Falwell Company, as lessee, enters into a lease agreement on January 1, 2018, for equipment. The following data are relevant to the lease agreement:

1.         The term of the noncancelable lease is 4 years. Payments of $4,892 are due on January 1 of each year.

2.         The fair value of the equipment on January 1, 2018 is $25,000 and the book value is 20,000. The equipment has an economic life of 6 years. Both parties expect the equipment to have an unguaranteed residual value of $8,250 at the end of the lease term. The equipment reverts to the lessor at the end of the lease term. The equipment is not of a specialized nature and there is no purchase option.

3.         The lessee pays all executory costs.

4.         The interest rate implicit in the lease is 5% and known to Falwell.

1. Indicate the type of lease FalwellCompany has entered into and what accounting treatment is applicable.

(b)    Prepare lease amortization schedule (s) for Falwell Company for the first three years.

(c)    Prepare the journal entries on Falwell’s books that relate to the lease agreement for the following dates:

        1.    January 1, 2018.

        2.    December 31, 2018.

        3.    January 1, 2019.

        4.    December 31, 2019.

On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,075,000. During 2018, costs of $2,030,000 were incurred, with estimated costs of $4,030,000 yet to be incurred. Billings of $2,536,000 were sent, and cash collected was $2,280,000.

In 2019, costs incurred were $2,536,000 with remaining costs estimated to be $3,645,000. 2019 billings were $2,786,000, and $2,505,000 cash was collected. The project was completed in 2020 after additional costs of $3,830,000 were incurred. The company’s fiscal year-end is December 31. This project does not qualify for revenue recognition over time.

Required:
1. Calculate the amount of revenue and gross profit or loss to be recognized in each of the three years.
2a. Prepare journal entries for 2018 to record the transactions described (credit "various accounts" for construction costs incurred).
2b. Prepare journal entries for 2019 to record the transactions described (credit "various accounts" for construction costs incurred).
3a. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2018.
3b. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2019.

Considering the effect that the pandemic may have on some businesses and larger companies, would your decision to lend to American Airlines change when considering the current situation?

American Airlines' biggest liability in their operating income is its contributions to pension plans. It contributed (in millions) $286, $475, and $1,230 in 2017, 2018, and 2019 respectively. Even with these large sums contributed, American Airlines has stayed in the green in net cash earned from operating activities; earning inflows of cash of (in millions) $4,744, $3,533, $3,815 in 2017, 2018 and 2019 respectively.

American has not been as successful in its financing and investing activities. American has financed a lot of aircraft with long term debt. In 2018 they had a capital expenditure and aircraft purchase of $3,745 and $2,354 in the issuance of long-term debt. In 2019 they had capital expenditures and aircraft purchase of $4,268 and $3,960 in the issuance of long-term debt. American Airlines has seen outflows from financing activities of (in millions) $1,145, $1,672, $1,568 in 2017, 2018, and 2019 respectively. It also saw outflows from Investing activities of $3,636, $1,973, and $2,243.

On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $400 million. The expected completion date is April 1, 2020, just in time for the 2020 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):

Required:
1. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion.
2. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming this project does not qualify for revenue recognition over time.
3. Suppose the estimated costs to complete at the end of 2019 are $150 million instead of $50 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method.

WHC, SRG and MRR are three different companies but follow similar business models. Analyse the liquidity risk exposure and solvency risk exposure for these three firms between 2018 and 2019.

Common and preferred stock-issuances and dividends

Permabilt Corp. Was incorporated on January 1, 2016, and issued the following stock for cash:

4,000,000 shares of no-par common stock were authorized; 1,750,000 shares were issued on January 1, 2016, at $45 per share.

1,800,000 shares of $100 par value, 7.5% cumulative, preferred stock were authorized, and 840,000 shares were issued on January 1, 2016, at $105 per share.

Net income for the years ended December 31, 2016, 2017,and 2018 was $38,000,000, $46,000,000, and $57,000,000, respectively.

No dividends were declared or paid during 2016 or 2017. However, on December 17, 2018, the board of directors of Permabilt Corp. declared dividends of $64,000,000, payable on February 9, 2019, to holders of record as of January 4, 2019.

Required:

a. Use the horizontal model (or write the entry) to show the effects of

1. The issuance of common stock and preferred stock on January 1, 2016.

2. The declaration of dividends on December 17, 2018.

3. The payment of dividends on February 9, 2019.

b. Of the total amount of dividends declared during 2018, how much will be received by preferred shareholders?

Accorsi & Sons specializes in selling upscale home theater systems. As a package deal, Accorsi sells a premium home theater package that includes a projector and a one year subscription to premium cable channels for $2,100. Accorsi sells individual projectors for $2,000 and sells individual one-year subscriptions to premium cable channels for $500.

On March 1, 2018, Accorsi delivers a premium home theater package to Valley Hills Nursing Home, which includes the projector and the one-year subscription to the premium cable channels at a price of $2,100. On April 15, 2018, Accorsi receives $2,100 from Valley Hills Nursing Home.

Required:

1. Identify the performance obligation(s) in the premium home theater package?

2. How much revenue will be allocated to each performance obligation?

3. What journal entry (if any) will Accorsi record on March 1, 2018 to record the revenue from the sale of the premium home theater package?

4. What journal entry (if any) will Accorsi record on March 31, 2018?

5. What journal entry will Accorsi record when they receive payment from Valley Hills Nursing Home?

Sheridan Inc. issued $3,240,000 of convertible 10-year bonds on July 1, 2017. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was $57,600, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Sheridan Inc.’s $100 par value common stock for each $1,000 of bonds. On August 1, 2018, $324,000 of bonds were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash. Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following dates. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) (a) August 1, 2018. (Assume the book value method is used.) (b) August 31, 2018. (c) December 31, 2018, including closing entries for end-of-year.

On December 31, 2017, Mercantile Corp. had a $10,000,000, 8% fixed-rate note outstanding, payable in 2 years. It decides to enter into a 2-year swap with Chicago First Bank to convert the fixed-rate debt to variable-rate debt. The terms of the swap indicate that Mercantile will receive interest at a fixed rate of 8% and will pay a variable rate equal to the 6-month LIBOR rate, based on the $10,000,000 amount. The LIBOR rate on December 31, 2017, is 7%. The LIBOR rate will be reset every 6 months and will be used to determine the variable rate to be paid for the following 6-month period.

Mercantile Corp. designates the swap as a fair value hedge. Assume that the hedging relationship meets all the conditions necessary for hedge accounting. The 6-month LIBOR rate and the swap and debt fair values are as follows:

Prepare the journal entries for:

(a) 6/30/2018

(b) 12/31/2018