Question 1 – A -Problem – 22Answer the following three separate questions.
1. Gear Company records $2,000 of depreciation under the sum-of-years’-digits method in 2019,
the company’s first year of operations. In 2020, the company decides to change to the straightline method for accounting purposes. If the straight-line method were used in 2019, depreciation
would have been $1,500. Depreciation in 2020 under the straight-line method is $1,800
(depreciated based on the book value on January 1,
2020). The tax rate is 25%. Income from continuing operations before tax and before deducting
depreciation
in 2020 is $12,000.
Required
Provide the 2020 entry to record this change and calculate 2020 net income.
2. Helms Company purchases a delivery truck for $12,000 on January 1, 2019. Helms expects to
use the truck
only two years and to sell it for $4,000. The company’s policy is to use straight-line depreciation
but depreciation in 2019 is not recorded. Rather, the accountant charges the entire cost to
delivery expense in 2019.
The controller discovers the error late in 2020.
Required
Provide the 2020 entries to record depreciation and the error correction and indicate the amounts
of the prior
period adjustments appearing in the 2019 and 2020 retained earnings sections of the statement of
stockholders’
equity. The tax rate is 25%.
3. On July 1, 2018 a full year’s insurance premium of $2,400, covering the period July 1, 2018,
to June 30,
2019 was paid and debited to insurance expense. Assume the following:
•
The company has a calendar fiscal year.
•
January 1, 2018, retained earnings balance is $20,000.
•
2018 reported net income (assuming the error is not discovered) is $22,800.
•
2019 net income (assuming the error is not discovered) is $30,000.
•
2020 net income is $40,000. Ignore taxes.
Required
a. List the effects of the error on affected accounts and on net income in 2018 and 2019,
assuming no adjusting
entry is made on December 31, 2018.
b. Prepare the entry to record the error if discovered in 2018.
c. Prepare the entry to record the error if discovered in 2019, and the 2018 and 2019 retained
earnings sections
of the statement of stockholders’ equity.
d. Prepare the entry (if needed) to record the error if discovered in 2020, and the 2019 and 2020
retained earnings sections of the statement of stockholders’ equity.
Question 2 – Problem 19-66
Mason Company has a noncontributory defined benefit pension plan. On December 31, 2020,
information about
the pension plan included the following.
Projected Benefit Obligation, Jan. 1, 2020 . . . . . . . . . . . $ 40,000
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600
Pension benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Projected Benefit Obligation, Dec. 31, 2020. . . . . . . . . . 103,600
Plan Assets, Jan. 1, 2020. . . . . . . . . . . . . . . . . . . . . . . . 50,000
Funding of plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,000
Actual return and expected return on plan assets . . . . . 10,000
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9%
Required
a. Prepare a reconciliation of plan assets for 2020.
b. Compute the plan’s funded balance on the beginning and ending dates.
c. Provide the 2020 entries for Mason Company to record the defined benefit pension plan.
d. Provide the same entries in (c), assuming cash funding of $55,000 (instead of $37,000).
e. Provide the computation for the $3,600 of interest.
Question 3 – chapt. 17 – Problem 17-96
Rentals Inc. leases a vehicle to United Inc. for four years on January 1, 2020, requiring equal
annual payments
on each January 1. The leased asset, recently purchased new, cost the lessor $45,000. The
estimated unguaranteed value of the asset at the end of the lease term is $5,000. The annual lease
payments were computed to yield
Rentals Inc. 6%, a rate known to United Inc. The leased asset has a six-year life with zero
residual value at the
end of year 6. There is no purchase option, and the asset is retained by Rentals Inc. at the end of
the lease term.
The accounting period for both lessor and lessee ends December 31.
Required
a. Compute the annual lease payment.
b. What type of lease is this to the lessor and lessee? Explain.
c. Prepare amortization schedules for the lessee and for the lessor.
d. Provide all journal entries associated with this lease for the lessee for the years ended
December 31, 2020,
and 2021.
e. Provide all journal entries associated with this lease for the lessor for the years ended
December 31, 2020,
and 2021.
f. What balances (account titles, amounts) appear on the lessee’s balance sheet on December 31,
2020, related
to the lease?
g. What balances (account titles, amounts) appear on the lessee’s income statement for 2020,
related to the lease?
h. What balances (account titles, amounts) appear on the lessor’s balance sheet on December 31,
2020, related
to the lease?
i.
What balances (account titles, amounts) appear on the lessor’s income statement for
2020, related to the lease?
Question 4 – Problem 17-102
Lessor Sales Company and Lessee Manufacturing Company agreed to a noncancelable lease.
The following information is available to both entities regarding the lease terms and the leased asset.
1. Lessor’s cost of the leased asset was $30,000. The asset was new at the inception of the lease
term.
2. Lease term is three years starting January 1, 2020.
3. Estimated useful life of the leased asset is six years. Estimated residual value at end of six
years is zero.
4. On January 1, 2023, the estimated unguaranteed residual value of the leased asset one day
after the end of
the lease term is $10,000.
5. Lessor’s implicit rate is 7%.
6. Lessee’s incremental borrowing rate on January 1, 2020, is 8% and the lessee is unaware of
the lessor’s
implicit rate.
7. Title to the leased asset is retained by the lessor.
8. The fair value of the leased asset on January 1, 2020, is $45,000.
9. Three annual lease payments are due on January 1 of each year during the lease term, and the
first payment
is due at the inception of the lease term.
10. The accounting period for the lessor and the lessee ends on December 31.
Required
a. Compute the annual lease payment.
b. What type of lease is this for the lessee and lessor?
c. Provide all journal entries associated with this lease for the lessee for the years ended
December 31, 2020,
and 2021.
d. Provide all journal entries associated with this lease for the lessor for the years ended
December 31, 2020,
and 2021
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