Expert Answers

In each of the following independent cases the company closes its books on December 31.

1. Danny Ferry Co. sells $250,000 of 10% bonds on March 1, 2007. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2010. The bonds yield 12%. Give entries through December 31, 2008.

2. Brad Dougherty Co. sells $600,000 of 12% bonds on June 1, 2007. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2011. The bonds yield 10%. On October 1, 2008, Dougherty buys back $120,000 worth of bonds for $126,000 (includes accrued interest). Give entries through December 1, 2009.

Instructions

(Round to the nearest dollar.)

For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated.

Use the effective interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.)

I5-4:

The XYZ Company entered into the following leasing arrangements, as the lessee, during the current year:

XYZ leased a copy machine for 3 years.  The fair market value of the machine at the inception of the lease was $17,500 and XYZ agreed to pay a quarterly lease payment of $1,475.  At the end of the lease the remaining life is estimated to be 2 years and XYZ has the option to purchase the copy machine for its then estimated fair market value of $5,000.

XYZ leased a mid-range computer for 4 years.  The fair market value of the computer at the inception of the lease was $139,000 and XYZ agreed to pay a quarterly lease payment of $9,000.  At the end of the lease the remaining life is estimated to be 2 years.  XYZ has no option to purchase the computer at any time during the lease term

XYZ leased a new car for 2 years for its president’s use.  The fair market value of the car at the inception of the lease was $65,000 and XYZ agreed to pay a quarterly lease payment of $5,750.  At the end of the lease the remaining life is estimated to be 4 years.  XYZ has no option to purchase the car at any time during the lease term.

XYZ leased a delivery truck for 5 years.  The fair market value of the truck at the inception of the lease was $84,000 and XYZ agreed to pay a quarterly lease payment of $4,500.  At the end of the lease the fair market value of the truck is estimated to be $24,000 and the truck’s remaining economic life is estimated to be 2 years.  XYZ has the option to purchase the truck at the end of the lease for $10,000.

XYZ leased a collation machine for 6 years.  The fair market value of the machine at the inception of the lease was $142,000 and XYZ agreed to pay a quarterly lease payment of $6,750.  At the end of the lease, the ownership of the machine transfers to XYZ.

XYZ leased a widget production machine for 7 years.  The fair market value of the machine at the inception of the lease was $246,000 and XYZ agreed to pay a quarterly lease payment of $11,000.  XYZ has no option to purchase the machine at any time during the lease term.

XYZ current borrowing rate is 10%.

All lease payments are made in advance at the beginning of each quarter.

Instructions:

1)   Determine if each lease is an operating or a capital lease.

2)   For each capital lease, identify the factor or factors that qualify the lease as a capital lease.  Include the appropriate calculations to support your conclusions.

A. XYZ leased a copy machine for 3 years.  The fair market value of the machine at the inception of the lease was $17,500 and XYZ agreed to pay a quarterly lease payment of $1,475.  At the end of the lease the remaining life is estimated to be 2 years and XYZ has the option to purchase the copy machine for its then estimated fair market value of $5,000.

B. XYZ leased a mid-range computer for 4 years.  The fair market value of the computer at the inception of the lease was $139,000 and XYZ agreed to pay a quarterly lease payment of $9,000.  At the end of the lease the remaining life is estimated to be 2 years.  XYZ has no option to purchase the computer at any time during the lease term.

C. XYZ leased a new car for 2 years for its president’s use.  The fair market value of the car at the inception of the lease was $65,000 and XYZ agreed to pay a quarterly lease payment of $5,750.  At the end of the lease the remaining life is estimated to be 4 years.  XYZ has no option to purchase the car at any time during the lease term.

D. XYZ leased a delivery truck for 5 years.  The fair market value of the truck at the inception of the lease was $84,000 and XYZ agreed to pay a quarterly lease payment of $4,500.  At the end of the lease the fair market value of the truck is estimated to be $24,000 and the truck’s remaining economic life is estimated to be 2 years.  XYZ has the option to purchase the truck at the end of the lease for $10,000.

E. XYZ leased a collation machine for 6 years.  The fair market value of the machine at the inception of the lease was $142,000 and XYZ agreed to pay a quarterly lease payment of $6,750.  At the end of the lease, the ownership of the machine transfers to XYZ.

F. XYZ leased a widget production machine for 7 years.  The fair market value of the machine at the inception of the lease was $246,000 and XYZ agreed to pay a quarterly lease payment of $11,000.  XYZ has no option to purchase the machine at any time during the lease term.

XYZ current borrowing rate is 10%.

All lease payments are made in advance at the beginning of each quarter.

Instructions:

1) Determine if each lease is an operating or a capital lease.