Reference no: EM132464745
AF 311 Intermediate Accounting Assignment - University of Massachusetts Boston, USA
Question 1 - True or false
1. Service cost is the expense caused by the increase in the accumulated benefit obligation because of employees' service during the current year.
2. The difference between the PBO and the ABO is that the PBO takes into account future salary increases, while the ABO is based on current salaries.
3. Prior service cost is the increase in the PBO because of pension plan amendments.
4. The PBO is a more appropriate measure for pension obligation in the case of firm bankruptcy than the VBO.
5. Other Comprehensive Income related to pension prior service cost is reported as part of net income.
6. Executory costs should be excluded by the lessee in computing the present value of the minimum lease payments.
7. A lessee records interest expense in both a finance lease and an operating lease.
8. No lease liabilities should be reported on the balance sheet if the lease is classified as an operating lease.
9. The lessor should ignore the guaranteed residual value in its calculation of lease receivable.
10. If residual value is unguaranteed, the lessee ignores the residual value in the computation of lease liability.
11. Companies report the cash flows from purchases and sales of trading securities as cash flows from operating activities.
12. A company should add back bond premium amortization to net income to arrive at net cash flow from operating activities.
13. Dividends received from other companies' stocks should be reported as cash flow from investing activities.
14. Interest paid to creditors should be reported as cash flows from financing activities.
15. Cash paid to the lessor in the case of operating lease should be reported as cash flows from financing activities.
Question 2 - Colson Corp. had $900,000 net income in 2018. On January 1, 2018 there were 600,000 shares of common stock outstanding. On March 1, 400,000 shares were issued and on September 1, Colson bought 100,000 shares of treasury stock. The tax rate is 40%.
In addition, Colson issued $2,000,000 of 6% convertible bonds at face value during 2017. Each $1,000 bond is convertible into 100 shares of common stock. No bond was converted into common stock in 2018.
Required -
a) Compute basic earnings per share for 2018.
b) Compute diluted earnings per share for 2018.
Question 3 - On June 15, 2021, Red Sox Construction entered into a long-term construction contract to build a new baseball stadium in Boston., for $240 million. The expected completion date is April 1, 2023, just in time for the 2023 baseball season. Costs incurred in the first two years and estimated remaining costs to complete the project are as follows ($ in millions):
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2021
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2022
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Costs incurred during the current year
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$40
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$90
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Estimated future costs to complete
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120
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70
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Required -
a. Compute the revenue and gross profit Red Sox Construction will report in year 2021 and 2022, using the percentage of completion method.
b. Provide journal entry to record revenue and gross profit for 2022.
Question 4 - Howard Corp. sponsors a defined-benefit pension plan for its employees. On January 1, 2011, the following balances related to this plan.
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Plan assets (market-related value)
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$500,000
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Projected benefit obligation
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600,000
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OCI - Prior service cost
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75,000
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OCI - Loss
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70,000
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As a result of the operation of the plan during 2011, the actuary provided the following additional data at December 31, 2011.
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Service cost for 2011
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$75,000
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Actual return on plan assets in 2011
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45,000
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Amortization of prior service cost
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20,000
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Contributions in 2011
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115,000
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Benefits paid retirees in 2011
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70,000
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Interest rate
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7%
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Expected return rate
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10%
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Average remaining service life of active employees 10 years.
Instructions -
(a) Using the above information to complete the pension work sheet for 2011 (see the next page). Indicate (credit) entries by parentheses.
(b) Prepare the journal entry to reflect the accounting for the company's pension plan for the year ending December 31, 2011.
Question 5 - UMB leased a Cloud Computing equipment from Academy Leasing Services on January l, 2019. Academy Leasing Services paid $454,595 for the equipment. Its fair value is $454,595. Terms of the Lease Agreement and Related Information are as below.
Lease term: 5 years
Semiannual lease payments: $100,000 at beginning of each period
Economic life of asset: 5 years
Annual interest rate: 5%
Required -
a. Prepare the amortization schedule that shows the pattern of interest expense for UMB.
b. Prepare the appropriate entries for 2019 for UMB.
Question 6 - UMB Corporation entered into a lease agreement on January 1, 2019, to provide CM Company with a piece of machinery. The terms of the lease agreement were as follows.
1. The lease is to be for 3 years with rental payments of $10,000 to be made at the end of each year.
2. The machinery has a fair value of $50,000, and an economic life of 6 years.
3. At the end of the lease term, both parties expect the machinery to have a residual value of $30,000, none of which is guaranteed.
4. The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature.
5. The implicit interest rate is 10%.
6. Collectability of the payments is probable.
Required -
a. Evaluate the criteria for classification of the lease and describe the nature of the lease for the lessee (CM Company).
b. Prepare the journal entries for CM Company for year 2019.
Question 7 - The following information is taken from French Corporation's financial statements:
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December 31
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2019
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2018
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Cash
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$90,000
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$27,000
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Accounts receivable
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92,000
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80,000
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Allowance for doubtful accounts
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(4,500)
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(3,100)
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Inventory
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155,000
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175,000
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Prepaid expenses
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7,500
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6,800
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Land
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90,000
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60,000
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Buildings
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287,000
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244,000
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Accumulated depreciation
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(32,000)
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(13,000)
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Patents
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20,000
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35,000
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Total Assets
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$705,000
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$611,700
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Accounts payable
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$90,000
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$84,000
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Accrued liabilities
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54,000
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63,000
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Bonds payable
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125,000
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60,000
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Common stock
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100,000
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100,000
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Retained earnings
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351,000
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312,700
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Treasury stock, at cost
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(15,000)
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(8,000)
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Total Liabilities and SE
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$705,000
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$611,700
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For 2019 Year
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Net income
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$58,300
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Depreciation expense
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19,000
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Amortization of patents
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5,000
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French Corporation purchased some land and buildings in 2019. In addition, the company sold some of its patents. The gain or loss on the sale of patents is zero.
Instructions - Prepare the statement of cash flows for French Corporation for the year 2019. (Use the indirect method.)
Question 8 - Bonus question: Below is selected financial information from the financial statements of company A and company B. Both company A and company B started their business on 1/1/2019.
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Company A
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Company B
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Current assets on 12/31/2019
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100
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8,000
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Total assets on 12/31/2019
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11,000
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28,000
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Current liability on 12/31/2019
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200
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4,000
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Total liability on 12/31/2019
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4,000
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18,000
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Sales revenue on 12/31/2019
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4,500
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20,000
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Cost of goods sold for year 2019
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1,000
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16,000
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Interest expense for year 2019
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400
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1,000
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Net income for year 2019
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1,500
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2,500
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Required -
a) Which company provides better return on assets?
b) Which company has less liquidity risk in terms of current ratio?
c) Which company has less solvency risk in terms of debt to total assets ratio?