Considering the following time series data: (Tableau)

1. Determine the least squares trend equation. Use a linear equation and any other non- linear equation. Provide R-squared for both cases.

2. Estimate the price of gold (ounce) for 2020. Does this seem like a reasonable estimate based on historical data?

3. What is the quality of the forecast? Also, Provide Mean Absolute Error (MAE), and the Mean Absolute Percentage Error (MAPE).

Please provide step by step tabulea solution and output.

(10) Considering the following time series data: (Tableau) A. Determine the least squares trend equation. Use a linear equation and any other nonlinear equation. Provide R-squared for both cases. B. Estimate the price of gold (ounce) for 2020. Does this seem like a reasonable estimate based on historical data? C. What is the quality of the forecast? Also, Provide Mean Absolute Error (MAE), and the Mean Absolute Percentage Error (MAPE).

Price of Gold (ounce) 2005 $513.00 2006 $635.70 2007 $836.50 2008 $869.75 2009 $1,087.50 2010 $1,420.25 2011 $1,531.00 2012 $1,664.00 2013 $1,204.50 2014 $1,199.25 2015 $1,060.00

CAN YOU PLEASE PROVIDE WITH STEPS ON TABLEAU. APPREICTAE IT THANK YOU

The table shows the estimated percentage P of the population of a certain country that are mobile-phone subscribers. (End of year estimates are given.)

(c) Estimate the instantaneous rate of growth in 2003 by sketching a graph of P and measuring the slope of a tangent. (Sketch your graph so that it is a smooth curve through the points, and so that the tangent line has an x-intercept of 1999.3 and passing through the point

(2006, 46.6).  Round your answer to two decimal places.)

For part, c use the two points that are on the tangent line to determine the slope, which is the instantaneous rate of change.
.........................................  percentage points per year

Deep Down Mining Corp. (DDM) is a publicly traded, Canadian-based mining operation with various mines located throughout Canada. Investors benchmark earnings compared to market expectations and to other similar companies. DDM’s loan facility with a consortium of banks stipulates that DDM’s long-term debt cannot exceed 1.5 times the book value of its equity. DDM is not currently in danger of breaching this covenant, but is planning some acquisitions that will increase its debt significantly and bring its debt-to-equity ratio much closer to the stipulated maximum. Wherever feasible, DDM prefers to adopt accounting policies that increase short-term profitability, to keep the equity base strong. As part of its compensation package, DDM awards bonuses to its executives on an annual basis. The primary criterion considered by the board of directors when determining the size of the bonuses to be awarded to the executives overseeing the production side of the mine is the firm’s actual earnings before interest and taxes (EBIT) compared to the budgeted EBIT for the year. Projected financial results for the Xavier mine, an open-pit gold mine in northern British Columbia, are shown below. However, projections are notoriously unreliable, because the selling price of gold per ounce fluctuates significantly from year to year. When prices are high, the mine increases production volume and when prices are low, production volume is reduced. The results below are based on expected high price/high volume in Year 2 and low price/low volume in Year 3, but the opposite situation might unfold, or prices might be constant. Extraction costs are stable per tonne processed, and are projected to increase by inflation only. Projected financial results — Xavier mine (in $’000s) Year 1 Year 2 Year 3 Volume 110,000 154,000 88,000 Sales price $1,500 $2,100 $1,250 Revenue1 $165,000 $323,400 $110,000 Extraction2 88,000 126,896 74,687 Administration3 20,000 20,600 21,218 Earnings before interest, taxes, depreciation and amortization (EBITDA) $ 57,000 $175,904 $ 14,095 Depreciation4 10,000 10,000 10,000 EBIT $ 47,000 $165,904 $ 4,095 Intermediate Financial Reporting 1 Project 2 6 / 8 1 1,000,000 tonnes mined; 0.11 ounces recovered per tonne processed; Year 1, C$1,500 sales price per ounce; 1,000,000 tonnes mined × 0.11 = 110,000; 110,000 × $1,500 = $165 million; Year 2, C$2,100 sales price per ounce; 1,400,000 tonnes mined × 0.11 = 154,000; 154,000 × $2,100 = $323.4 million; Year 3, C$1,250 sales price per ounce; 800,000 tonnes mined × 0.11 = 88,000; 88,000 × $1,250 = $110 million 2 C$800 per ounce recovered with an inflation factor of 3% per year. For year 1: 110,000 × $800 = $88 million; Year 2 154,000 × ($800 × 1.03) = $126.896 million; Year 3 88,000 × ($800 × 1.03 × 1.03) = $74.687 million 3 Inflation factor of 3% per year. Will not be materially affected by changes in throughput. 4 Depreciation expense excluding the new Jaw Crusher. A brand-new class of equipment has recently been purchased by DDM for the Xavier mine. Details of the equipment • Jaw Crusher model XY2 is to be used in the Xavier mine and costs $10.5 million. • The manufacturer advises that the maximum capacity is 1.6 million tonnes per year. Your engineering staff has indicated that this throughput is probably on the high side and could only be achieved in ideal circumstances. • Your counterparts in other mining companies that use similar machinery advise that the maximum capacity of this machine, when allowing for shutdowns for maintenance and emergency repairs, is closer to 1.4 million tonnes per year. They also advise that, as the machine ages, the capacity declines by about 5% per year, because the time lost for maintenance and repair shutdowns increases as the machine ages. • The manufacturer advises that the estimated useful life of the Jaw Crusher model XY2 varies depending on its usage, per the following table: Yearly production (% of maximum) Estimated maximum useful life 75% to 100% 10 years 16 million tonnes 50% to 75% 15 years 18 million tonnes 25% to 50% 25 years 20 million tonnes • Your research has determined that it is difficult to resell Jaw Crushers that are more than five years old due to the ongoing advances of technology for this type of equipment, as well as the prohibitive dismantling and shipping costs. Intermediate Financial Reporting 1 Project 2 7 / 8 Other information • DDM uses the cost model to subsequently measure the value of all its property, plant, and equipment (PPE). • DDM currently uses the straight-line method to depreciate all its depreciable nonmining PPE. The depreciation method used by DDM to depreciate PPE directly involved in mining operations is governed by the nature of the PPE. Straight-line, double-declining-balance, and units-of-production methods are all used in various circumstances at other mines. When DDM uses the double-declining-balance method of depreciation, the rate used is two times the percentage used in the straight-line method. • Based on geological surveys, management estimates that the ore body1 of the Xavier mine is approximately 15 million tonnes. DDM expects that it will extract an average of 1 million tonnes of ore from the gold mine annually, thus taking about 15 years to exhaust the ore body. Actual volume will change yearly based on the price of gold. It is not uncommon for the tonnage extracted from mines to be significantly different from that originally projected. • The senior vice president of extraction has suggested that DDM should adopt the straight-line method to depreciate the Jaw Crusher because he would like to extract the same volume of ore each year. Required: Brian, the company’s chief financial officer, has asked you, the financial controller and a CPA, to make recommendations with respect to an appropriate depreciation method for the brand-new class of equipment recently purchased by DDM for the Xavier mine. Prepare a memo to Brian analyzing each of the three most widely used depreciation methods. Your memo should include a summary of pertinent information and do the following: • Identify and explain what each of the methods entails and then evaluate the advantages and disadvantages of each method. • Determine whether each of the three depreciation methods would be suitable and explain why or why not. • Recommend the estimated equipment life to be used; however, use management’s assumptions of a 15-year useful life when calculating depreciation expense. • Determine the estimated residual value to be used when calculating depreciation expense. • Recommend a depreciation method. Quantify the impact on DDM’s projected EBIT for each option under consideration. 1 An ore body is an area of land that contains minerals such as gold, silver, or zinc, and is commercially viable to mine (extract the minerals). Intermediate Financial Reporting 1 Project 2 8 / 8 Your response should be supported by a quantitative and qualitative analysis that considers the precepts of the IFRS Conceptual Framework and the requirements of IFRS, DDM’s financial reporting environment, the financial reporting goals, and the potential biases of stakeholders. It is recommended that you use point form in your memo and use language appropriate for a financially sophisticated user, as Brian is the CFO of a public company.

BACKGROUND INFORMATION: Frosty Co. is a publicly traded, medium-sized manufacturing firm that produces refrigerators, freezers, ice makers, and snow cone machines. During the past three years, the company has struggled against increasing competition, sluggish sales, and a public relations scandal surrounding the departure of the former Chief Executive Officer (CEO) and Chief Financial Officer (CFO). The new CEO, Jane Mileton, and CFO, Doug Steindart, have worked hard to improve the company's image and financial position. After several difficult years, the company now seems to be resolving its difficulties, and the management team is considering new investment opportunities. The team hopes that diversification into a line of professional ice cream makers, and perhaps a line of consumer products, will help the company continue its recent growth and effectively compete with future competitors. In order to raise the funds needed for these new investments, Frosty Co.'s Board of Directors has approved a seasoned equity offering (SEO). The discussions regarding the new investment opportunities and the equity offering have been kept quiet until a positive set of financial statements can provide strong evidence that the company has turned around, leading to an increase in the company's stock price. INTRODUCTION: After a full week of carefully examining financial statements, Simon was exhausted. He had become Frosty Co.'s corporate controller only a month ago, after several years as an auditor at a public accounting firm, and was excited about the move to corporate accounting. The first few weeks had gone well, as Simon met his accounting staff and settled into his new responsibilities. Then, he had started reviewing Frosty Co.'s financial statements for the prior year to make sure they correctly followed GAAP, and to familiarize himself more with the company and industry. Unfortunately, his relative inexperience with the industry and Frosty's accounting procedures had required him to spend more time on the review than he had anticipated. He still had a few questions about the financial statements, but he needed to start preparing for the upcoming SEO. He decided that he would talk to his staff about his lingering questions 1 Excerpt from Porter, J. C. 2012. How adjusting entries affect the quality of financial reporting: The case of Frosty Co. Issues in Accounting Education 27(2): 70-88. 2 tomorrow morning, just before his meeting with the CEO and CFO. The three of them were to discuss the upcoming audit and the earnings announcement and how they would impact the proposed SEO. He rubbed his tired eyes and headed home to get a little sleep. MEETING OF THE ACCOUNTING STAFF: 10:30AM Simon looked up as the divisional controllers, Elsa Pilebody and John Mortenson, came into his office. Elsa worked with Frosty Co.'s fridge and freezer division; John worked with the ice maker and snow cone machine division. So far, Simon had enjoyed working with them, especially since neither of them seemed to resent him stepping in as their new boss. They were both smiling as they came through the door, and their good-natured teasing started almost before they had finished shaking hands. “Sorry we're a little late,” Elsa started, “but John had to stop for the last jelly donut.” “I did not!” John said indignantly. He looked at Simon. “It was chocolate.” Because of his busy schedule that day, Simon got down to business instead of joining the banter as he normally would have done. “Thanks for coming by, Elsa and John. We have several issues to discuss before I have to meet with Jane and Doug this afternoon.” He paused for a second. “I've spent the past week going over the financial statements. Overall, they look well done, but I need clarification on a few details. To start with, I want to discuss the construction project we began last year.” “That's our big project at the moment. We're building a new factory that should be done next summer,” Elsa said. “Construction is going well, and we've been careful to capitalize all of the expenditures.” Simon shook his head. “That's the problem. I think we capitalized more than we should have. More specifically, it looks like we capitalized all of the interest on our most recent bank loan.” “We did,” Elsa replied. “Since we're using all of the loan proceeds to build the new factory, we felt it was appropriate to capitalize all of the interest.” John nodded in agreement. “I disagree,” said Simon. “Here's a breakdown of the payments we made on our new building and a list of our outstanding long-term debt (see tables below). Did we take out any of these loans specifically for the new factory?” Elsa shook her head. “No, we took out the new loan, Loan 2, for general expansion, then decided the most appropriate use of the funds would be for the new factory.” Simon frowned. “Why are we capitalizing the interest on Loan 2 if it wasn't originated specifically for the new factory?” “Well, if the capital from the loan is eventually used on a specific construction project, then I think we should be able to capitalize the interest on that loan as part of the historical cost of the 3 project. Of course,” Elsa frowned, “maybe we are capitalizing too much. Perhaps we need to calculate avoidable interest to determine the amount of interest that should be capitalized.” “You are right that generally we would need to calculate avoidable interest before capitalizing any interest,” Simon answered. “But in this case, we don't need to do that. I believe GAAP allows interest to be capitalized only if a specific construction loan is used.” “Well, I still think that we should be able to capitalize at least some of the interest. But I'll do some research to make sure.” Date Expenditure Spent February 15 April 1 June 30 October 1 November 15 The Amount of Expenditure $90,000 $125,000 $200,000 $300,000 $585,000 Liabilities Bond A Loan 1 Loan 2 Amount $678,000 $650,000 $1,000,000 Annual Interest Rate 7.1% 5% 7% Answer the following questions based on the information above: Capitalizing interest on the new factory: 1) During the year, Frosty Co. paid all of the interest accrued on Bond A and Loan 1, but only $50,000 of the interest accrued on Loan 2. Using one journal entry, summarize how Frosty originally recorded the accrued interest on all three long-term debts. 2) Assuming John and Elsa are right that the new loan meets the standards for capitalizing interest, calculate avoidable interest. 3) What correcting entries would need to be made to properly record interest on Frosty Co.'s construction project if John and Elsa are right? 4) What would be the effect of interest adjustments on net income, assuming that Frosty Co.’s income tax rate is 30 percent 5) Obtain the relevant authoritative literature on accounting interest capitalization using the FASB’s Codification Research System. How would you help Simon, John and Elsa to dissolve their disagreement? In other words, whose argument was right?

BACKGROUND INFORMATION Frosty Co. is a publicly traded, medium-sized manufacturing firm that produces refrigerators, freezers, ice makers, and snow cone machines. During the past three years, the company has struggled against increasing competition, sluggish sales, and a public relations scandal surrounding the departure of the former Chief Executive Officer (CEO) and Chief Financial Officer (CFO). The new CEO, Jane Mileton, and CFO, Doug Steindart, have worked hard to improve the company's image and financial position. After several difficult years, the company now seems to be resolving its difficulties, and the management team is considering new investment opportunities. The team hopes that diversification into a line of professional ice cream makers, and perhaps a line of consumer products, will help the company continue its recent growth and effectively compete with future competitors. In order to raise the funds needed for these new investments, Frosty Co.'s Board of Directors has approved a seasoned equity offering (SEO). The discussions regarding the new investment opportunities and the equity offering have been kept quiet until a positive set of financial statements can provide strong evidence that the company has turned around, leading to an increase in the company's stock price. INTRODUCTION After a full week of carefully examining financial statements, Simon was exhausted. He had become Frosty Co.'s corporate controller only a month ago, after several years as an auditor at a public accounting firm, and was excited about the move to corporate accounting. The first few weeks had gone well, as Simon met his accounting staff and settled into his new responsibilities. Then, he had started reviewing Frosty Co.'s financial statements for the prior year to make sure they correctly followed GAAP, and to familiarize himself more with the company and industry. Unfortunately, his relative inexperience with the industry and Frosty's accounting procedures had required him to spend more time on the review than he had anticipated. He still had a few questions about the financial statements, but he needed to start preparing for the upcoming SEO. He decided that he would talk to his staff about his lingering questions 1 Excerpt from Porter, J. C. 2012. How adjusting entries affect the quality of financial reporting: The case of Frosty Co. Issues in Accounting Education 27(2): 70-88. 2 tomorrow morning, just before his meeting with the CEO and CFO. The three of them were to discuss the upcoming audit and the earnings announcement and how they would impact the proposed SEO. He rubbed his tired eyes and headed home to get a little sleep. MEETING OF THE ACCOUNTING STAFF: 10:30AM Simon looked up as the divisional controllers, Elsa Pilebody and John Mortenson, came into his office. Elsa worked with Frosty Co.'s fridge and freezer division; John worked with the ice maker and snow cone machine division. So far, Simon had enjoyed working with them, especially since neither of them seemed to resent him stepping in as their new boss. They were both smiling as they came through the door, and their good-natured teasing started almost before they had finished shaking hands. “Sorry we're a little late,” Elsa started, “but John had to stop for the last jelly donut.” “I did not!” John said indignantly. He looked at Simon. “It was chocolate.” Because of his busy schedule that day, Simon got down to business instead of joining the banter as he normally would have done. “Thanks for coming by, Elsa and John. We have several issues to discuss before I have to meet with Jane and Doug this afternoon.” He paused for a second. “I've spent the past week going over the financial statements. Overall, they look well done, but I need clarification on a few details. To start with, I want to discuss the construction project we began last year.” “That's our big project at the moment. We're building a new factory that should be done next summer,” Elsa said. “Construction is going well, and we've been careful to capitalize all of the expenditures.” Simon shook his head. “That's the problem. I think we capitalized more than we should have. More specifically, it looks like we capitalized all of the interest on our most recent bank loan.” “We did,” Elsa replied. “Since we're using all of the loan proceeds to build the new factory, we felt it was appropriate to capitalize all of the interest.” John nodded in agreement. “I disagree,” said Simon. “Here's a breakdown of the payments we made on our new building and a list of our outstanding long-term debt (see tables below). Did we take out any of these loans specifically for the new factory?” Elsa shook her head. “No, we took out the new loan, Loan 2, for general expansion, then decided the most appropriate use of the funds would be for the new factory.” Simon frowned. “Why are we capitalizing the interest on Loan 2 if it wasn't originated specifically for the new factory?” “Well, if the capital from the loan is eventually used on a specific construction project, then I think we should be able to capitalize the interest on that loan as part of the historical cost of the 3 project. Of course,” Elsa frowned, “maybe we are capitalizing too much. Perhaps we need to calculate avoidable interest to determine the amount of interest that should be capitalized.” “You are right that generally we would need to calculate avoidable interest before capitalizing any interest,” Simon answered. “But in this case, we don't need to do that. I believe GAAP allows interest to be capitalized only if a specific construction loan is used.” “Well, I still think that we should be able to capitalize at least some of the interest. But I'll do some research to make sure.” Date Expenditure Spent The Amount of Expenditure February 15 $90,000 April 1 $125,000 June 30 $200,000 October 1 $300,000 November 15 $585,000 Liabilities Amount Annual Interest Rate Bond A $678,000 7.1% Loan 1 $650,000 6% Loan 2 $1,000,000 7% Answer the following questions based on the information above: Capitalizing interest on the new factory:

1) During the year, Frosty Co. paid all of the interest accrued on Bond A and Loan 1, but only $50,000 of the interest accrued on Loan 2. Using one journal entry, summarize how Frosty originally recorded the accrued interest on all three long-term debts.

2) Assuming John and Elsa are right that the new loan meets the standards for capitalizing interest, calculate avoidable interest.

3) What correcting entries would need to be made to properly record interest on Frosty Co.'s construction project if John and Elsa are right?

4) What would be the effect of interest adjustments on net income, assuming that Frosty Co.’s income tax rate is 30 percent?

5) Obtain the relevant authoritative literature on accounting interest capitalization using the FASB’s Codification Research System. How would you help Simon, John and Elsa to dissolve their disagreement? In other words, whose argument was right?

Module 7

Book: Financial Reporting & Analysis 13 Edition

Final Statement Analysis

Choose a publicly traded company and perform an expanded analysis on the financial statements. Use the most current 10K statements available on SEC or annual statements in Yahoo Finance. Complete the following for your chosen firm in an Excel spreadsheet: Company Chosen: Amazon

***https://finance.yahoo.com/quote/AMZN/financials?p=AMZN***

Horizontal and vertical analysis of the income statements for the past three years (all yearly balances set as a percentage of total revenues for that year). Horizontal and vertical analysis of the balance sheets for the past three years (all yearly balances set as a percentage of total assets for that year). Ratio analysis (eight ratios of your choosing) for the past three years PLUS a measurement for the creditworthiness of your firm as measured by Altman’s Z-score. Note that if you used your chosen firm for our ratio-related discussion posts, then you MUST also present industry-average ratios or current year competitor ratios for your ratio analysis. Comparing your firm’s ratios to a close competitor or an industry-average ratio makes your analysis much more meaningful.

Module 7 Book: Financial Reporting & Analysis 13 Edition Final Statement Analysis

Choose a publicly traded company and perform an expanded analysis on the financial statements. Use the most current 10K statements available on SEC or annual statements in Yahoo Finance.

Complete the following for your chosen firm in an Excel spreadsheet:

Company Chosen: Amazon

***https://www.sec.gov/Archives/edgar/data/1018724/000101872416000172/amzn-20151231x10k.htm#sDE44A2B31082AE97A401ABB24E2245F0***

or

***https://finance.yahoo.com/quote/AMZN/financials?p=AMZN***

Horizontal and vertical analysis of the income statements for the past three years (all yearly balances set as a percentage of total revenues for that year). Horizontal and vertical analysis of the balance sheets for the past three years (all yearly balances set as a percentage of total assets for that year). Ratio analysis (eight ratios of your choosing) for the past three years PLUS a measurement for the creditworthiness of your firm as measured by Altman’s Z-score. Note that if you used your chosen firm for our ratio-related discussion posts, then you MUST also present industry-average ratios or current year competitor ratios for your ratio analysis. Comparing your firm’s ratios to a close competitor or an industry-average ratio makes your analysis much more meaningful.

I need this to be done in excel sheet to show the analysis of Amazon thanks

Renter’s Dilemma

Hucks, Inc. (Hucks), a publicly traded corporation, plans to lease equipment from Jackson Co. (Jackson) on January 1, 2020, for a period of three years. Lease payments of $100,000 are due to Jackson each year. Other expenses (e.g., insurance, taxes, and maintenance) are also to be paid by Hucks and amount to $2,000 per year. Jackson will not incur any initial direct costs. The lease contains no purchase or renewal options and the equipment reverts back to Jackson on the expiration of the lease. The remaining useful life of the equipment is four years. The fair value of the equipment at lease inception is $265,000. Hucks 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 Hucks 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. Hucks’s incremental borrowing rate is 11 percent (Jackson’s implicit rate is 10 percent and is calculable by Hucks from the lease agreement).

The junior accountant of Hucks analyzed the assets under lease, determined whether the lease was an operating lease or finance lease, and prepared the applicable journal entries. The senior accountant of Hucks reviewed the junior accountant’s analysis and prepared a separate analysis. As the finance controller, you were given both analyses to determine the correct accounting treatment. Calculations and journal entries performed by your junior and senior accountant follow:

Present Value of the Lease Obligation

Using the rate implicit in the lease (10 percent), the present value of the guaranteed residual value would be $15,026 ($20,000 x 0.7513), and the present value of the annual payments would be $248,685 ($100,000 x 2.4869).

Using the incremental borrowing rate (11 percent), the present value of the guaranteed residual value would be $14,624 ($20,000 x 0.7312), and the present value of the annual payments would be $244,371 ($100,000 x 2.4437).

Junior accountant analysis:

Since the equipment reverts back to Jackson, it is an operating lease. 840

Entry to be posted in years 1, 2, and 3:

Dr. Rent expense                        $100,000

Dr. Insurance expense                   $2,000

              Cr. Cash                                                        $102,000

        (Operating lease rental paid to Jackson)

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

2. Show the correct analysis including all year one entry(ies)?

3. Use FASB codification to support the answer?

Renter’s Dilemma

Adam's, Inc., a publicly traded corporation, plans to lease equipment from Jackson Co. (Jackson) on January 1, 2020, for a period of three years. Lease payments of $100,000 are due to Jackson each year. Other expenses (e.g., insurance, taxes, and maintenance) are also to be paid by Adams and amount to $2,000 per year. Jackson will not incur any initial direct costs. The lease contains no purchase or renewal options and the equipment reverts back to Jackson on the expiration of the lease. The remaining useful life of the equipment is four years. The fair value of the equipment at lease inception is $265,000. Adams 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 Adams 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. Adam’s incremental borrowing rate is 11 percent (Jackson’s implicit rate is 10 percent and is calculable by Adams from the lease agreement).

The junior accountant of Adams analyzed the assets under lease, determined whether the lease was an operating lease or finance lease, and prepared the applicable journal entries. The senior accountant of Adams reviewed the junior accountant’s analysis and prepared a separate analysis. As the finance controller, you were given both analyses to determine the correct accounting treatment. Calculations and journal entries performed by your junior and senior accountant follow:

Present Value of the Lease Obligation

Using the rate implicit in the lease (10 percent), the present value of the guaranteed residual value would be $15,026 ($20,000 x 0.7513), and the present value of the annual payments would be $248,685 ($100,000 x 2.4869).

Using the incremental borrowing rate (11 percent), the present value of the guaranteed residual value would be $14,624 ($20,000 x 0.7312), and the present value of the annual payments would be $244,371 ($100,000 x 2.4437).

Junior accountant analysis:

Since the equipment reverts back to Jackson, it is an operating lease. 840

Entry to be posted in years 1, 2, and 3:

Dr. Rent expense                        $100,000

Dr. Insurance expense                   $2,000

              Cr. Cash                                                        $102,000

        (Operating lease rental paid to Jackson)

Senior accountant analysis:

Step 1 – Lease classification

The lease term is for three years. The useful life of the equipment is four years. Since the lease term is for a major part of the useful life of the equipment, it is a finance lease.

Step 2 – Computation of the lease asset and obligation

Since Adam’s incremental borrowing rate is greater than the implicit rate in the lease, compute the present value of the minimum lease payments using the 11 percent rate.

Present value of the minimum lease payments = $100,000 x 2.4437 = $244,371.

Step 3 – Allocation of payments between interest and lease obligation

Since interest has to be charged on the straight-line method, the following is the allocation of the interest and the reduction in the lease liability.

Entry to be posted in year 1 for capitalization of equipment:

Db. Equipment                            $244,371

              Cr. Lease obligation                                 $244,371

Entry to be posted in years 1, 2, and 3 for payment:

Dr. Rent expense                             $2,000

Dr. Interest expense                    $26,881

Dr. Lease obligation                     $73,119

              Cr. Cash                                                        $102,000

        (Finance lease rental paid to Jackson)

Required:

Are either of the above analyses correct? If so, which one? If not, why not and what would need to be changed? Please provide appropriate codification support for your conclusions. ( Use answers according FASB Codifications)