Exam 1 Acct 414 – Corporate Accounting & Reporting II Spring 2007CHOICES:[8] SolutionExam No. ______Start time: ______ End time: _______Name: __________________________________Exam 1Acct 414 – Corporate Accounting & Reporting II Spring 2007Show 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. 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.1-4. Time Value of Money (60 points total)5. Troubled debt (30 points total)6-7. Leases. (70 points total)8. Long-term contracts (20 points)9. Serial Bonds (20 points)10. Extra credit points (if any) total: __________ (max = 10)Total points earned (max = 200)Do not attempt the extra credit section until you have completed all other sections of the exam!To be completed by professor:After Exam 1 - Course GradeTotal Points = __________/__________ = _________%Quiz and HW percentage = ___________%Projects percentage = ___________%Exam 1 – Acct 414 – Spring 2007 Page 2Are assets or an ownership interest transferred from debtor to creditor in settlement of debt?Is the debt settled in full?Is entity the CREDITOR?CREDITOR discounts expected future cash flows to be received under modified terms using original (historical) interest rateNoNoYesRecord ordinary gain or loss on asset. Difference between fair value of asset or equity interest and amount due on debt is ordinary gain for debtor and ordinary loss for creditorYesDifference between carrying value of receivable and present value of expected future cash flows is ordinary loss for CREDITORAre the cash flows to be made under the modified terms greater than the carrying value of the debt after transfer of any assetor equityinterest?(Debtor pays LESS than amount owed at restructuring) The difference between carrying value of debt and total future cash flows is recorded as a gain from restructuring for DEBTOR. No interest expense will be recorded in future years. No(Debtor pays MORE than amount owed at restructuring)No gain is recorded by DEBTOR. Find interest rate to set cash flow equal to carrying value of debt. Use this interest rate to amortize the restructured debt over its term. YesTROUBLED DEBT RESTRUCTURING (FASB 15, 114, 118 & 145)Prepared by T. Gordon 8-31-06Record ordinary gain or loss on asset or equity interest transferred. Difference between fair value of asset or equity interest and carrying value of debt is recognized as an ordinary gain from restructuring for debtor and an ordinary credit loss for creditor.NoYesExam 1 – Acct 414 – Spring 2007 Page 31. Assume that you are working for a leasing company. The boss asks you to compute the annual lease payment that the company should charge to earn a 12% return on the following lease: Fair market value of leased asset $100,000. The first payment on the lease will be made immediately. The lease term is 5 years. The property should be worth 30,000 at the end of the lease but the lessee can buy it for $15,000. [15 points]2. Standard Corporation wants to accumulate $500,000 on December 31, Year 10 to retire preferred stock. The company deposits $125,000 in a savings account on January 1, Year 1 which will earn interest at 8% compounded quarterly. Standard Corporation wants to know what additional amount it has to deposit at the end of each quarter for 10 years to have $500,000 available at the end of Year 10. The periodic deposits will also earn interest at 8% compounded quarterly. [15 points]Exam 1 – Acct 414 – Spring 2007 Page 43. Lease accounting [10 points]. Law Co. leased a machine from Order Co. The lease qualifies as a capital lease and requires 10 annual payments of $10,000 with the first payment to be made upon signing the lease. The lease specifies an interest rate of 12% and a purchase option of $5,000 at the end of the tenth year, even though the machine's estimated value on that date is $20,000. The fair value of the machine is $66,500 at the inception of the lease. Law's incremental borrowing rate is 14%. What amount should Law record as the leased asset at the beginning of the lease term? 4. Troubled debt restructuring. [20 points] A debtor owes $50,000 plus $5,000 in accrued interest on a note payable. The original interest rate on the loan was 10%. 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 $40,000. (2) The interest rate on the debt will be lowered to 8%. (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. Compute the creditor’s LOSS from this troubled debt restructuring.Exam 1 – Acct 414 – Spring 2007 Page 55. Troubled debt restructuring. [30 points]Colfax Combines (CC) had signed a $100,000 note to Pullman First Bank and Trust (PFBT). The note specified annual payments of $20,000 per year plus 12% interest on the unpaid balance. Colfax Combines finds itself unable to make its loan payments. The bank has agreed to restructure the terms of the loan. The balance due at October 1, 2006, the date of the troubled debt restructuring, was $100,000 plus $12,000 in unpaid accrued interest. The new agreement specifies an interest rate of 10% on a reduced principal balance of $80,000. The debtor will pay interest only for 4 years. On October 1, 2011, the entire principal balance will be due with the final interest payment.Required: Prepare any necessary journal entries for Colfax Combines (debtor) for 2006 including year end accruals at December 31, 2006.Exam 1 – Acct 414 – Spring 2007 Page 66. Lease Accounting. On September 1, 2006, Post Falls Ford, Inc. and First Bank of Bozeman signed a lease with the following terms: 1. Term: 5 years 2. Annual payment = $103,073 3. Implicit interest rate (not known to lessee) 9% 4. Est. fair value of asset at end of lease $20,000 5. Fair value of asset $450,000 6. Cost of asset $450,000 7. Incremental borrowing rate: 10% 8. First payment due 9/1/069. Equipment is returned to lessor at end of lease if the purchase option is not exercised10.