Reference no: EM132589973

Question 1: On January 2, 2005, Noblick Corporation leased equipment under a three-year lease with payments of $3,000 on each December 31 of the lease term. The present value of the lease payments at a discount rate of 10% is $7,460. If the lease is considered a capital lease, depreciation expense (straight-line) and interest expense are recognized. If the lease is considered an operating lease, then rent expense is recognized.

Required:

a. What factors must Noblick consider in determining whether the lease is a capital lease or an operating lease?

b. What will be the total expense recognized on Noblick's income statement over the three years if the lease is considered an operating lease?

c. What will be the total expense recognized on Noblick's income statement over the three years if the lease is considered a capital lease?

d. Which lease will result in the highest income in each of the three years? Explain.

e. Which lease will result in the highest cash flow in each of the three years? Explain.

Question 2: On January 1, 2004, Gerry Corporation issued $10,000,000 8% semiannual coupon bonds. The bonds were issued at face value. By December 31, 2006, the market value of the bonds had fallen to $9,875,200. Interest payment dates are January 1 and July 1 of each year.

Required:

a. Prepare the entry to record the sale of the bonds on January 1, 2004.

b. Prepare the entry made on the first coupon payment date of July 1, 2004.

c. What will the book value of the bonds be on December 31, 2006?

d. What factors would have caused the market value of the bonds to fall below the face value? Explain.

e. What accounting adjustments would Gerry be required to make on December 31, 2006?

f. Assume that Gerry retires the bonds on December 31, 2006, by buying the bonds on the open market. What journal entry would be made to retire the bonds?

g. Indicate the impact of the bond retirement on Gerry's net income and debt-to- equity ratio.

h. Explain why management may sometimes retire bonds when it is not in the best interest of the company's stockholders.