COMM 450 Study Guide - Final Guide: Pension, Operating Lease, Finance Lease

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12 Feb 2016
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C450 Sections 103/104 Review questions
Question 1 Pensions
Preston Chemical Ltd. operates a defined benefit pension plan. The plan was retro-actively adjusted one year
ago on January 1, 20x8 for those employees who had been a part of the previous plan. This resulted in a past
service cost obligation of $650,000. The expected period to full eligibility of this employee group at the time
the plan was adjusted was 13 years.
The actuary informed you that on January 1, 20x9 the market value of the pension assets is $900,000 while
the accrued benefit obligation is $1,200,000. Also, as of January 1, 20x9, there is an unamortized actuarial
loss of $180,000.
The actuary also informs you that the actual pension obligation on December 31, 20x9 is $1,300,000. Tundra
Ltd. has a December 31 year-end.
Figures for fiscal 20x9:
Benefits Paid $ 150,000
Current service cost $ 170,000
EARSL for corridor 12 years
Expected rate on pension obligation 8 %
Expected rate pension fund assets 9 %
Pension funding contribution $ 225,000
Market value of pension fund assets (12/31/20x9) $ 1,100,000
Deferred pension liability (B/S) at 12/31/20x8) $ 480,000 (Dr)
Note: All accruals and cash flows occur at mid-year. Actuarial Gains or losses are amortized beginning in the
year after they are identified/occur. Past service costs are amortized starting in the year of plan adjustments.
The company’s year end is December 31.
Required:
a) Complete the attached Pension worksheet for 2009.
b) Prepare the journal entry(s) to record the pension expense and the plan contributions made for 2009.
Question 2 Leases
Wesley Pictures leased a camera crane from Crane Leasing Inc. on January 1, 2009. The crane has
an expected useful life of 17 years and a fair market value of $219,000.
Additional terms for the lease include:
Lease term is 5 years beginning January 1, 2009.
Annual lease payments of $ 40,000 paid each year on January 1 include $8,000 of insurance
costs.
At the end of the 5 year lease period, Wesley has the option to renew the lease for an additional 8
years with annual lease payments of $20,000 per year (which includes $5,000 for annual
insurance costs). Wesley knows that a rental of this crane, even in 13 years, would be $50,000
annually.
At the end of the lease, the title remains with Crane.
Wesley may purchase the crane at market value at the end of the renewal period. This offer is
made without any obligation to Wesley.
Wesley has an annual borrowing rate of 8% and does not know the rate implicit in the lease.
Wesley has a December 31 year end and amortizes all assets using straight line amortization,
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Required:
a) Determine whether this lease is a capital or operating lease to Wesley (you must calculate the
minimum lease payments).
b) Prepare the journal entry(ies) for the Lesee for January and December 2009
c) Explain how the accounting for this lease would change for Wesley if the price to purchase the crane
at the end of the second lease term was for one half of the market value on that date. (Note: no
calculations are required to answer this part).
Question 3 CFS
The comparative balance sheets for Aloha Resorts Ltd for the years ended December 31, 20x8 and 20x7 is
presented below: 20x8 20x7 Change
Cash $ 10,000 $ 40,000 30,000
Accounts receivable 82,000 110,000 28,000
Securities held for trading, at market value 105,000 50,000 55,000
Inventory 940,000 600,000 340,000
Land 390,000 320,000 70,000
Building 620,000 800,000 180,000
Accumulated amortization - Building (80,000) (60,000) 20,000
Equipment 291,000 240,000 51,000
Accumulated amortization - Equipment (185,000) (190,000) 5,000
Intangible Assets, net 88,000 120,000 32,000
Total Assets $2,261,000 $2,030,000
Accounts Payable $ 21,000 $ 82,000 61,000
Pension Liability 143,000 150,000 7,000
Bonds Payable 1,050,000 1,050,000 0
Discount on bonds (80,000) (100,000) 20,000
Future income tax liability 26,000 14,000 12,000
Preferred shares 0 152,000 152,000
Common shares 800,000 500,000 300,000
Contributed surplus – common shares 22,000 0 22,000
Retained earnings 279,000 182,000 97,000
Retained Earnings and Liabilities $2,261,000 $2,030,000
Additional Information:
I. The company began operations July 1, 20x7 at which time they issued 100,000 common shares at $5
per share.
II. On January 1, 20x8 the company issued a 10% common share dividend. Market price per share was
$7.
III. All items in “other expense” are cash expenses.
IV. During 20x8 the company issued a preferred dividend of $12,000 and then, redeemed the preferred
shares at their book value. Common share dividends were also paid in 2008.
V. Aloha Ltd purchased $94,000 of common shares for treasury on January 30, 20x8. On October 31,
20x8 Aloha sold all the common shares from treasury for $116,000.
VI. Equipment with a cost of $90,000 was sold.
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Below is the income statement for the year ended December 31, 20x8.
Aloha Ltd.
Income Statement for Year ended December 31, 20x8
Sales $4,095,000
Cost of goods sold 2,800,000
Gross profit $1,295,000
Amortization – Building $70,000
Amortization – Equipment 35,000
Amortization – Intangible assets 32,000
Salaries 220,000
Office rental 315,000
Pension expense 95,000
Other expenses 151,000
Interest expense 90,000
(Gain) Loss on market value of trading securities (55,000)
(Gain) Loss on sale of equipment (20,000)
(Gain) Loss on sale of building (8,000)
Net income before taxes $370,000
Income tax expense 185,000
Net Income $185,000
Required:
Prepare a Statement of Cash Flows using the direct approach, along with related note disclosure.
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