Accounting 3312
Fall 2011
Test 3
KEY
Name:_______________________
Problem 1. On December 31, 2011 the Palmer Company determined that the 2011 service cost
on its defined benefit pension was $120,000. At the beginning of 2011 Palmer Company has
pension plan assets of $520,000 and a projected benefit obligation of $600,000. Its discount rate
(and expected long-term rate of return on plan assets) for 2011 was 8%. The actual return on the
pension plan assets was 4.5%. There are no other components of Palmer Company’s pension
expense; the company had a pre-paid/ accrued pension cost liability at the end of 2010.
1. Compute the amount of Palmer Company’s pension expense for 2011.
2. Prepare the journal entry to record Palmer‘s 2011 pension expense if it funds the pension
plan in the amount of $128,000.
#1 $126,400
#2 Pension Expense
126,400
OCI-Loss
18,200
Cash
Pension Liability
128,000
16,600
See sheet page 5 Points awarded off of spread sheet
Problem 2.
The Edom Company, the lessor, enters into a lease with Jebusite Company to lease equipment to
Jebusite beginning January 1, 2012. The lease terms, provisions, and related events are as
follows:
1. The lease term is five years. The lease is noncancelable and requires annual rental
receipts of $86,191.69 to be made in advance at the beginning of each year.
2. The equipment has an estimated life of six years.
3. Jubusite agrees to pay all executory costs.
4. The interest rate of the lessee for this type of purchase is 10%.
The fair value of the minimum lease payments is $359,407.73
1. Prepare an amortization table for the first 3 years of lease payments and interest expense
of the lessee.
2. Prepare journal entries for Jebusite Company, the lessee, for the years 2012 and 2013.
Payments
Interest
Principle
$359,407.73
$86,191.69
0
86,191.69
273,216.04
$86,191.69
27,321.60
58,870.09
214,345.95
$86,191.69
21,434.60
64,757.09
149,588.86 5 pts
Asset (leasehold)
359,407.73
Lease Payable
Cash
(can be made in two entries 5 points)
Depreciation Expense
Accumulated Depreciation
(5 points)
71,881.55
Interest Expense
Interest Payable
(5 points)
27,321.60
273,216.04
86,191.69
71,881.55
27,321.60
2008
Interest Payable
27,321.60
Lease Payable
58,870.09
Cash
86,191.69
(could have reversed and then charged expense 5 points)
Depreciation Expense
Accumulated Depreciation
(5 points)
71,881.55
Interest Expense
Interest Payable
(5 points)
21,434.60
71,881.55
21,434.60
Problem 3. The following 2011 information is available for the Stewart Company:
Condensed Income Statement for 2011
Sales
9,000
Cost of goods sold
-6,000
Other expenses
-2,000
Loss on sale of equipment
-260
Gain on sale of land
400
Net Income
1,140
Additional Info:
The equipment that was sold for cash had cost $400 and had a book value of $300.
Land that was sold brought a cash price of $530.
Fifty shares of stock were issued at par.
Making whatever additional assumptions that are necessary,
Prepare a worksheet to support a statement of cash flows for the Stewart Company for 2011.
Comparative Balance Sheets
12/31/2010
12/31/2011
Cash
700
1,130
Accounts receivable
450
310
Inventory
350 (j) 50
400
Land
300
(i)330
500
Equipment
1,600 (h)600
1,800
Less: Accumulated
depreciation
-200 ©100
-150
Total Assets
3,200
3,990
Accounts payable
600
750
Bonds payable (due 1/1/2012)
1,000
1,000
Common stock, $10 par
900
1,400
Retained earnings
700 (e)1000
840
Total Liab & Equity
3,200
3,990
Operating activities
Net income
(a)1140
2.5 points
2.5 points
Gain on land
(b)400
2.5 points
Loss on sale of equip
©260
2.5 points
Increase in A/P
(f)150
2.5 points
Depreciation Expense
(g)50
2.5 points
Increase in Inventory
(j)50
2.5 points
Decrease in A/R
(k)140
Net increase of cash operating activities
1,290
Investing Activities
2.5 points
Sale of Land
(b)530
2.5 points
Sale of Equipment
©40
2.5 points
Purchase Equipment
(h)600
2.5 points
Purchase Land
(i)330
Net decrease in cash from Investing activities
-360
Financing Activities
2.5 points
Sale of Stock
(d)500
2.5 points
Paid Dividends
(e)1000
Net decrease in cash from financing activities
-500
Net increase in Cash
430
Items
Annual Pension
Expense
Cash
OCI
—Prior Service
Cost
OCI —
Gain/Loss
Balance, Jan. 1, 2011
Pension
Asset/Liability
Projected Benefit
Obligation
Plan Assets
-80000
600000
520000
Service Costs
120000
120000
Interest Cost
48000
48000
Interest Credit
-41600
Amortization PSC
0
Amortize G/L
0
Cash
Journal Entry
18200
23400
0
0
-128000
128000
126400
-128000
0
18200
-16600
5 points
5 points
5 points
5 points
5 points
Balance, Dec. 31, 2011
-96600
768000
5 points
Worksheet for problem 1
671400
Extra Credit
Jebusite beginning January 1, 2011. The lease terms, provisions, and related events are as
follows:
1. The lease term is five years. The lease is noncancelable and requires annual rental
receipts of $86,191.69 to be made in advance at the beginning of each year.
2. The cost of the equipment is $313,000. The equipment has an estimated life of six years
and. At the end of the lease term, has an unguaranteed residual value of $20,000 accruing
to the benefit of Edom.
3. Jubusite agrees to pay all executory costs.
4. The interest rate implicit in the lease is 10%.
5. The initial direct costs are insignificant and assumed to be zero.
6. The collectability of the rentals is reasonable assured, and there are no important
uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the
lessor.
Assume that the lease is a sales-type lease from Edom’s point of view, the selling price and fair
value is $371,826.16.
1. Prepare a table summarizing the lease receipts and interest revenue earned by the lessor.
2. Prepare journal entries for Edom Company, the lessor, for the years 2011 and 2012.
Pymts
Interest
Principle
371,826.16
86,191.69
0
86,191.69
285,634.47
86,191.69
28,563.45
57,628.24
228,006.23
86,191.69
22,800.62
63,391.07
164,615.16 (5pts)
2011
Lease Receivable
Cash
Sales
Cost of Goods Sold
Inventory
Interest Receivable
Interest Revenue
2012
Cash
Interest Receivable
Lease Receivable
Interest Receivable
Interest Revenue
285,634.47
86,191.69
371,826.16
5 pts per JE
294,220.00
294,220
5 pts per JE
28,563.45
5 pts per JE
28,563.45
86,191.69
28,563.45
57,628.24
5 pts per JE
22,800.62
5 pts per JE
22,800.62