed by a third party and therefore excluded in computing the lease liability Problem 3-51 Answer B Present value – 12/31/2008 1,350,000 Less: First payment on December 31, 2008 (all applicable to principal) 200,000 Lease liability – 12/31/2008 1,150,000 Less: Second payment on December 31, 2009: Payment 200,000 Interest for 2009 (10% x 1,150,000) 115,000 Principal payment 85,000 Lease liability – 12/31/2009 1,065,000 Problem 3-52 Answer A Problem 3-53 Answer A Cash payment 1,440,000 Book value of leased asset (2,000,000 – 800,000) 1,200,000 Total consideration 2,640,000 Balance of lease liability 1,300,000 Cost of machinery purchased 1,340,000 The entry to record the actual purchase of the leased asset is: Machinery (purchased) Lease liability Accumulated depreciation Cash 1,440,000 Machinery (leased) 2,000,000 Problem 3-54 Question – Answer A Question – Answer B 1,340,000 1,300,000 800,000 Gain on sale (3,520,000 – 2,800,000) 720,000 67 Date value 07/01/2008 07/01/2008 07/01/2009 Payment 600,000 600,000 10% interest 292,000 Principal 600,000 308,000 Present 3,520,000 2,920,000 2,612,000 July to December 31, 2008 (292,000 x 1/2) 146,000 Problem 3-55 Answer B Date 01/01/2008 01/01/2008 01/01/2009 Payment 355,080 355,080 10% interest 204,492 Principal 355,080 150,588 Present value 2,400,000 2,044,920 1,894,332 Selling price or fair value 2,400,000 Less: Cost to Gallant Company 2,000,000 Dealer’s profit 400,000 Add: Interest income – 2008 204,492 Total income before tax 604,492 Problem 3-56 Answer C This is mathematical The procedure is to determine the annual rental payment which is equal to the “cost of the asset divided by the present value factor of annuity of 1” Accordingly, the annual rental is equal to P323,400 divided by 4.312 or P75,000 Lease receivable (75,000 x 5) 375,000 Present value of rentals (fair value) 323,400 Total interest revenue 51,600 Problem 3-57 Answer A Cost of equipment 4,361,200 Present value of residual value (200,000 x 466) ( 93,200) Net investment to be recovered 4,268,000 Annual rental (4,268,000 / 5.335) 800,000 Problem 3-58 Answer B Interest income (5,250,000 – 900,000 x 12%) 522,000 68 Problem 3-59 Answer A Problem 3-60 Answer B Problem 3-61 Answer D Problem 3-62 Question - Answer A Gross rentals (1,500,000 x 20) 30,000,000 Present value or fair value of asset (1,500,000 x 8.37) 12,555,000 Unearned financial revenue 17,445,000 Observe that the present value of rentals is the same as the fair value of the asset Note also that the residual value is ignored because the ownership of the asset will transfer to the lessee at the end of the lease term Question - Answer B Fair value of asset Cost of asset Profit on sale Question – Answer C 12,555,000 8,000,000 4,555,000 PV of rentals equals to the fair value of asset 12,555,000 Payment of January 1, 2008 – all applicable to principal 1,500,000 Balance – January 1, 2008 11,055,000 Interest income for 2008 (11,055,000 x 12%) 1,326,600 Problem 3-63 Question – Answer B Interest income for 2008 (10% x 4,850,000) 485,000 69 Question – Answer A Sales price 3,250,000 Book value of lease receivable: Lease receivable Unearned interest income (1,000,000 – 485,000) 5,335,000 Loss on sale of machinery 5,850,000 ( 515,000) (2,085,000) To recognize the interest income for 2008: Unearned interest income Interest income To record the sale of the machinery: 485,000 485,000 Cash Unearned interest income Loss on sale of machinery Lease receivable 5,850,000 3,250,000 515,000 2,085,000 Problem 3-64 Answer D Problem 3-65 Answer B Problem 3-66 Answer C Problem 3-67 Answer C Problem 3-68 Answer B Sales price 1,500,000 Cost of equipment sold Deferred gain on sale and leaseback Less: Realized gain in 2008 (500,000 / 10) 50,000 Deferred gain – December 31, 2008 1,000,000 500,000 450,000 Problem 3-69 Answer A Sales price 480,000 Carrying amount Deferred revenue 360,000 120,000 The gain is deferred because the leaseback is a finance lease (12 / 15 equals 80%) 70 Problem 3-70 Answer A Sales price 7,800,000 Carrying amount 5,850,000 Deferred gain – 12/31/2008 1,950,000 Problem 3-71 Answer D Sales price 360,000 Carrying amount 330,000 Gain on sale and leaseback 30,000 The gain is not deferred but recognized immediately because the leaseback is an operating lease Problem 3-72 Answer C Sales price 6,000,000 Fair value 5,000,000 Deferred gain 1,000,000 Fair value 5,000,000 Carrying amount 3,500,000 Gain on sale and leaseback to be recognized immediately 1,500,000