Reference no: EM132887035

PROBLEM 1 - On January 1, 2021, Hooman Inc. leased equipment with a useful life of 8 years form Farhad Corp. for a six-year period. Equipment costs Farhad Inc. $150,000 and its estimated value the end of the lease period is $15,000 which is not guaranteed by Hooma (lessee). Fair market value of the equipment is $200,100. Equal annual payments under the lease are $45,000 (including 5,000 maintenance costs). Hooman inc. incurred initial direct costs of $6,000 related to this lease. The first payment is due on January 1, 2021and the remaining payments are made each December 31, beginning with December 31, 2021. Implicit rate on the lease is 10%.

REQUIRED - Assuming that this is a Finance lease for Hooman Inc., prepare all the required journal entries for Hooman Inc. (Lessee) for 2021 and 2022.

PROBLEM 2 - Arndt Inc. manufactures equipment that is sold or leased. On January 1, 2021, Arndt Inc. leased equipment with a useful life of six years to Alsup Corp. for a five-year period. Equipment costs Arndt Inc. $100,000 and its estimated value the end of the lease period is $10,000 which is not guaranteed by lessee. Fair market value of the equipment is $126,795. Equal annual payments under the lease are $32,000 (including maintenance costs of $2,000). Arndt Inc. incurred initial direct costs of $10,000 related to this lease. The first payment is due on January 1, 2021and the remaining payments are made each December 31, beginning with December 31, 2021. Implicit rate on the lease is 12%. Assume that the lease qualifies as a sales-type lease for Arndt In..

REQUIRED -

1. Prepare all required entries for Arndt Inc (Lessor) for 2021 and 2022.

2. Assume that carrying value of the lease receivable at the beginning of the fifth year of lease (1-1-2025) is $8,929 and the fair market value of the leased equipment at the end of the lease tem (12-31-2025) is $7,500. Prepare the journal entries that would be recorded by Arndt (lessor) at 12-31-205 for the receipt of the leased equipment form the lessee.

Problem 3 - Riverside Corporation purchased equipment from Brainard Co., on January 1, 2021. In payment for $150,000 equipment, Riverside Corporation issued a 6-year note to be paid in six equal payments at the end of each year. The payments include interest at the rate of 8%.

Required -

1. Calculate the amount of each installment.

2. Prepare the journal entry for purchase of equipment.

3. Prepare the journal entries for the first two installment payments on December 31, 2021 and 2022.

Problem 4 - On January 1, 2021, Ledge Company issued 12% bonds dated January 1, with a face amount of $5,000,000. The bonds mature on Dec. 31, 2040 (20 years). For bonds of similar risk and maturity the market rate 10%. Interest is paid annually on December 31. Braxton Corporation purchased the entire bond issue. Ledge Company uses effective interest method and Braxton Corporation use straight line method for amortization of discount or premium.

Required -

1. For Ledge Company (Issuer)

a. Determine the issue price of the bonds at January 1, 2021.

1. Prepare the journal entry to record the issuance of the bonds on 1/1/21.

2. Prepare the journal entries to record interest in on December 31, 2021 and 2022.

3. Assume that entire bond issue is retired on January 1, 2036, at 103.

4. Calculate the carrying value of the bonds on January 1, 2036.

5. Determine the amount of gain or loss on the bond retirement.

6. Prepare the journal entry for the bond retirement.

2. For Braxton Corporation

a. Prepare the journal entry to record the purchase of the bonds on 1/1/21.

b. Prepare the journal entry to record the interest payment on 12/31/21.

Problem 5 - On August 1, 2021, National Corporation issued $200,000 of 8% bonds at 99. The bonds mature in 10 years. Each $1,000 bond was issued with 10 detachable stock warrants, each of which entitled the bondholder to purchase, for $25, one share of National $5 par common stock. World Company purchased the entire bond issue. On August 2, 2021, the market value per share for National stock was $45 and the market value of each warrant was $6. On March 15, 2023, when National common stock had a market price of $70 per share, World Company exercised all the warrants it held.

Required -

1. Prepare the journal entry on August 1, 2021 to record the issuance of the bonds with detachable warrants by National.

2. Prepare the journal entry on March 15, 2023 to record the exercise of the warrants in the books of National.