Exam 1 Acct 414 – Corporate Accounting & Reporting II Spring 2011SOLUTIONSExam #__________ Name: __________________________________ Exam 1 Acct 414 – Corporate Accounting & Reporting II Spring 2011 Show any necessary computations if you want to be eligible for partial credit. Present your work in a neat, well-organized manner. When you are using a financial calculator, spell out what you put in for n, i, PMT, FV, PV, etc. You could also draw a time-line if that would explain your thinking to me. You may use abbreviations in your essay answers but I need complete thoughts. Follow the instructions and answer all parts of the question as directed. 1-3. Time Value of Money (45 points total) 4. Loan Impairment (30 points total) 5 Leases (70 points total) IFRS points________________ (5b, 5c & 5d) US GAAP points____________ (5a & 5e) 6. Fair value & fair value option (30 points) 7. Serial Bonds (25 points) Total points earned (max = 200) To be completed by professor: After Exam 1 - Course Grade Total Points = __________/500 = _________% Quiz and HW percentage = ___________% Projects percentage = ___________%Exam 1 – Acct 414 – Spring 2011 Page 2 1. On October 31, 2010, Franny Farms Inc. purchased a machine for $500,000. The down payment was $25,000, and the balance will be paid in 48 equal monthly payments, including interest at 12% per annum compounded monthly. What is the amount of the monthly payment if the first payment is due November 30, 2010? The monthly payment would be $____________________________ 2. Percy Corporation wants to accumulate $1,000,000 on December 31, 2020 to retire preferred stock. The company plans to deposit $250,000 in a savings account on January 1, 2012 which will earn interest at 8% compounded quarterly for nine years (until 12/31/20). Percy Corporation will begin making equal quarterly deposits on December 31, 2012 and will continue making quarterly deposits until December 31, 2020. The controller wants you to compute the amount of the quarterly deposits that will, with the initial deposit, accumulate to the necessary $1,000,000. You may assume that the account will continue to pay the same interest rate (8% compounded quarterly). [15 points] REQUIRED: What is the amount of the necessary quarterly deposits? $___________________Exam 1 – Acct 414 – Spring 2011 Page 3 3. Assume that you are working for a leasing company. The original lease agreement specified an annual payment of $35,000 over a six-year lease term. The first payment was to be made immediately and the asset was to be returned to the lessor at lease end. These terms gave a healthy return to the leasing company. However, the lessee wants to be able to buy the asset for $15,000 at the end of the lease (when the estimated fair value will be $40,000). Since the fair value of the asset was approximately $181,400, the original rate of return was about 12%. You boss wants you to compute the new rate of return to be sure it is adequate. Find the interest rate implicit in the lease assuming the terms are modified to include a purchase option for $15,000 at the end of 6 years. Carry computation to two decimal places. The implicit rate is _____________________% Extra credit: If the lessor agrees to the bargain purchase option but still wants to earn 12%, what lease payment would be needed (instead of the $35,000 in the proposed lease agreement)? (5 points)Exam 1 – Acct 414 – Spring 2011 Page 4 4. Troubled debt restructuring. [20 points] On March 1, 2011, a debtor owes $500,000 plus $60,000 in accrued interest on a note payable. The original interest rate on the loan was 12%. The debtor is unable to make any payments toward principal or interest at this time. The creditor agrees to modify the terms of the agreement as follows: (1) The total amount due is reduced to $400,000. (2) The interest rate on the debt will be lowered to 10%. (3) The term of the restructured debt is four years with interest only due during the first three years. Principal and interest will be due at the end of the fourth year. Instructions Show any entries needed on the books of the creditor at the following dates – note the variations in revenue recognition methods shown by each date. You will need to compute the creditor’s LOSS from this troubled debt restructuring. March 1, 2011, Date of restructuring (assuming the creditor uses the effective interest method to recognize revenue) December 31, 2011, end of fiscal year (assuming the creditor uses the effective interest method to recognize revenue) December 31, 2011, end of fiscal year (assuming the creditor uses the cost recovery method to recognize revenue)Exam 1 – Acct 414 – Spring 2011 Page 5 5. Lease Accounting. On February 1, 2011, Jem Jewelers (lessee) and Frederic Fixtures Corp. (lessor) signed a lease with the following terms: 1. Term: 7 years 2. Annual payments of $36,818 3. Implicit interest rate (not known to lessee) 10% 4. Cost of asset $180,000 (not known to lessee) 5. Fair value of asset $210,000 6. First payment due upon signing 7. Incremental borrowing rate: 12% 8. There are no cost uncertainties for lessor 9. Estimated useful life of asset: 10 years 10. The residual value is NOT guaranteed by lessee 11. Est. fair value of asset at end of lease: $25,000 12. The lessor is concerned about collectability of payments 13. A commission of 1% of the fair value of the leased asset is paid to the salesperson who negotiated the lease. 14. Lessor and lessee both use straight-line depreciation for fixed assets and have fiscal years that end on December 31 15. There is a purchase option for $25,000 at the end of the lease. If the purchase option is not exercised, the asset is returned to the lessor at the end of the lease. 16. The lessee is responsible for loss from fire or other casualties, all property taxes and maintaining the equipment. The estimated total cost to the lessee is $2,000 per year. a. Classify the lease under US GAAP for both the lessor and the lessee. Explain. Let me know that YOU know all the rules. Abbreviations are fine as long as they are obvious. If you do present value computations, be sure to provide the inputs. [15 points] LESSEE = ______________________________________ LESSOR = ______________________________________ b. Classify the lease under