Exam 1 Acct 414 – Corporate Accounting & Reporting II Spring 2006Name: __________________________________Exam 1Acct 414 – Corporate Accounting & Reporting II Spring 2006Show any necessary computations if you want to be eligible for partial credit. Present your workin a neat, well-organized manner. If you are using a PV 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.Follow the instructions and answer all parts of the question as directed.1-4. Time Value of Money (15 points each, max = 60)5-6. Leases. (60 points total)7-8. Troubled debt (50 points total)9. Serial Bonds (30 points)Extra credit points (if any) total: __________Total points earned (max = 200)Exam 1 – Acct 414 – Spring 2006 Page 2Are assets or an ownershipinterest transferredfrom debtor tocreditor in settlementof debt?Is the debtsettled in full?Is entity theCREDITOR?CREDITOR discountsexpected future cash flows tobe received under modifiedterms using original(historical) interest rateNoNoYesRecord ordinary gainor loss on asset.Difference between fairvalue of asset or equityinterest and amountdue on debt is a gainfor DBTOR andordinary loss forCREDITORYesDifference between carryingvalue of receivable andpresent value of expectedfuture cash flows is ordinaryloss for CREDITORAre thecash flows to bemade under the modifiedterms greater than thecarrying value of the debtafter transfer of any assetor equityinterest?The differencebetween carryingvalue of debt andtotal future cashflows is recorded asa gain fromrestructuring forDEBTOR. Nointerest expense willbe recorded in futureyears.NoNo gain isrecorded byDEBTOR.Find interest rate toset cash flow equalto carrying value ofdebt. Use thisinterest rate toamortize therestructured debtover its term.YesTROUBLED DEBT RESTRUCTURING (FASB 15, 114, 118 & 145)Prepared by T. Gordon 2-5-03Record ordinary gain or loss on asset or equity interesttransferred and reduce balance owed. Difference between fairvalue of asset or equity interest and new carrying value of debtis recognized as a gain from restructuring for DEBTOR and anordinary credit loss for CREDITOR.NoYesExam 1 – Acct 414 – Spring 2006 Page 3Time Value of Money – problems 1 through 4 (15 points each = 60 points total)1. 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 $120,000. The first payment will be made immediately. Lease term will be 6 years. The property should be worth $15,000 when it is returned to the lessor.2. How much should you pay to buy a $10,000 face value semi-annual bond with an 8% per annum stated interest rate if the market rate is currently 12% (compounded semiannually) for bonds with comparable risk? The bonds will mature in 10 years.3. Troubled debt restructuring: The debtor owes $40,000 plus $4,000 in accrued interest on a note payable. The original interest rate was 10%. The creditor agrees to modify the terms of the agreement such that the debtor will pay interest at an 8% annual rate for 5 years on a reduced principal balance of $25,000. Determine the loss the creditor will recognize on this troubled debt restructuring. For 5 points extra credit: What is the interest rate that the debtor will use to recognize interest during the life of the restructured note payable? (Could be as low as 0%)4. Princeton Pudding Inc. is establishing a pension plan for its employees. The actuary determines that $5,078,000 will be needed in pension plan assets 15 years from now. What equal annual deposit to the pension plan should PPI make at the end of each of the next 15 years if the plan assets are expected to earn 10% interest?Exam 1 – Acct 414 – Spring 2006 Page 45. Lease Accounting – (30 points) Tobby Co. manufactures machines to be sold or leased. On January 1, 2006, Tobby leased machinery to Upsilon, Inc. for a 5-year period. At the end of the lease term, the machinery is to be returned to Tobby. The machinery should be worth $10,000 at the end of the lease. Equal $21,168.38 payments are due at the beginningof each of the 5 years. Toby has no material uncertainties, and the likelihood of collecting all lease payments is high. The implicit rate of the lease is 7%. Upsilon (the lessee) does not know the implicit interest rate but could borrow money to buy the machinery at 10% per annum. The normal sales price of the machinery is $100,000, and the cost to Tobby is $90,000. The useful life of the machinery is 10 years. You may assume the lease is noncancelable.a. What type of lease is this for the lessee? Explain. This is an essay question. Use complete sentences (abbreviations okay) and let me know that you know all of the criteria! Give me the “numbers” for the numeric tests! If the lease is a capital lease, tell me the amount that would be capitalized as an asset.b. What type of lease is this for the lessor? Explain. This is an essay question. Use complete sentences and let me know that you know the all of the criteria! You may refer to part a if you wish.Exam 1 – Acct 414 – Spring 2006 Page 55. Continued (facts repeated for your convenience)Tobby Co. manufactures machines to be sold or leased. On January 1, 2006, Tobby leased machinery to Upsilon, Inc. for a 5-year period. At the end of the lease term, the machinery is to be returned to Tobby. The machinery should be worth $10,000 at the end of the lease. Equal $21,168.38 payments are due at the beginningof each of the 5 years. Toby has no material uncertainties, and the likelihood of collecting all lease payments is high. The implicit rate of the lease is 7%. Upsilon (the lessee) does not know the implicit interest rate but could borrow money to buy the machinery at 10% per annum. The normal sales price of the machinery is $100,000, and the cost to Tobby is $90,000. The useful life of the machinery is 10 years. c. Prepare the journal entries on Tobby’s books (lessor)January 1, 2006December 31, 2006Exam 1 – Acct 414 – Spring 2006 Page 66. Lease Accounting. (20 points)On April 30, 2006, Muffy Vanderbear, Inc. (lessee) and Leases R Us (lessor) sign a noncancelable lease with the following terms: 1. Term: 5 years 2. Annual payment = $9,228 3. Implicit interest rate (known to lessee) 8% 4. Est. fair value of asset at end of lease $15,000 5. Fair value of asset