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In: Accounting

Armstrong Inc. did a physical inventory count and accidentally overstated ending inventory on the 12/31/18 financial...

Armstrong Inc. did a physical inventory count and accidentally overstated ending inventory on the 12/31/18 financial statement by $20,000. The company noticed the error during 2020, before books were closed. The 2020 inventory was not affected since physical inventory was adequately counted. How would Armstrong Inc correct this error in 2020, assume a 21% tax rate.

Credit Retained Earnings by $15,800.
No adjustment necessary since it fixed itself.
Debit Retained Earnings by $15,800.

Credit Inventory by $20,000

On January 1, 2020, Bubble Corporation signed a five-year noncancelable lease to obtain a bubble machine. The terms of the lease called for Bubble to make annual payments of $90,000 at the beginning of each year for 5 years. The equipment has an estimated useful life of 7 years and no salvage value. Bubbles effective interest rate is 10%. The fair value on Jan. 1, 2020 of the asset is $500,000. With respect to this lease, what should Bubble record for 2020?

A capital lease
An operating lease
A sales-type lease
A direct-financing lease

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Answer
(Part one)
Inventory Error always having two year effect. As in this case overstated ending inventory as on 31.12.2018 by $20,000
having second effect during 2019 by overstated beginning Inventory by $ 20,000. Therefore, it can say overstated income
of 2018 got offset during 2019 by same amount. So No adjustment necessary since it fixed itself.
(Part Two)
These are some ofindication to define the lease shall for being as "Capital Lease" otherwise " Operating lease"-
1) Ownership is transferred by the end of lease term - Not Complied as there is no any option available at the end of lease.
2) Lease term is equal to 75% or more than economic life of leased assets - 71.42 as not complied
3) Present Value of Minimum Lease Payment is 90% or more of fair value of leased asset- 75.05 % as not complied
Lease term % of Useful Life of Assets = (5/7*100) = 71.42%
Calculation of Present Vale Lease Payment
Year Advance Payment Dis. Factor @10% Discounted Value
0 90000 1.00          90,000
1 90000 0.91          81,818
2 90000 0.83          74,380
3 90000 0.75          67,618
4 90000 0.68          61,471
5 0 0.62                   -  
Present Value of Min. Lease Payment      3,75,288
MLP % of Fair value (375288/500000*100) = 75.05%
As not complied by Capital Lease, So it is An Operating Lease .
As there is a term of lease not for sale so option of sale type lease is wrong option and
direct finance lease option is not valid as it does not satisfied capital lease complied condition.

ekkarill92 answered 1 year ago
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