Question

14

On 1/1/14, ABC Corporation signed a 5-year noncancelable lease for a delivery vehicle. The terms of the lease called for ABC to Corporation to make

annual payments of $10,503 at the beginning of each year, starting January 1, 2014. The delivery vehicle has an estimated useful life of 6 years and a $7,000

unguaranteed residual value. The delivery vehicle reverts back to the lessor at the end of the lease term. ABC Corporation uses the straight-line method

of depreciation for the delivery vehicle. ABC Corporation's incremental borrowing rate is 10%, and the Lessor's implicit rate is unknown. No entries have yet

been made concerning this lease arrangement. After determining the type of lease arrangement (capital or operating), prepare the necessary multiple-part journal

entry for 2014 for ABC Corporation. (Hints: You will need to compute the present value of the minimum lease payments and 4 separate sub-entries for

this lease transaction. Also, for Statement of Cash Flow purposes, the principal portion of lease payments are correctly categorized as a financing activity.)

15

ABC Corporation provides a defined benefit pension plan for its employees. A combination adjusting entry should be made to correctly account for this type of pension

plan given the following items of information for the 2014 plan year, including the recording of pension expense and the employer's contribution to the pension plan in 2014.

Note: Use the summary entry method as demonstrated and discussed in the chapter lectures on pension accounting to prepare the adjusting entry.

Pension asset/liability (January 1)

$0

Actual return on plan assets

$40,000

Expected return on plan assets

$20,000

Contributions (funding) in 2014

$37,000

Fair value of plan assets (December 31)

$75,000

Settlement rate

10%

Projected benefit obligation (January 1)

$0

Service cost

$60,000

Benefits paid in 2014

$0

*For purposes of financial statement presentation, consider Pension Expense as an operating item and any resulting Pension Asset/Liability as long-term in nature.

Answer 1

Below adjusting entries are correct.

Pension Expense                             $40,000

(Refer below workings)

Pension Related Asset                                   $14,000

(Balancing figure)

                To Other Comp. Income                               $17,000

                (Fair market value - Service cost)

                To Cash                                                                $37,000

                (Contributions in 2014)

Opening Value pension asset	0
Add : Employee contribution in 2014	$37,000
Add: Actual return on plan asset	$40,000
Less: Benefits paid	0
Fair market value of plan asset at the end of the year	$77,000

Computation of Pension expense
Service Cost	$60,000
Actual return	-$20.000
Interest cosy	0
Pension expense	$40,000