ACC 414 Lecture Notes - Hire Purchase, Cash Flow

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coffeeturtle519

11 Feb 2013

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One important advantage is that a hire purchase or leasing agreement is a medium term funding facility, which cannot be withdrawn, provided the business makes the payments as they fall due. The uncertainty that may be associated with alternative funding facilities such as overdrafts, which are repayable on demand, is removed. However, it should be borne in mind that both hire purchase and leasing agreements are long term commitments. It may not be possible, or could prove costly, to terminate them early. The regular nature of the hire purchase or lease payments (which are also usually of fixed amounts as well) helps a business to forecast cash flow. The business is able to compare the payments with the expected revenue and profits generated by the use of the asset. In most cases the payments are fixed throughout the hire purchase or lease agreement, so a business will know at the beginning of the agreement what their repayments will be.

Related Questions

Case 1- Determining Lease Capitalization Amounts

Hill Corporation, a diversified manufacturing company, has offices and operating locations in major cities throughout the United States. The corporate headquarters for Hill Corporation is located in Chicago, Illinois, and employees connected with various phases of company operations travel extensively. Corporate management is currently evaluating the feasibility of acquiring a business aircraft that can be used by company executives to expedite business travel to areas not adequately served by commercial airlines. Proposals for either leasing or purchasing a suitable aircraft have been analyzed, and the leasing proposal was considered to be more desirable. The proposed lease agreement involves a fully equipped business jet that has a fair value of $10,000,000. This plane would be leased for a period of 10 years beginning January 1, 2016. The lease agreement is cancelable only upon accidental destruction of the plane. An annual lease payment of $1,417,800is due on January 1 of each year; the first payment is to be made on January 1, 2016. Maintenance operations are scheduled by the lessor, and Hill Corporation will pay for these services as they are performed. Estimated annual maintenance costs are $69,000. The lessor will pay all insurance premiums and local property taxes, which amount to a combined total of $40, 000 annually and are included in the annual lease payment of $1,417,800. Upon expiration of the 10-year lease, Hill Corporation can purchase the CJ4 for $444,400. The estimated useful life of the plane to Hill is 10 years, and its salvage value in the used plane market is estimated to be $750,000.If the purchase option is not exercised, possession of the plane will revert to the lessor, and there is no provision for renewing the lease agreement beyond its termination on December 31, 2023. Hill Corporation can borrow $10,000,000 under a 10-year term loan agreement at an annual interest rate of 12%. The lessor's implicit interest rate is not expressly stated in the lease agreement, but this rate appears to be approximately 8% based on 10 annual net rental payments and the initial fair value of $10,000,000 for the plane. On January 1, 2016, the present value of all net rental payments and the purchase option of $444,440 is $8,888,900 using the 12% interest rate. The present value of all net rental payments and the $44,440 purchase option on January 1, 2016, is $10,222,260 using the 8% interest rate implicit in the lease agreement. The controller of Hill Corporation has established that this lease agreement is a capital lease as defined in GAAP. Hill has not early adopted ASU 2016-02.

Required:

What is the appropriate amount that Hill Corporation should recognize for the leased aircraft on its balance sheet after the lease is signed?

Assume instead that the annual lease payment is $1,417,800, that the appropriate capitalized amount for the leased aircraft is $10,000,000 on January 1, 2016, the interest rate is 9% and that the lease term is 10 years. How will the lease be reported on Hillâs December 31, 2016, balance sheet and related income statement? (Ignore any income tax implications.)

Need help with 8-11

Create financial statements by properly employing prescribedmethods in accordance with generally accepted accountingprinciples: A. Step Eight: Prepare the financial statements. Notethat you must use your adjusted trial balance to prepare the incomestatement, statement of ownerâs equity, and balance sheet. You mustcomplete these statements in this order, as there areinterdependencies among them. B. Step Nine: Complete the âClosingEntriesâ tab in your workbook by closing all temporary incomestatement amounts to create closing entries. C. Step Ten: Preparethe âPost Closing Trial Balanceâ tab for the next accountingperiod. [ACC-201-03] D. Step Eleven: Prepare the reversing entriesin the âReversing Entriesâ tab of your workbook.

Here is all of the info to go along with it:

July 1: You take $10,000 from your personal savings account andbuy common stock in Peyton Approved. July 1: Purchase $6,500 inbaking supplies from vendor, on account. July 3: Your parents lendthe company $10,000 cash in exchange for a two-year, 6% notepayable. Interest and the principal are repayable at maturity. July7: Enter into a lease agreement for bakery space. The agreement isfor 1 year. The rent is $1,500 per month, and the last monthâs rentpayment of $1,500 is required at time of lease agreement. Thepayment was made in cash. Lease period is effective July 1, 2018,through June 30, 2019. July 10: Pay $375 to the county for abusiness license. July 11: Purchase a cash register for $250(deemed to be not material enough to qualify as depreciableequipmentâuse misc. exp.). July 13: You have baking equipment,including an oven and mixer, which you have been using for yourhome-based business and will now start using in the bakery. Youestimate that the equipment is currently worth $6,000, and youtransfer the equipment into the business in exchange for additionalcommon stock. The equipment has a 5-year useful life. July 13: Pay$200 for business cards/flyers/posters/ads to use for advertising.July 14: Pay $300 for office supplies. July 15: Hire part-timehelper to be paid $12 per hour. Pay periods are the 1st through the15th and 16th through the end of the month, with paydays being the20th for the first pay period and the 5th of the following monthfor the second pay period. (No entry is required on this date; itis here for informational purposes only.) July 30: Receivedtelephone bill for July in amount of $75. Payment is due on August10. 6 July 31: Pay $2,400 for a 12-month insurance policy. Policyeffective dates are August 1, 2018, through July 31, 2019. July 31:Accrue wages earned for employee for period of 16th through 31st ofJuly (Wage calculations table provided below). July 31: Total Julybakery sales were $15,000. $5,000 of these sales are on accountsreceivable. Step Two Data (Click on the link to return to theprompt.) The following events occur in August, 2018: August 5: Paidemployee for period ending 7/31. August 8: Receive payments fromcustomers towards accounts receivable in amount of $3,800. August10: Paid July telephone bill. August 15: Purchase additional bakingsupplies in amount of $5,000 from vendor, on account. August 15:Accrue wages earned for employee from period of 1st through 15th ofAugust (Wage calculations table provided below). August 15: Payrent on bakery space. August 18: Receive payments from customerstowards accounts receivable in amount of $3,000. August 20: Paid$8,500 toward baking supplies vendor payable. August 20: Payemployee for period ending 8/15. August 22: $300 in office suppliespurchased. August 31: Received telephone bill for August in amountof $75. Payment is due on September 10. 7 August 31: Accrue wagesearned for employee for period of August 16th through August 31st(Wage calculations table provided below). August 31: August bakerysales total $20,000. $7,500 of this total is on accountsreceivable. Step Three (Click on the link to return to the prompt.)Updated Scenario: Many customers have been asking for morehypoallergenic products, so in September you start carrying a lineof hypoallergenic shampoos on a trial basis. The followinginformation relates to the purchase and sales of the shampoo: ï· Youuse the perpetual inventory method. Although you could use thefollowing valuation methodsâFIFO, LIFO, or weighted average, youchoose to use the FIFO method. Data: The following events occur inSeptember, 2018: September 1: Paid dividends to self in amount of$10,000. September 5: Pay employee for period ending 8/31.September 7: Purchase merchandise for resale. See âInventoryValuationâ tab for details. September 8: Receive payments fromcustomers toward accounts receivable in amount of $4,000. September10: Pay August telephone bill. September 11: Purchase bakingsupplies in amount of $7,000 from vendor on account. September 13:Paid on supplies vendor account in amount of $5,000. September 15:Accrue employee wages for period of September 1 through September15. September 15: Pay rent on bakery space: $1,500. 8 September 15:Record merchandise sales transaction. See âInventory Valuationâ tabfor details. September 15: Record impact of sales transaction onCOGS and the inventory asset. See âInventory Valuationâ tab fordetails. September 20: Pay employee for period ending 9/15.September 20: Purchase merchandise inventory for resale tocustomers. See âInventory Valuationâ tab for details. September 24:Record sales of merchandise to customers. See âInventory Valuationâtab for details. September 24: Record impact of sales transactionon COGS and the inventory asset. See âInventory Valuationâ tab fordetails. September 30: Purchase merchandise inventory for resale tocustomers. See âInventory Valuationâ tab for details. September 30:Accrue employee wages for period of September 16th throughSeptember 30th September 30: Total September bakery sales are$20,000. $6,000 of these sales are on accounts receivable. Step SixData (Click on the link to return to the prompt.) On September 30,the following adjustments must be made: ï· [Note: This is a sample.]Depreciation of baking equipment transferred to company on 7/13.Assume a half month of depreciation in July using the straight-linemethod. ï· Accrue interest for note payable. Assume a full month ofinterest for July. (6% annual interest on $10,000 loan fromparents.) ï· Record insurance used for the year. ï· Actual bakingsupplies on-hand as of September 30 are $1,100. ï· Office supplieson-hand as of September 30 are $50. Wage calculation data: 9 MonthHours Rate Pay 31 Jul. 10 12 120 15 Aug. 40 12 480 31 Aug. 35 12420 15 Sep. 38 12 456 30 Sep. 40 12 480

PEYTON APPROVED
General Journal for the period from July, 1 to September, 30
Date	Account Title	Debit	Credit
July, 1	Cash	$10,000
	Common Stock		$10,000
July, 1	Baking Supplies	$6,500
	Accounts Payable		$6,500
July, 3	Cash	$10,000
	6% Note Payable		$10,000
July, 7	Prepaid Rent	$1,500
	Cash		$1,500
July, 10	Licensing fee	$375
	Cash		$375
July, 11	Miscellaneous Expense	$250
	Cash		$250
July, 13	Baking Equipment	$6,000
	Common Stock		$6,000
July, 13	Advertising expense	$200
	Cash		$200
July, 14	Office Supplies	$300
	Cash		$300
July, 30	Telephone expense	$75
	Accounts Payable		$75
July, 31	Prepaid Insurance	$2,400
	Cash		$2,400
July, 31	Salaries expense	$120
	Salaries payable		$120
July, 31	Cash	$10,000
	Accounts Receivable	$5,000
	Sales		$15,000
Aug, 5	Salaries payable	$120
	Cash		$120
Aug, 8	Cash	$3,800
	Accounts Receivable		$3,800
Aug,10	Accounts Payable	$75
	Cash		$75
Aug,15	Baking Supplies	$5,000
	Accounts Payable		$5,000
Aug,15	Salaries expense	$480
	Salaries payable		$480
Aug,15	Rent Expense	$1,500
	Cash		$1,500
Aug,18	Cash	$3,000
	Accounts Receivable		$3,000
Aug,20	Accounts Payable	$8,500
	Cash		$8,500
Aug,20	Salaries payable	$480
	Cash		$480
Aug,22	Office Supplies	$300
	Cash		$300
Aug,31	Telephone expense	$75
	Accounts Payable		$75
Aug,31	Salaries expense	$420
	Salaries payable		$420
Aug,31	Cash	$12,500
	Accounts Receivable	$7,500
	Sales		$20,000
Sept, 1	Dividend	$10,000
	Cash		$10,000
Sept, 5	Salaries payable	$420
	Cash		$420
Sept, 8	Cash	$4,000
	Accounts Receivable		$4,000
Sept,10	Accounts Payable	$75
	Cash		$75
Sept,11	Baking Supplies	$7,000
	Accounts Payable		$7,000
Sept,13	Accounts Payable	$5,000
	Cash		$5,000
Sept,15	Salaries expense	$456
	Salaries payable		$456
Sept,15	Rent Expense	$1,500
	Cash		$1,500
Sept,20	Salaries payable	$456
	Cash		$456
Sept,30	Salaries expense	$480
	Salaries payable		$480
Sept,30	Cash	$14,000
	Accounts Receivable	$6,000
	Sales		$20,000

	Unadjusted Trial Balance		Adjusting Entries		Adjusted Trial Balance
Account	Debit	Credit	Debit	Credit	Debit	Credit
Cash	25,356.75				25,356.75
Baking Supplies	18,500.00			17,400.00	1,100.00
Merchandise Inventory	175.45				175.45
Prepaid Rent	1,500.00				1,500.00
Prepaid Insurance	2,400.00			400.00	2,000.00
Baking Equipment	6,000.00				6,000.00
Misc. Supplies	600.00			550.00	50.00
Accounts Receivable	7,700.00				7,700.00
Notes Payable		10,000.00				10,000.00
Accounts Payable	2,000.00				2,000.00
Wages Payable		480.00				480.00
Common Stock		16,000.00				16,000.00
Dividends	10,000.00				10,000.00
Bakery Sales		55,000.00				55,000.00
Merchandise sales		221.00				221.00
Baking Supplies Expense			17,400.00		17,400.00
Rent Expense	4,500.00				4,500.00
Insurance Expense			400.00		400.00
Misc. Expense	250.00				250.00
Business License Expense	375.00				375.00
Advertising Expense	200.00				200.00
Wages Expense	1,836.00				1,836.00
Telephone Expense	150.00				150.00
COGS	157.80				157.80
Depreciation Expense			250.00		250.00
Accumulated Depreciation				250.00		250.00
Interest Expense			150.00		150.00
Interest Payable			150.00		150.00
Misc. Supplies Expense			550.00		550.00
Total	81,701.00	81,701.00	18,750.00	18,750.00	82,101.00	82,101.00

beigewombat114

Which of the following characteristics may result in theclassification of a liability being changed from current tononcurrent:

a) violation of a subjective acceleration clause

b) violation of a objective acceleration clause

c) a demand provision for payment

d) refiancing after the balance sheet date

Pending litigation would generally be considered:

a) nonmonetary liabilty

b) contingent liability

c) estimated liability

d) current liability

Barrons Co. current ratio is 2:1. Which of the followingtransactions would normally increase Barney's current ratio?

a) purchasing inventory on account

b) borring money by signing a long-term note

c) collecting an account receivable

d) purchasing land for cash

On multiple step income statement, gains or losses on sale ofequipment would be shown

a) before gross profit on sales

b) after gross profit on sales but before income from conitnuingoperations

c) after income from continuing operations but before incomefrom extraordinary items

d) after income before extraordinary items but before netincome

A single step income statement is a format that

a) compares the current years income with last year's income

b) recongnizes subtotals at intermediate stages such as grossmargin

c) combines revenues and gains and subtracts from them expensesand losses, resulting in income from operations

d) reports sales revenue, cost of goods sold, gross margin, andall other expenses

In contrast with a multiple-step income statement, a single stepincome statement does NOT show the amount of

a) income taxes on continuing operations

b) cost of goods sold

c) gross profit

d) earnings per share

The amount of income reported for tax purposes

a) is nomally greater than the net income reported tostockholders

b) must be computed according to GAAP

c) is used to compute earnings per share

d) may differ from the amount of income detemined for financialreporting purposes

Under the general rule of revenue recognition, revenue isrecognized when

a) marketability and market price are assured

b) a contractual agreement exists, and cash collection isassured

c) the earnings process is complete, and a valid promise ofpayment has been received

d) all related expenses have been incurred

Seaworth Company's gross sales in 2014 were 3930000. Assumingsales returns and allowances were 74000 sales discounts were 35000and freight-out was 28000 what were Seaworthy's net sales in2014?

a) 3792000

b) 3821000

c)3856000

d) 3930000

On June 30, 2014 Sonata COmpanys operating facilities inNebraska were detroyed by a flood. The loss of $700000 was notcovered by insurance. Sonata's tax rate for 2014 is 40 percent. InSonatas income statement for the year ended sept 30 2014 this eventshould be reported as an extraordinary loss of

a) 0

b) 280000

c) 420000

d) 700000

In a statement of cash flows, payments to acquire debtinstruments of other entities would typically be classified as cashoutflows for

a) financing activities

b) equity activities

c) operating activities

d) investing activities

A gain on the sale of a plan asset in the ordinary course ofbusiness should be presented in a staement of cash flows preparedusing the indirect method as

a) a cash inflow from investing activities

b) a cash inflow from financing activities

c) a deduction from net income

d) a addition to net income

In a statement of cash flows, proceeds from issuing equityinstruments should be classified as cash inflows from

a) brokerage activities

b) financing activities

c) investing activites

d) operating activities

When preparing a statement of cash flows using the indirectmethod, the amortization of trademarks should be reported as a

a) increase in cash flows from investing activities

b) reduction in cash flows from investing activities

c) increase in cash flows from operating activities

d) reduction in cash flows from operating activites

A loss in the sale of machinery in the ordinary course ofbusiness should be presented in a statement of cash flows( indirectmethod) as

a) an addition to net income

b) a deduction from net income

c) an inflow and outflow of cash

d) an outflow of cash

In preparing a statement of cash flows, which of the followingtransactions would be considered an investing activity?

a) sale of a business segment

b) Issuance of bonds payable at a discount

c) purchase of treasury stock

d) sale of capital stock

In a statement of cash flows (indirect method), depreciation istreated as an adjustment to reported net income becausedepreciation

a) is an inflow of cash to reserve account for assetreplacement

b) reduces the reported net income and involves an inflow ofcash

c) reduces the reported net inome but does not involve anoutflow of cash

d) usually represents a significant portion of operatingexpense

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ACC 414 Lecture Notes - Hire Purchase, Cash Flow

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