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Intermediate Accounting 10th Edition Loren A Nikolai, D. Bazley and Jefferson P. Jones - Solutions

In the chapter the conceptual issues related to pension expense, pension liabilities, and pension plan assets are discussed.RequiredExplain how FASB Statement No. 87 resolves each of these three conceptual issues.
Companies often provide their employees with postemployment benefits other than pensions. These benefits may include health insurance, life insurance, and disability benefits.RequiredExplain how the accounting for these other postemployment benefits is similar or dissimilar to accounting for
The development of FASB Statement No. 87 took many years and included compromises among competing arguments. One of the areas of compromise was the additional pension liability.RequiredExplain how the additional pension liability is calculated and describe any aspects that might be considered to be
Generally, accounting principles do not support the concept of income smoothing (the avoidance of year-to-year fluctuations in the amount of income). A friend of yours, however, after studying FASB Statement No. 87, claims, “Pension accounting includes income smoothing.”RequiredDescribe the
The MacAdams Company had engaged in large amounts of R&D to develop a new product that would put the company ahead of its Japanese competition. As a result, the company’s profits were severely reduced and the president was concerned about the possibility of a takeover by a European competitor.
“Will it cost your company your company? Ready for one of the most difficult challenges ever to confront corporate America? One that is estimated to cost up to $400 billion. New FASB regulations will force companies to measure and post as a debit their health expense obligation to current and
The following information is for the Dermer Company’s OPEB plan, which it adopted on January 1, 2007:Service cost, 2007 .................$100,000Interest cost, 2007 .................20,000Unrecognized prior service cost, 1/1/07 ........300,000Benefits paid to employees, 2007
Refer to the financial statements and related notes of The Coca-Cola Company in Appendix A of this book. Answer each of the questions for (a) the company’s pension benefits and (b) the company’s other benefits. Required1. How much is the company’s expense in 2004?2. How much are the
You are an accountant for the Lanthier Company. The president of the company calls you into the office and says, “We have to find a way to reduce our pension costs. They are too high and they are making us uncompetitive against our foreign competitors whose employees have state-funded pensions. I
What does FASB Statement No. 13 as Amended provide in reference to the measuring and reporting of leases?
List seven advantages to the lessee of leasing, as compared with purchasing, an asset.
Assume that a lessee leases equipment and insists on terms that qualify it as an operating lease, barely escaping the qualification as a capital lease. Discuss the impact that such an operating lease has on financial statements and related financial information as compared to the effect that a
Define the following terms: (a) Lease, (b) Sales-type lease, (c) Direct financing lease, (d) Sale-leaseback transaction, (e) Operating lease, (f) Leveraged lease.
Define the following terms used in FASB Statement No. 13 as Amended: (a) Inception of lease, (b) Bargain purchase option, (c) Unguaranteed residual value, (d) Implicit interest rate,(e) Initial direct costs.
What components make up the minimum lease payments of a typical capital lease?
List the four criteria used to determine if a lease is classified as a capital lease by the lessee.
Describe briefly the accounting procedures followed by the lessor and by the lessee for an operating lease.
Describe briefly the procedures followed by the lessee to account for a capital lease.
From the standpoint of the lessor, a sales-type lease must meet one or more of the criteria of a capital lease as well as two additional criteria. Name these two additional criteria.
What is the basic difference between the accounting procedures used by a lessor for a sales-type lease and those used for a direct financing lease?
Why are compound interest concepts appropriate and applicable in accounting for a direct financing lease?
The Owens Company leased equipment for four years at $50,000 a month, with an option to renew the lease for six years at $2,000 per month or to purchase the equipment for $25,000 (a price considerably less than the expected fair value) after the initial lease term of four years. How does Owens
McFarland Corporation leased equipment under a lease calling for the payment of $50,000 a year in rent. At the end of the current year, when the capital lease had a remaining term of 20 years, McFarland Company subleased the asset for a rental of $75,000 a year for 20 years. The new lease is
a. What disclosures are lessees required to make?b. What disclosures are lessors required to make for various types of leases?
From the point of view of the seller-lessee, what is the primary accounting issue involved in accounting for a sale-leaseback transaction as compared to other lessee transactions? Discuss.
What distinguishes a leveraged lease from other leases? What, if any, is the major difference in the accounting of the lessee for a leveraged lease?
Multiple Choice1. The present value of the minimum lease payments should be used by the lessee in the determination of a (an) Capital OperatingLease Liability Lease Liability a. Yes ......No b. Yes ......Yes c. No ......Yesd. No ......No2. East Company leased a new machine from North
On January 1, 2007 the Caswell Company signs a 10-year cancelable (at the option of either party) agreement to lease a storage building from the Wake Company. The following information pertains to this lease agreement:1. The agreement requires rental payments of $100,000 at the end of each year.2.
The Sax Company signs a lease agreement dated January 1, 2007 that provides for it to lease computers from the Appleton Company beginning January 1, 2007. The lease terms, provisions, and related events are as follows:1. The lease term is five years. The lease is non-cancelable and requires equal
The Adden Company signs a lease agreement dated January 1, 2007 that provides for it to lease heavy equipment from the Scott Rental Company beginning January 1, 2007. The lease terms, provisions, and related events are as follows:1. The lease term is four years. The lease is non-cancelable and
The Rexon Company leases equipment to Ten-Care Company beginning January 1, 2007. The lease terms, provisions, and related events are as follows:1. The lease term is eight years. The lease is non-cancelable and requires equal rental payments to be made at the end of each year.2. The cost, and also
Ramallah Company leases heavy equipment to Terrell, Inc. on January 2, 2007 on the following terms:1. Forty-eight lease rentals of $1,600 at the end of each month are to be paid by Terrell, Inc., and the lease is non-cancelable.2. The cost of the heavy equipment to Ramallah Company was $60,758.3.
Lessor Leasing Company agrees to provide Lessee Company with equipment under a non-cancelable lease for five years. The equipment has a five-year life, cost Lessor Company $30,000, and will have no residual value when the lease term ends. Lessee Company agrees to pay all executory costs ($500 per
The Berne Company, the lessor, enters into a lease with Fox Company to lease equipment to Fox beginning January 1, 2007. The lease terms, provisions, and related events are as follows:1. The lease term is four years. The lease is noncancelable and requires annual rental payments of $50,000 to be
The Edom Company, the lessor, enters into a lease with Jebusite Company to lease equipment to Jebusite beginning January 1, 2007. The lease terms, provisions, and related events are as follows:1. The lease term is five years. The lease is noncancelable and requires annual rental receipts of
The following information is available for a noncancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee. Assume that the lease payments are made at the beginning of each month, interest and straight-line depreciation are recognized
On January 1, 2007 Nelson Company leases certain property to Queens Company at an annual rental of $60,000 payable in advance at the beginning of each year for eight years. The first payment is received immediately. The leased property, which is new, cost $275,000 and has an estimated economic life
Reuben Company retires a machine from active use on January 2, 2007 for the express purpose of leasing it. The machine had a carrying value of $900,000 after 12 years of use and is expected to have 10 more years of economic life. The machine is depreciated on a straight-line basis. On March 2, 2007
The Ravis Rent-A-Car Company leases a car to Ira Reem, an employee, on January 1, 2007. The term of the non-cancelable lease is four years. The following information about the lease is provided:1. Title to the car passes to Ira Reem on the termination of the lease with no additional payment
On January 1, 2007 the Stimpson Company sells land to Barker Company for $2.5 million, then immediately leases it back. The relevant information is as follows:1. The land was carried on Stimpson’s books at a value of $2 million.2. The term of the non-cancelable lease is 25 years.3. The lease
On January 1, 2007 the Alice Company leases electronic equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease. Superior Electronics Company, the lessor, agrees to pay all executory costs, estimated to be $3,450 per year. The cost and
On January 1, 2007 the Ballieu Company leases specialty equipment with an economic life of eight years to the Anderson Company. The lease contains the following terms and provisions: The lease is noncancelable and has a term of eight years. The annual rentals are $35,000, payable at the beginning
The Timmer Company signs a lease agreement dated January 1, 2007 that provides for it to lease equipment from Landau Company beginning January 1, 2007. The lease terms, provisions, and related events are as follows:The lease is non-cancelable and has a term of five years. The annual rentals are
Calder Company, the lessor, enters into a lease with Darwin Company, the lessee, to provide heavy equipment beginning January 1, 2007. The lease terms, provisions, and related events are as follows:The lease is non-cancelable, has a term of eight years, and has no renewal or bargain purchase
Landlord Company and Tenant Company enter into a non-cancelable, direct financing lease on January 1, 2007 for new heavy equipment that cost the Landlord Company $300,000 (useful life is six years with no residual value). The fair value is also $300,000. Landlord Company expects a 14% return over
Lessor Company and Lessee Company enter into a five year, non-cancelable, direct financing lease on January 1, 2007 for a new computer that cost the Lessor Company $400,000 (useful life is five years). The fair value is also $400,000. Lessor Company expects a 12% return over the five-year period of
The Lamplighter Company, the lessor, agrees to lease equipment to Tilson Company, the lessee, beginning January 1, 2007. The lease terms, provisions, and related events are as follows:The lease is non-cancelable and has a term of eight years. The annual rentals are $32,000, payable at the end of
Lessee Company leases heavy equipment on January 1, 2007 under a capital lease from Lessor Company with the following lease provisions:The lease is non-cancelable and has a term of 10 years. The lease does not contain a renewal or bargain purchase option.The annual rentals are $27,653.77, payable
Benjamin Company has rented new equipment to Murrell Builders that cost $50,000. This equipment has a life of 4 years and no residual value at the end of that time. The lease is non-cancelable and is signed on January 1, 2007. Murrell Builders assumes all normal risks and executory costs of
On January 1, 2007 the Amity Company leases a crane to Baltimore Company. The lease contains the following terms and provisions:The lease is non-cancelable and has a term of 10 years. The lease does not contain a renewal or bargain purchase option. The annual rentals are $4,000, payable at the
Farrington Company leases a computer from the Wilson Company. The lease includes the following provisions:The lease is non-cancelable and has a term of eight years. The annual rentals are $60,000, payable at the end of each year. The Farrington Company agrees to pay all executory costs and has an
Scuppermong Farms, the lessee, and Tyrrell Equipment, the lessor, sign a lease agreement on January 1, 2007 that provides for Scuppermong Farms to lease a cultivator from Tyrrell Equipment. The lease terms, provisions, and other related events are as follows: The lease is non-cancelable and has a
The Dahlia Company has two divisions, the Astor Division which started operating in 2005, and the Tulip Division which started operating in 2006. The Astor Division leases medical equipment to hospitals. All of its leases are appropriately recorded as operating leases for accounting purposes,
Rigdon Company leases 50 acres of land to Christmas Tree International on January 1, 2007. The provisions of the lease are as follows:The lease is non-cancelable and has a term of 25 years. The annual rentals are $10,000, payable at the end of each year. The lease contains no bargain purchase
On January 1, 2007 the Orr Company sells heavy equipment to Foible Company for $3 million, then immediately leases it back. The relevant information is as follows:The lease is non-cancelable and has a term of eight years. The annual rentals are $603,908.50, payable at the end of each year. The
The Efland Company leases equipment to Orange Company. Efland pays $3,000 initial direct costs in negotiating the lease.Required1. Explain what initial direct costs are.2. Indicate precisely how Efland should account for initial direct costs if this lease is (a) an operating lease, (b) a sales-type
Jordan Industries manufactures and leases to its customers five-ton construction dump trucks. The lease arrangements are usually as follows:1. Payments on the lease are due for five years after its inception, but the present value is not greater than 90% of the fair value of the trucks at the time
Part a. Capital leases and operating leases are the two classifications of leases for the lessee.Required1. Explain how a capital lease is accounted for by the lessee, both at the inception of the lease and during the first year of the lease, assuming the lease transfers ownership of the property
On January 1, 2007 Von Company entered into two noncancelable leases for new machines to be used in its manufacturing operations. The first lease does not contain a bargain purchase option. The lease term is equal to 80% of the estimated economic life of the machine.The second lease contains a
On January 1, 2007 Metcalf Company sold equipment for cash and leased it back. As seller-lessee, Metcalf retained the right to substantially all of the remaining use of the equipment. The term of the lease is eight years. There is a gain on the sale portion of the transaction. The lease portion of
On January 1 Borman Company, a lessee, entered into three non-cancelable leases for brand new equipment, Lease J, Lease K, and Lease L. None of the three leases transfer ownership of the equipment to Borman at the end of the lease term. For each of the three leases, the present value of the minimum
United Manufacturing Company manufactures and leases computers to its customers. During 2007 the following lease transactions take place:1. On January 1 a computer is leased to Superior Microelectronics Industries and is guaranteed by United against obsolescence. The present value of the lease
Circuit Village Company entered into a lease arrangement with Thomas Leasing Company for a certain machine. Thomas’s primary business is leasing, and it is not a manufacturer or dealer. Circuit Village will lease the machine for a period of four years, which is 50% of the machine’s economic
On January 1, 2007 Lani Company entered into a non-cancelable lease for a machine to be used in its manufacturing operations. The lease transfers ownership of the machine to Lani by the end of the lease term. The term of the lease is eight years. The minimum lease payment made by Lani on January 1,
On December 31, 2006 Port Co. sold six-month-old equipment at fair value and leased it back. There was a loss on the sale. Port pays all insurance, maintenance, and taxes on the equipment. The lease provides for eight equal annual payments, beginning December 31, 2007, with a present value equal to
You are an accountant for the ABC Mining Company, and the CFO gives you a copy of a recent lease agreement to record. As you read the agreement you discover the company has leased 12 trucks from the XYZ Finance Co. The fair value of the trucks is $2.4 million. ABC has agreed to pay $250,000
Situation The Cliborn Retail Company negotiated a lease for a retail store in a new shopping center that included 30 stores. The accountant for Cliborn, Gail Naugle, was given the lease agreement to analyze. She looked into whether the lease was a capital lease. The lease did not include a transfer
Situation The Stirbis Company was negotiating a lease for a new building that would be used as a warehouse. Stirbis’ accountant, Shannon Fenimore, had been invited to join Jim Stirbis (the president) in a meeting where the lease agreement was settled. The president of the company that owned the
What is a statement of cash flows?
Briefly describe the three types of activities of a company reported in its statement of cash flows.
What does the information in a statement of cash flows help external users to assess?
Name the five items a company’s statement of cash flows must clearly show. What items are reported in a separate schedule accompanying the statement?
What are “cash equivalents”? How does a company’s reporting on its cash and cash equivalents affect the statement of cash flows?
What are the three categories of a company’s inflows of cash? What are the three categories of a company’s outflows of cash?
Starting with the basic accounting equation, derive a set of equations that show the relationship between increases (decreases) in cash and increases (decreases) in assets other than cash, liabilities, and stockholders’ equity.
Briefly describe a retail company’s operating cycle and the relationship of its various stages to cash inflows and outflows.
What are the two ways to calculate and report a company’s net cash flow from operating activities? Briefly describe each method.
Briefly describe the indirect method for reporting a company’s net cash flow from operating activities. List several adjustments to net income and indicate whether they are additions or subtractions.
Give two examples of a company’s (a) Cash inflows from investing activities, and (b) Cash outflows for investing activities.
Give two examples of a company’s (a) Cash inflows from financing activities, and (b) Cash outflows for financing activities.
Give two examples of a company’s investing and financing activities not affecting cash.
What is the visual inspection method? List the steps in this method.
Briefly describe the worksheet method of analyzing the information for a company’s statement of cash flows. (Do not list the steps in preparation.)
Indicate how a company computes the amount of interest and income taxes that it paid during the year.
What two alternatives are allowed for where a company may disclose the net cash flow from operating activities prepared under the indirect method in regard to its statement of cash flows?
A company purchases equipment costing $12,500 by paying $5,000 down and signing a $7,500 note payable. Show two ways of disclosing the effects of this transaction in regard to the statement of cash flows.
Define the direct method of reporting the cash flows from operating activities of a company.
List the three operating cash inflows that a company reports under the direct method.
List the five operating cash outflows that a company reports under the direct method.
Briefly describe how to determine each of the operating cash inflows and operating cash outflows under the direct method.
Multiple Choice1. If a company issues a balance sheet and an income statement with comparative figures from last year, a statement of cash flowsa. Is no longer necessary, but may be issued at the company’s optionb. Should not be issuedc. Should be issued for each period for which an income
The following are several transactions and events that might be disclosed on a company’s statement of cash flows:1. Issuance of common stock 2. Purchase of building 3. Net income 4. Increase in accounts receivable 5. Depreciation expense 6. Sale of land at cost7. Conversion of bonds to common
The following is accounting information taken from the Hyde Company’s records for 2007:1. Amortization of premium on bonds payable, $6002. Purchase of equipment, $6,0003. Depreciation expense, $7,4004. Decrease in accounts receivable, $8005. Decrease in accounts payable, $2,8006. Issuance of
The following is a list of the items for the 2007 statement of cash flows of the Lombardo Company:1. Depreciation expense, $4,2002. Proceeds from sale of land, $5,6003. Payment of dividends, $5,0004. Net income, $7,9005. Conversion of bonds to common stock, $7,0006. Increase in accounts payable,
The following is a list of items for the 2007 statement of cash flows of the Witts Company:1. Receipt from sale of equipment, $2,7002. Increase in inventory, $3,9003. Net income, $13,5004. Payment for purchase of building, $29,0005. Depreciation expense, $8,7006. Receipt from issuance of bonds,
The Dauve Company reported the following condensed income statement for 2007:During 2007, the following changes occurred in the company's current assets and current liabilities:Increase(Decrease)Cash .............$3,700Accounts receivable ........(5,500)Inventories ...........8,900Accounts payable
The following is an Equipment account and its associated Accumulated Depreciation account:Additional data:1. Machine A was sold at a gain of $9002. Machine B was sold for its scrap value of $2003. Machine C was acquired during the yearRequiredAnalyze the two accounts and show, in journal entry
The following changes in account balances and other information for 2007 were taken from the accounting records of the Gordon Company:Other information: Net income totaled $5,800. Dividends were declared and paid. Equipment was purchased for $8,800. No buildings and equipment were sold during the
The following changes in account balances and other information for 2007 were taken from the accounting records of the Noble Company:Other information: Net income was $9,900. Dividends were declared and paid. Land was sold for $1,700; a building was purchased for $23,000. No land was purchased and
The following beginning balance sheet and statement of cash flows for 2007 are available for Fazzi Company:RequiredOn the basis of this information, prepare a balance sheet for the Fazzi Company as of December 31,2007.

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