Epps Corp., a public company, leased equipment from Anderson Inc. on January 2, 2018, for a period of three years. Lease payments of $100,000 are due to Anderson Inc. each year on December 31. The lease contains no purchase or renewal options and the equipment reverts back to Anderson Inc. on the expiration of the lease. The remaining useful life of the equipment is four years (the equipment is new at the time Epps leases it). The fair value of the equipment at lease inception is $270,000. Epps Corp. has guaranteed $20,000 as the residual value at the end of the lease term. The $20,000 represents the expected value of the leased equipment to the lessee at the end of the lease term. The salvage value of the equipment is expected to be $2,000 after the end of its economic life. Epps’ incremental borrowing rate is 9 percent. Anderson’s implicit rate is 10 percent and is known by Epps.

The assistant controller  and controller of Epps Corp. analyzed the lease and made their recommendations for the appropriate accounting.. As the CFO, you were given both analyses to determine the correct accounting treatment. Calculations and journal entries performed by the assistant controller and controller are below.

Assistant controller analysis:

Since the equipment reverts back to Anderson Inc., Epps should not record an asset or liability on the lease.

Entries to be posted in Years 1, 2, and 3:

Dr. Lease expense                           $100,000

Cr. Cash                                                        $100,000

Controller analysis:

The lease term is for three years. Since it is long-term, an asset and liability must be recorded. The amount of the asset and liability is based on the present value of the lease payments. The controller uses Epps’ incremental borrowing rate since it is the lower rate.

Present value of the lease payments = $100,000 × 2.53129 = $253,129

Since interest has to be charged on the straight-line method, the controller determines the following for the amortization of the lease liability.

                                                                                                Reduction in             Balance of

                                                                 Interest                     Lease                         Lease

  Year             Cash Payment             Expense                  Obligation               Obligation

    0                                                                                                                              $253,129

    1                  $100,000                        $15,624                $84,376                     $168,753

    2                  $100,000                        $15,624                $84,376                     $  84,377

   3                  $100,000                        $15,623                $84,377                     $           0

Journal entries in Year 1:

January 2

Leased Asset                                   253,129

            Lease Obligation                                                    253,129

December 31

Interest expense                             15,624

Lease obligation                             84,376

Cash                                                              100,000

Depreciation Expense                     84,376

             Accumulated Depreciation                          84,376        

Required:

1. Was the assistant controller’s analysis correct? Why or why not?

2. Was the controller’s analysis correct? Why or why not?

3. If neither answer is correct, show the correct analysis including all year one entry(ies).

Be sure to provide appropriate authoritative sources for positions taken.

Operating and Capital Leases - The CEO of Smith & Sons, Inc., was considering a lease for a new administrative headquarters building. The building was old, but was very well located near the company’s principal customers. The leasing agent estimated that the building’s remaining useful life was ten years, and at the end of its useful life, the building would probably be worth $100,000. The proposed lease term was eight years, and as an inducement to Smith & Sons’ CEO to sign the lease, the leasing agent indicated a willingness to include a statement in the lease agreement that would allow Smith & Sons to buy the building at the end of the least for only $75,000. As the CEO considered whether or not to sign the lease, she wondered whether the lease could be accounted for as an off-balance-sheet operating lease. What would you advise her?

Data: Use SEC EDGAR or another resource to obtain financial statements and notes for the following firms and fiscal year-ends. You can use their 10-K’s or annual reports.

2. How does Amgen account for research and development costs?
3. In 2015, Amgen acquired Dezima Pharma B.V. for total consideration of $410 million. What would Amgen’s goodwill balance have been on December 31, 2017 if the total consideration was only $330 million. Assume no other changes (e.g., same ‘Currency translation adjustments’ in Note 12
4. What identifiable intangible assets do Amgen and Dollar Tree report in the notes to their financial statements? List them.
   

Presented below are two independent situations related to future taxable and deductible amounts resulting from temporary differences existing at December 31, 2020. 1. Sunland Co. has developed the following schedule of future taxable and deductible amounts. 2021 2022 2023 2024 2025 Taxable amounts $200 $200 $200 $200 $200 Deductible amount — — — (1,400 ) 2. Coronado Co. has the following schedule of future taxable and deductible amounts. 2021 2022 2023 2024 Taxable amounts $200 $200 $200 $200 Deductible amount — — (2,500 ) — Both Sunland Co. and Coronado Co. have taxable income of $3,800 in 2020 and expect to have taxable income in all future years. The tax rates enacted as of the beginning of 2020 are 30% for 2020–2023 and 35% for years thereafter. All of the underlying temporary differences relate to noncurrent assets and liabilities.

1. Compute the net amount of deferred income taxes to be reported at the end of 2020, and indicate how it should be classified on the balance sheet for situation one.

2. Compute the net amount of deferred income taxes to be reported at the end of 2020, and indicate how it should be classified on the balance sheet for situation two.

Perez Cameras, Inc. manufactures two models of cameras. Model ZM has a zoom lens; Model DS has a fixed lens. Perez uses an activity-based costing system. The following are the relevant cost data for the previous month:

Perez’s facility has the capacity to operate 2,700 machine hours per month.

   
Required

1. Compute the cost per unit for each product.

2. The current market price for products comparable to Model ZM is $119 and for DS is $66. If Perez sold all of its products at the market prices, what was its profit or loss for the previous month?

3. A market expert believes that Perez can sell as many cameras as it can produce by pricing Model ZM at $114 and Model DS at $34. Perez would like to use those estimates as its target prices and have a profit margin of 30 percent of target prices. What is the target cost for each product?
   

Why is it important to properly state the issue in a judgment?

Match the definition to the proper term.

Group of answer choices

The sales level at which operating income is zero: Total revenues = Total expenses.

      [ Choose ]            unit contribution margin            contribution margin ratio            operating leverage            sensitivity analysis            net income            breakeven point            margin of safety            contribution margin income statement            gross margin            total contribution margin            cost-volume-profit (CVP) analysis      

Sales revenue minus variable expenses.

      [ Choose ]            unit contribution margin            contribution margin ratio            operating leverage            sensitivity analysis            net income            breakeven point            margin of safety            contribution margin income statement            gross margin            total contribution margin            cost-volume-profit (CVP) analysis      

An income statement that groups costs by behavior rather than function; it can be used only by internal management.

      [ Choose ]            unit contribution margin            contribution margin ratio            operating leverage            sensitivity analysis            net income            breakeven point            margin of safety            contribution margin income statement            gross margin            total contribution margin            cost-volume-profit (CVP) analysis      

Expresses the relationships among costs, volume, and profit or loss

      [ Choose ]            unit contribution margin            contribution margin ratio            operating leverage            sensitivity analysis            net income            breakeven point            margin of safety            contribution margin income statement            gross margin            total contribution margin            cost-volume-profit (CVP) analysis      

A “what-if” technique that asks what results will be if actual prices or costs change or if an underlying assumption changes.

      [ Choose ]            unit contribution margin            contribution margin ratio            operating leverage            sensitivity analysis            net income            breakeven point            margin of safety            contribution margin income statement            gross margin            total contribution margin            cost-volume-profit (CVP) analysis      

The excess of the unit sales price over the variable cost per unit

      [ Choose ]            unit contribution margin            contribution margin ratio            operating leverage            sensitivity analysis            net income            breakeven point            margin of safety            contribution margin income statement            gross margin            total contribution margin            cost-volume-profit (CVP) analysis      

Ratio of contribution margin to sales revenue.

      [ Choose ]            unit contribution margin            contribution margin ratio            operating leverage            sensitivity analysis            net income            breakeven point            margin of safety            contribution margin income statement            gross margin            total contribution margin            cost-volume-profit (CVP) analysis      

Excess of expected sales over breakeven sales

Describe workers compensation and explain why it is important. Also, what is Washington state’s worker’s compensation requirements. Summarize your findings

On April 6, 2018, Home Furnishings purchased $41,000 of merchandise from Una's Imports, terms 3/10 n/45. On April 8, Home Furnishings returned $8,600 of the merchandise to Una's Imports for credit. Home Furnishings paid cash for the merchandise on April 15, 2018.

Required

1. What is the amount that Home Furnishings must pay Una's Imports on April 15?

   	Net amount due.

2. Record the events in a horizontal statements model. In the Cash Flow column, use OA to designate operating activity, IA for investment activity, FA for financing activity, or NC for net change in cash. If the element is not affected by the event, leave the cell blank

   HOME FURNISHINGS Effect of Events on the Financial Statements Events Balance Sheet Income Statement Statement of Cash Flows Assets = Liabilities + Stockholders’ Equity Revenue – Expenses = Net Income Cash + Merchandise Inventory = Accounts Payable + Common Stock + Retained Earnings Purchase inventory + = + + – = Return inventory + = + + – = Discount percentage + = + + – = Paid accounts payable + = + + – =

   
   
3. How much must Home Furnishings pay for the merchandise purchased if the payment is not made until April 20, 2018?

1. 	Payment

2. Record the payment of the merchandise in Requirement (c) in a horizontal statements. In the Cash Flow column, use OA to designate operating activity, IA for investment activity, FA for financing activity, NC for net change in cash and NA to indicate the element is not affected by the event.

   	HOME FURNISHINGS Effect of Events on the Financial Statements Events Balance Sheet Income Statement Statement of Cash Flows Assets = Liabilities + Stockholders’ Equity Revenue – Expenses = Net Income Cash + Merchandise Inventory = Accounts Payable + Common Stock + Retained Earnings Paid accounts payable + = + + – =

For each transaction below, write the net effect on Current Assets (CA), Total Assets, Net Income Before Taxes (NI pretax), Cash flows from operating activities (CFO), and Cash flows from investing activities (CFI).

• Write only the effect for the current period.
• Assume the company is a merchandising firm.
• If the net effect is negative, include a negative sign. If no effect, write 0.
• For CFO and CFI, positive net inflows are positive, net cash outflows are negative.
• For classifying interest expense, assume U.S. GAAP conventions.

12-3

Forten Company, a merchandiser, recently completed its calendar-year 2017 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company’s income statement and balance sheets follow.

Additional Information on Year 2017 Transactions

1. The loss on the cash sale of equipment was $5,125 (details in b).
2. Sold equipment costing $46,875, with accumulated depreciation of $30,125, for $11,625 cash.
3. Purchased equipment costing $96,375 by paying $30,000 cash and signing a long-term note payable for the balance.
4. Borrowed $4,000 cash by signing a short-term note payable.
5. Paid $50,125 cash to reduce the long-term notes payable.
6. Issued 2,500 shares of common stock for $20 cash per share.
7. Declared and paid cash dividends of $50,100.

Required:
1. Prepare a complete statement of cash flows; report its operating activities using the indirect method. (Amounts to be deducted should be indicated with a minus sign.)

FORTEN COMPANYStatement of Cash FlowsFor Year Ended December 31, 2017Cash flows from operating activitiesNet income$114,975Adjustments to reconcile net income to net cash provided by operations:Accounts payable decrease20,750Accounts receivable increase5,125Cash paid for dividendsCash borrowed on short-term note$140,850Cash flows from investing activities0Cash flows from financing activities:0Net increase (decrease) in cash$140,850Cash balance at beginning of yearCash balance at end of year$140,850

9-4

On October 29, 2016, Lobo Co. began operations by purchasing razors for resale. Lobo uses the perpetual inventory method. The razors have a 90-day warranty that requires the company to replace any nonworking razor. When a razor is returned, the company discards it and mails a new one from Merchandise Inventory to the customer. The company's cost per new razor is $14 and its retail selling price is $90 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 9% of dollar sales. The following transactions and events occurred.

2016

2017

2. How much warranty expense is reported for November 2016 and for December 2016

3. How much warranty expense is reported for January 2017?
  4. What is the balance of the Estimated Warranty Liability account as of December 31, 2016?
  

5. What is the balance of the Estimated Warranty Liability account as of January 31, 2017?
  

Problem 21A-6 b-f (Part Level Submission)

Stellar Leasing Company agrees to lease equipment to Pearl Corporation on January 1, 2017. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $520,000, and the fair value of the asset on January 1, 2017, is $737,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $110,000. Pearl estimates that the expected residual value at the end of the lease term will be 110,000. Pearl amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017. 5. The collectibility of the lease payments is probable. 6. Stellar desires a 10% rate of return on its investments. Pearl’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown. (Assume the accounting period ends on December 31.)

9-4

On October 29, 2016, Lobo Co. began operations by purchasing razors for resale. Lobo uses the perpetual inventory method. The razors have a 90-day warranty that requires the company to replace any nonworking razor. When a razor is returned, the company discards it and mails a new one from Merchandise Inventory to the customer. The company's cost per new razor is $14 and its retail selling price is $90 in both 2016 and 2017. The manufacturer has advised the company to expect warranty costs to equal 9% of dollar sales. The following transactions and events occurred.

2016

2017

1.1 Prepare journal entries to record above transactions and adjustments for 2016.
  

• 1Record the sales revenue of 50 razors for $4,500 cash.

• 2Record the cost of goods sold for 50 razors.

• 3Record the estimated warranty expense at 9% of November sales.

• 4Record the replacement of 10 razors that were returned under the warranty.

• 5Record the sales revenue of 150 razors for $13,500 cash.

• 6Record the cost of goods sold for 150 razors.

• 7Record the replacement of 20 razors that were returned under the warranty.

• 8Record the estimated warranty expense at 9% of December sales.

• 1Record the sales revenue of 100 razors for $9,000 cash.

• 2Record the cost of goods sold for 100 razors.

• 3Record the replacement of 25 razors that were returned under the warranty.

• 4Record the adjusting entry for warranty expense for the month of January 2017.

The Ageless Child, Inc. (“TAC” or “the Company”) is a public company that sells children’s fashions and educational toys and games. As an incentive to its employees, TAC established a compensation incentive plan in which a total of 100,000 options were granted on January 1, 2019. TAC’s stock price was $15.00 per share on that date. 718-20-55-10 The significant terms of the incentive plan are as follows: • The options have a $15.00 “strike” or exercise price. • For the options to vest, the following must occur: o The employee must continue to provide service to the Company throughout the entire explicit service period of five years (i.e., a five-year “cliff-vesting” award). o TAC must achieve annual sales of at least $20 million during the fifth year (2023) of the explicit service period. o TAC’s share price must increase by at least 25% over the five-year explicit service period. • In addition, if the Company achieves sales of at least $25 million during the fifth year (2023) of the explicit vesting period, the strike price of the options will decrease from $15 to $10. • The options expire after 10 years following the grant date. • The options are classified as equity awards. Additional Facts: • Assume it is probable at all times that 100% of the employees receiving the awards will continue providing service to the Company as employees for the entire five-year explicit service period and that the five-year explicit service period is determined to be the requisite service period. • On the grant date, TAC’s management determine that it is probable that the Company’s sales in 2023 will be $30 million, and therefore it is probable on the grant date that sales are greater than or equal to at least $25 million in the fifth year. • The grant-date fair value of the options assuming a strike price of $15 is $8 per option. The grant-date fair value assuming a strike price of $10 per option is $12 per option. The CFO, Jayne Wilson, has come to you, the controller, and asked you to gather some information for her. First, she wants the types of conditions (i.e., service, performance, market, or other) present in the plan for the vesting of the units. Second, she wants to know how the service, performance, and market conditions affect vesting of the units. That is, of the various conditions present in the award, which conditions affect the vesting of the award and which affect factors other than vesting of the award (and what is their accounting treatment). Third, she would like to know the accounting impact if TAC’s share price remains steady at $15 through the end of the fifth year. Bonus (5 points) As described above, on January 1, 2019 (the grant date), $30 million of sales were probable for the fifth year (2023). During 2019, 2020, and 2021 $30 million of sales for 2023 remained probable. At the beginning of 2022 (the fourth year), management determines that it is probable that only $22 million of sales will occur for 2023. What are the journal entries for each year? Cite references from the FASB Accounting Standards Codification.