ACC301, Spring 2001
Dr. Dow
Exam 2 Review Problems
PROBLEM 1: LEASES
On January 1, 19X1, Lessor Company leased a machine to Lessee Company. Lease
payments of $10,000 are due on January 1 of each year beginning on January 1, 19X1. The
lease qualifies as a capital lease for both the lessee and lessor (direct financing). Other details
are as follows:
Lease term
Useful life of the asset
Cost of the machine to the lessor
Fair market value of machine
Lessor's implicit interest rate
Lessee's incremental borrowing rate
Residual value
Depreciation Method
Present value of minimum lease payments
10 years
10 years
$67,590
$67,590
10%
10%
Zero
Straight-line
$67,590
REQUIRED: A. Prepare all journal entries relating to the lease and the leased asset on
Lessee Company's books for 19X1 and 19X2.
B. Prepare all journal entries relating to the lease on Lessor Company's books
for 19X1 and 19X2.
PROBLEM 2: LEASES
On January 1, 19X1, Lessor Company leased a machine to Lessee Company. Lease
payments of $15,000 (including executory costs of $1,379) are due on December 31 of each
year. The lease qualifies as a capital lease for both the lessee and the lessor. Other details
are as follows:
Lease term
Useful life of the asset
Cost of the machine to the lessor
Fair market value of machine
Lessor's implicit interest rate (known to lessee)
Lessee's incremental borrowing rate
Residual value (Guaranteed by lessee)
Depreciation Method
8 years
10 years
$50,000
$75,000
10%
12%
$5,000
Straight-line
Required: A. List each of the criteria the lessee should consider in determining whether this is
a capital lease and indicate all of the criteria that are satisfied.
B. Calculate the depreciation expense the lessee should record each year.
C. Is this a direct financing or a sales-type lease for the lessor. Briefly explain.
D. Calculate the Lease Payments Receivable the lessor should record at the
inception of the lease (January 1, 19X1).
Problem 3: Cash Dividends
XYB Corporation has 50,000 shares of $2 par value common stock and 1,000 shares of 9%,
$10 par value preferred stock issued and outstanding. The preferred stock is cumulative and
participates to 12%; dividends in arrears total $1,800. Assuming that XYB declares a total
dividend of $14,000 for the year, determine how much of the dividend will be allocated to the
common stockholders and to the preferred stockholders.
Problem 4: Cash Dividends
XYB Corporation has 40,000 shares of $3 par value common stock and 1,000 shares of 7%,
$10 par value preferred stock issued and outstanding. The preferred stock is cumulative and
participates to 12%; dividends in arrears total $1,400. Assuming that XYB declares a total
dividend of $25,000 for the year, determine how much of the dividend will be allocated to the
common stockholders and to the preferred stockholders.
Problem 5: Cash Dividends
Lovejoy, Inc., has 20,000 shares of 10%, $10 par preferred stock and 30,000 shares of $10 par
common stock. No dividends have been paid or declared during 1994 and 1995. During 1996,
the company distributes $140,000 in dividends.
Directions:
Calculate the amount that will be distributed to the preferred stockholders
and the common stockholders under each of the following assumptions:
1.
2.
3.
4.
The preferred is noncumulative and nonparticipating.
The preferred is cumulative and nonparticipating.
The preferred is cumulative and fully participating.
The preferred is cumulative and participating to 15% total.
ACC301, Spring 2001
Dr. Dow
Exam 2 Review Problems, Page 2
Problem 6: Stockholders’ Equity Transactions
Dennis Company's December 31, 19X1 balance sheet contained the following information:
Preferred Stock, 5%, $10 par, 50,000 shares authorized, none issued
Common Stock, $2 par, 1 million shares authorized, 100,000 shares issued & outstanding
Required: Prepare journal entries (if necessary) to record the following 19X2 transactions:
1. Declared a 30% stock dividend on the common stock. The market price of the common
stock was $8.
2. Issued 10,000 shares of the preferred stock and 5,000 shares of the common stock for a
lump sum price of $175,000. The market price of the common stock was $9.
3. Issued the certificates for the stock dividend (#1).
4. 3,000 shares of common treasury stock were purchased at $15 per share. The shares
were originally issued at $5 per share. Dennis uses the cost method.
5. Issued 25,000 shares of common stock for land. The seller of the land was asking
$300,000 for the land; the land was appraised for tax purposes at $240,000; the market
price of the common stock was $12.
6. 1,000 shares of the treasury stock were reissued at $13 per share.
7. The board of directors appropriated $500,000 of retained earnings for plant expansion.
8. The remaining shares of the treasury stock were retired.
9. Declared and issued a 4 for 1 stock split.
Problem 7: Stockholders’ Equity Transactions
Dennis Company's December 31, 19X1 balance sheet contained the following information:
Preferred Stock, 5%, $10 par, 50,000 shares authorized, none issued
Common Stock, $1 par, 1 million shares authorized, 100,000 shares issued & outstanding
Required: Prepare journal entries (if necessary) to record the following 19X2 transactions:
1. Declared a property dividend on the common stock. The company will transfer some of its
investments in marketable securities to the common stockholders. The marketable
securities cost Dennis $500,000; at the date of declaration the market value of the securities
was $734,000.
2. Issued 5,000 shares of the preferred stock for $25 per share.
3. Distributed the property dividend declared in #1.
4. 2,000 shares of common treasury stock were purchased at $10 per share. The shares
were originally issued at $7 per share. Dennis uses the cost method.
5. Issued 25,000 shares of common stock and 10,000 shares of preferred stock for $350,000.
The market price of the common stock was $15 per share and $30 per share for the
preferred stock.
6. 500 shares of the treasury stock were reissued at $14 per share.
7. The board of directors appropriated $50,000 of retained earnings for plant expansion.
8. The remaining shares of the treasury stock were retired.
9. Declared and issued a 2 for 1 stock split.
ACC301, Spring 2001
Dr. Dow
Exam 2 Review Problems, Page 3
Solution to Problem 1: Leases, Part A – Lessee Accounting
Lessee’s Lease Amortization Schedule:
Date
Lease Payment 10% Interest
1/1/X1
1/1/X1
10,000
1/1/X2
10,000
5,759
1/1/X3
10,000
5,335
1/1/X4
10,000
4,868
1/1/X5
10,000
4,355
1/1/X6
10,000
3,791
1/1/X7
10,000
3,170
1/1/X8
10,000
2,487
1/1/X9
10,000
1,735
1/1/X10
10,000
909
Reduction of Lease Obligation Lease Obligation
67,590
10,000
57,590
4,241
53,349
4,665
48,684
5,132
43,552
5,645
37,908
6,209
31,698
6,830
24,868
7,513
17,355
8,265
9,090
9,091
-1
Lessee’s Journal Entries:
1/1/X1
Leased Equipment Under Capital Leases
Obligations Under Capital Leases
67,590
1/1/X1
10,000
12/31/X1
1/1/X2
12/31/X2
1/1/X3
Obligations Under Capital Leases
Cash
67,590
10,000
Interest Expense
Interest Payable
5,759
Depreciation Expense
Accumulated Depreciation
[$67,590/10]
6,759
Interest Payable
Obligations Under Capital Leases
Cash
5,759
4,241
Interest Expense
Interest Payable
5,335
Depreciation Expense
Accumulated Depreciation
[$67,590/10]
6,759
Interest Payable
Obligations Under Capital Leases
Cash
5,335
4,665
ACC301, Spring 2001
Dr. Dow
5,759
6,759
10,000
5,335
6,759
10,000
Exam 2 Review Problems, Page 4
Solution to Problem 1: Leases, Part B – Lessor Accounting
Lessor’s Lease Amortization Schedule
Annual
Interest
Net
Lease
on Net
Investment
Payment
Investment
Recovery
1/1/X1
1/1/X1
10,000
10,000
1/1/X2
10,000
5,759
4,241
1/1/X3
10,000
5,335
4,665
1/1/X4
10,000
4,868
5,132
1/1/X5
10,000
4,355
5,645
1/1/X6
10,000
3,791
6,209
1/1/X7
10,000
3,170
6,830
1/1/X8
10,000
2,487
7,513
1/1/X9
10,000
1,735
8,265
1/1/X10 10,000
909
9,091
Net
Investment
67,590
57,590
53,349
48,684
43,552
37,908
31,698
24,868
17,355
9,090
(1)
Lessor’s Journal Entries:
1/1/X1
Lease Payments Receivable ($10,000 X 10)
Machine
Unearned Interest Income ($100,000 - $67,590)
1/1/X1
12/31/X1
1/1/X2
12/31/X2
Cash
Lease Payments Receivable
Unearned Interest Income
Interest Income
Cash
Lease Payments Receivable
Unearned Interest Income
Interest Income
ACC301, Spring 2001
Dr. Dow
100,000
67,590
32,410
10,000
10,000
5,759
5,759
10,000
10,000
5,335
5,335
Exam 2 Review Problems, Page 5
Solution to Problem 2: Leases
A. Criteria 1: Transfer of ownership test; this criteria is not met.
Criteria 2: Bargain purchase option test; this criteria is not met.
Criteria 3: Economic life test (75% test); this criteria is met because the lease term (8 years)
equals or exceeds 75% of the asset’s economic life (10 years). It is actually 80%
of the asset’s economic life.
Criteria 4: Recovery of investment test (90% test); this criteria is met because the present
value of the minimum lease payments equals or exceeds 90% of the fair market
value of the asset. It is actually 100% of the fair market value of the asset (see
below for calculation of present value).
PV of annual payment (excluding executory costs):
(15,000 – 1,379) = 13,621 X 5.3349 =
PV of guaranteed residual value: 5,000 X .4665 =
Present value of minimum lease payments
72,667
2,333
75,000
B. ($75,000 - $5,000)/8 = 8,750
C. This is a sales type lease since the cost of the machine to the lessor is less than the fair
value of the machine.
D. Lease Payments Receivable = (8 X ($15,000 - $1,379)) + $5,000 = $113,968
Solution to Problem 3: Cash Dividends
Arrears - P.S.
Current - P.S. 9%
C.S. [($2 X9%) X 50,000]
Remainder
Total
Amount To
Preferred Common Be Distributed
14,000
1,800
12,200
900
11,300
9,000
2,300
209
2,091
0
2,909
11,091
Preferred Dividend: $10 par X 9% = $.90 per share X 1,000 shares = $900 per year
Allocation of Remainder:
Par value of preferred stock (1,000 shares X $10 par)
Par value of common stock (50,000 shares X $2 par)
Total Par Value
$ 10,000
100,000
$110,000
Common: (100,000/110,000) X 2,300 = $2,091
Preferred: (10,000/110,000) X 2,300 = $209
Although the preferred can participate up to 12%, the amount available after distributing the
dividends in arrears to the preferred only allows a total current year dividend of 11.09%
($12,200/$110,000) to both the preferred and common.
ACC301, Spring 2001
Dr. Dow
Exam 2 Review Problems, Page 6
Solution to Problem 4: Cash Dividends
Arrears - P.S.
Current - P.S. [($10 X 7%) X 1,000]
C.S. [($3 X 7%) X 40,000]
Additional 5%
Remainder
Total
Amount To
Preferred Common Be Distributed
25,000
1,400
23,600
700
22,900
8,400
14,500
500
6,000
8,000
8,000
0
2,600
22,400
The amount available after distributing the dividends in arrears to the preferred is 18.15%
($23,600/$130,000). However, the preferred only participates up to 12%. Therefore, the
preferred receives a 12% dividend for the current year.
Par value of preferred stock (1,000 shares X $10 par)
Par value of common stock (40,000 shares X $3 par)
Total Par Value
ACC301, Spring 2001
Dr. Dow
$ 10,000
120,000
$130,000
Exam 2 Review Problems, Page 7
Solution to Problem 5: Cash Dividends
Part 1: Preferred Stock = $10 par X 10% = $1 per share X 20,000 shares - $20,000 per year
Common Stock = $140,000 - $20,000 = $120,000
Part 2:
Preferred
Arrears - P.S.
Current - P.S. 10%
Remainder
Total
Part 3:
40,000
20,000
60,000
Preferred
Arrears - P.S.
Current - P.S. 10%
Common [($10 X 10%) X 30,000]
Remainder
Total
Amount To
Be Distributed
140,000
100,000
80,000
-0-
Common
80,000
80,000
Amount To
Be Distributed
140,000
100,000
80,000
50,000
-0-
Common
40,000
20,000
20,000
80,000
30,000
30,000
60,000
Allocation of Remainder:
Par value of preferred stock (20,000 shares X $10 par)
Par value of common stock (30,000 shares X $10 par)
Total Par Value
$ 200,000
300,000
$500,000
Common: (300,000/500,000) X 50,000 = $30,000
Preferred: (200,000/500,000) X 50,000 = $20,000
Part 4:
Arrears - P.S.
Current - P.S. 10%
Common – 10%
Additional 5%
Remainder
Total
ACC301, Spring 2001
Dr. Dow
Preferred
Common
40,000
20,000
10,000
70,000
30,000
15,000
25,000
70,000
Amount To
Be Distributed
140,000
100,000
80,000
50,000
25,000
-0-
Exam 2 Review Problems, Page 8
Solution to Problem 6: Stockholders’ Equity Transactions
1. Stock Dividends Declared (or Retained Earnings)
Stock Dividend To Be Distributed
(100,000 X 30% X $2)
60,000
60,000
2. Cash
Common Stock (5,000 X $2 par)
Additional Paid-in Capital - Common (5,000 X ($9 - $2))
Preferred Stock (10,000 X $10 par)
Additional Paid-in Capital – Preferred ($130,000 - $100,000)
175,000
10,000
35,000
100,000
30,000
3. Stock Dividend To Be Distributed
Common Stock
60,000
4. Treasury Stock (3,000 X $15)
Cash
45,000
60,000
45,000
5. Land (25,000 X $12)
Common Stock (25,000 X $2 par)
Additional Paid-in Capital - Common ((25,000 x ($12 - $2))
6. Cash (1,000 X $13)
Retained Earnings
Treasury Stock (1,000 X $15)
7. Retained Earnings - Unappropriated
Retained Earnings - Appropriated for Plant Expansion
8. Common Stock (2,000 X $2 par)
Additional Paid-in Capital ((2,000 X ($5 - $2))
Retained Earnings
Treasury Stock (2,000 X $15)
300,000
50,000
250,000
13,000
2,000
15,000
500,000
500,000
4,000
6,000
20,000
30,000
9. Memo entry: Declared a 4 for 1 stock split; shares issued and outstanding increased
to 632,000; par value reduced to $.50 per share.
Although no journal entry is required, the following journal entry could be made:
Common Stock, $2 par (158,000 shares X $2 par)
Common Stock, $.50 par (632,000 shares X $.50 par)
ACC301, Spring 2001
Dr. Dow
316,000
316,000
Exam 2 Review Problems, Page 9
Additional Comments on Problem 6:
Transaction 1: Since this is a large stock dividend, it is recorded at the par value of the
additional shares to be issued.
Transaction 2: Two classes of stock are sold for a lump sum amount. Only one of the classes
has a known market value. Therefore, allocate the market price (5,000 shares
X $9 = $45,000) to the common stock and allocate the remaining amount
($175,000 - $45,000 = $130,000) to the preferred stock. Note that the amount
allocated to each class of stock is divided between the stock account (par
value) and the A.P.I.C. account (excess of par).
Transaction 5: The land should be recorded at the fair market value of the stock issued or the
asset received, whichever is more reliable. In this case, the market value of
the stock is more reliable than the seller’s asking price and the tax appraisal.
Transaction 6: The retained earnings is debited since there is no credit balance in the
Additional Paid-in Capital from Treasury Stock Transactions account.
Transaction 9: There are 158,000 shares of common stock outstanding prior to the split
(100,000 + 30,000 + 5,000 - 3,000 + 25,000 + 1,000).
Solution to Problem 7: Stockholders’ Equity Transactions
1. Marketable Securities
Gain on Appreciation of Marketable Securities
234,000
234,000
Property Dividends Declared (or Retained Earnings)
Property Dividends Payable
734,000
734,000
2. Cash
Preferred Stock (5,000 X $10 par)
Additional Paid-in Capital - Preferred
125,000
3. Property Dividends Payable
Marketable Securities
734,000
50,000
75,000
734,000
4. Treasury Stock (2,000 X $10)
Cash
20,000
20,000
5. Cash
Common Stock (25,000 X $1 par)
Additional Paid-in Capital - Common ((194,444 - 25,000)
Preferred Stock (10,000 X $10 par)
Additional Paid-in Capital - Preferred (155,556 - 100,000)
6. Cash (500 X $14)
Treasury Stock (500 X $10)
Additional Paid-in Capital – Treasury Stock
ACC301, Spring 2001
Dr. Dow
350,000
25,000
169,444
100,000
55,556
7,000
5,000
2,000
Exam 2 Review Problems, Page 10
7. Retained Earnings - Unappropriated
Retained Earnings - Appropriated for Plant Expansion
8. Common Stock (1,500 X $1 par)
Additional Paid-in Capital – Common Stock (1,500 X ($7 - $1))
Additional Paid-in Capital – Treasury Stock
Retained Earnings
Treasury Stock (1,500 X $10)
50,000
50,000
1,500
9,000
2,000
2,500
15,000
9. Memo entry: Declared a 2 for 1 stock split; shares issued and outstanding increased
to 247,000; par value reduced to $.50 per share.
Although no journal entry is required, the following journal entry could be made:
Common Stock, $1 par (123,500 shares X $1 par)
Common Stock, $.50 par (247,000 shares X $.50 par)
123,500
123,500
Additional Comments on Problem 7:
Transaction 5: Two classes of stock are sold for a lump sum amount. Since the market value
of each class of stock is known, the amount received should be allocated to
each class of stock based on relative market values.
Market value of common stock (25,000 shares X $15)
Market value of preferred stock (10,000 shares X $30)
Total Market Value
$375,000
300,000
$675,000
Allocate to common: ($375,000/$675,000) X $350,000 = $194,444.
Allocate to preferred: ($300,000/$675,000) X $350,000 = $155,556.
Note that the amount allocated to each class of stock is divided between the
stock account (par value) and the A.P.I.C. account (excess of par).
Transaction 9: There are 123,500 shares of common stock outstanding prior to the split
(100,000 - 2,000 + 25,000 + 500).
ACC301, Spring 2001
Dr. Dow
Exam 2 Review Problems, Page 11