Some Issues in the Corporate Financial Management - Assignment Example

Final Exam

Question 1

• Pension asset/liability at December 31, 2015

Pension asset/liability = projected benefit obligation – plan assets at fair value

= $825,000 - $630,000

= $195,000

• Amortization of net gain = [accumulated OCI net gain – (projected benefit obligation * 10%)] / 10 (Bragg, Steven 299)

= [90,000 – ($825,000 * 10%)]/10

= $750

Question 2

• Interest costs for 2015

Interest cost = projected benefit obligation (Jan 1, 2015) * settlement rate

= $3,100,000 * 0.08

= $248,000

• Actual return on plan assets in 2015

Fair value of plan assets (Dec 31, 2015) 3,630,000

Less: fair value of plan assets (Jan 1, 2015) 3,130,000

Less contributions 520,000

Add: benefits 260,000

Actual return on plan assets $240,000

• Unexpected gain or loss in 2015

Unexpected gain or loss = actual return on plan assets – expected return

= $240,000 – ($3,130,000 * 6%)

= $240,000 - $187,800

= $52,200

• Corridor and amortization of the net gain

$3,130,000 * 10% = $313,000; $3,100,000 * 10% = $310,000

Therefore, the corridor is $313,000 (larger)

Amortization on net gain = ($425,000 - $313,000)/15

= $7,467

Question 3

• Corridor for 2015

$4,950,000 * 10% = $495,000; $4,750,000 * 10% = $475,000

The corridor is $495,000 (larger)

• Pension asset/liability at December 31, 2015

Pension asset/ liability = projected benefit obligation – plan assets at fair value

= $5,150,000 - $4,950,000

= $200,000

• Journal entry for 2015

Account description

Debit

Credit

Pension expense

Cash

Other comprehensive income

Pension asset/liability

1,700,000

1,350,000

300,000

50,000

Question 4

Corridor amortization was adopted by the financial accounting standards board (FASB) to amortize gains and losses when they are greater than 10% of the larger of the opening balances of the fair value of the plan assets and the projected benefit obligation (PBO) (Shim, Jae, Joel, and Nick 91). In most cases, corridor amortization uses straight-line method to amortize the gains or losses.

Question 5

Gibbs Company

Schedule for amortization of net gain or loss

For the years 2014, 2015 and 2016

PBO Plan assets Corridor Accumulated OCI Amortization

2014 2,100,000 1,680,000 210,000 0 0

2015 2,340,000 2,460,000 246,000 640,000 39,400

2016 2,940,000 2,550,000 294,000 46,600 0

Workings;

• Years of service = 2,000 / 200

= 10

• Amortization for 2015 = (640,000 – 246,000)/10 using straight line method.

= $39,400

• Accumulated OCI (2016) = 640,000 – 554,000 – 39,400 = $46,600

Question 6

The criteria that must be satisfied for a lessor to classify a lease as a direct-financing or sales-type lease include one or more of group I criteria and both of the group II criteria;

Group I

• Transfer of ownership.
• The lease should have bargain purchase option.
• The term of the lease is more than or equal to 75% o he estimated economic life of the leased property (Ellis, Jeffrey 26).
• The present value of the minimum lease payments is greater than or equal to 90% of the fair value of the leased property.

Group II

• Collectibility of the lease payment is reasonably predictable.
• No important uncertainties surrounding the costs yet to be incurred by the lessor under the lease agreement.

Question 7

Under a direct-financing lease, the lessor (owner of the property) report he present value of minimum lease payments as lease receivable and the property is removed from the financial statements. Consequently, the lease payments are deducted in lease receivable and interest revenue (Shim, Jae, Joel, and Nick 91). Interest revenue is recognized using the effective interest method while the interest rate (discounting factor) which is used to calculate the present value of minimum lease payment is obtained using the declining balance of the lease receivable.

Question 8

• The type of lease for the lessor (Hayes Corp.) is a sales-type lease. This is because there is transfer of ownership to the lessee and the minimum lease payments are greater than or equal to 90% of the fair value of the trailers leased (Ellis, Jeffrey 26). Similarly, the collectability of the lease payments is reasonably predictable and there are no uncertainties surrounding the amount of costs yet to be incurred by Hayes Corp.
• Annual lease payment = fair value of the ten trailers / present value factor

= ($50,000 * 10) / 4.99271

= $100,146

Hayes Corp.

Lease amortization schedule

For the first three years

Date

Annual lease

Interest on lease receivable

Lease receivable recovery

Lease receivable

1/1/14

500,000

12/31/14

100,146

40,000

60,146

439,854

12/31/15

100,146

35,188

64,958

374,896

12/31/2016

100,146

29,992

70,154

304,742

• Journal entries for the lessor for 2014

Date

Account description

Debit

Credit

1/1/14

Lease receivable

Cost of goods sold

Sales revenue

Inventory

500,000

450,000

500,000

450,000

12/31/14

Cash

Interest receivable

Interest revenue

100,146

60,146

40,000

12/31/15

Cash

Interest receivable

Interest revenue

100,146

64,958

35,188

Question 9

• Journal entries for 2015 for Morris Company

Date

Account description

Debit

Credit

1/1/15

Cash

Land

Unearned profit

Leased land

Lease liability

Cash

8,000,000

8,000,000

6,720,000

1,280,000

7,245,541

754,459

2015

Executory costs

Accounts payable & cash

255,000

255,000

12/31/15

Unearned profit

Revenue (1,280,000/20)

Interest expense (7,245,541*0.08)

Interest payable

64,000

579,643

64,000

579,643

Partial lease amortization schedule;

Date

Annual lease

Interest on lease receivable

Lease receivable recovery

Lease receivable

1/1/15

8,000,000

1/1/15

754,459

0

754,459

7,245,541

• Journal entries for 2015 for Lopez corporation

Date

Account description

Debit

Credit

1/1/15

Land

Cash

Cash

Leased receivable

Land

8,000,000

754,459

7,245,541

8,000,000

8,000,000

12/31/15

Interest receivable

Interest revenue

579,643

579,643

Question 10

• Journal entries of Hester for 2015

Date

Account description

Debit

Credit

1/1/15

Cash

Equipment

Unearned profit

Leased equipment

Lease liability

Lease liability

Cash

720,000

720,000

106,500

630,000

90,000

720,000

106,500

12/31/15

Depreciation expense (720,000/10)

Accumulated depreciation

Unearned profit

Depreciation expense

Interest expense (720,000 – 106,500)*10%

Interest payable

72,000

9,000

61,350

72,000

9,000

61,350

• Journal entries of Beck for 2015

Date

Account description

Debit

Credit

1/1/15

Equipment

Cash

Lease receivable

Equipment

Cash

Lease receivable

720,000

720,000

106,500

720,000

720,000

106,500

12/31/15

Interest receivable

Interest revenue

61,350

61,350