Exam 7: Non-Current Liabilities

Lance Corporation, a public corporation, entered into the following transactions: 1. On January 1, 2021, Gagne Car Rental leased a car to Lance Corporation for one year. Terms of the operating lease call for monthly payments of $ 550. 2. On January 1, 2021, Lance Corporation entered into an agreement to lease 20 machines with a fair market value of $ 160,000 from Wells Corporation. The terms of the lease agreement require an initial payment of $ 50,000 and then three annual rental payments of $ 60,000 beginning on December 31, 2021. The present value of the three rental payments is $ 149,211. Instructions a) Identify each lease as either operating or finance. b) Prepare the appropriate journal entries to be made by Lance Corporation on January 1 related to the lease transactions.

Prairie Corporation issued $ 100,000 of 10-year, 6% bonds payable on January 1, 2021 for $ 92,900, at a time when market interest rates were 7%. Interest is payable semi-annually on June 30 and December 31. On January 1, 2022, 20% of the bonds were redeemed at 101. Prairie has a December 31 year end and uses the effective-interest method in accounting for bonds payable. Instructions a) Record the issue of the bonds on January 1, 2021. b) Record the payment of interest on June 30 and December 31, 2021. c) Show how the bonds would be reported on Prairie's December 31, 2021 balance sheet. d) Record the redemption of the bonds on January 1, 2022.

Knowhere Corporation issues a $ 350,000, 4%, 20-year mortgage note payable on December 31, 2021, to obtain needed financing for the construction of a building addition. The terms provide for semi-annual blended payments of $ 12,795 on June 30 and December 31. Instructions a) Prepare the journal entries to record the mortgage loan on December 31, 2021, and the first instalment payment. b) Will the amount of principal reduction in the second instalment payment be more or less than with the first instalment payment?

Presented below are two independent situations: a) Hillman Corporation redeemed $ 150,000 of its bonds on June 30, 2021, at 102. The amortized cost of the bonds on the retirement date was $ 137,700. The bonds pay semi-annual interest and the interest payment due on June 30, 2021, has been made and recorded. b) Dalton Inc. redeemed $ 200,000 of its bonds at 96 on June 30, 2021. The amortized cost of the bonds on the retirement date was $ 196,500. The bonds pay semi-annual interest and the interest payment due on June 30, 2021, has been made and recorded. Instructions For each of the independent situations, prepare the journal entry to record the retirement or conversion of the bonds.

On September 1, 2021, Guss Corporation issued $ 1,000,000, 6%, 10-year bonds. Interest is payable annually with the first payment due on September 1, 2022. Instructions Prepare the appropriate journal entry to record the bond issuance on September 1, 2021 under each of the following market rate assumptions: a) 6%, b) 5%, and c) 7%. Round answers to the nearest dollar.

Kemba Corporation has acquired equipment on January 1, 2021 by engaging in a 5-year lease transaction that requires annual lease payments of $ 24,000 beginning January 1, 2021. Instructions Prepare the journal entries to record the lease inception at January 1, 2021 assuming: a) The lease is classified as an operating lease. b) The lease is classified as a finance lease and the present value of the minimal lease payments has been determined to be $ 100,077.

Moxy's Restaurant Supplies Ltd. issued $ 1,800,000, 7%, 10-year bonds on January 1, 2021. Interest is payable semi-annually on July 1 and January 1. Moxy's year-end is December 31. Assume the market rate for similar bonds is 8%. (Use the following present value factors: present value of $ 1 = 0.45639; present value of annuity = 13.59033) Instructions Prepare all necessary journal entries (rounding to the nearest dollar) for Moxy's on the following dates: a) January 1, 2021. b) July 1, 2021. c) December 31, 2021. d) January 1, 2022.

On September 1, 2021, Imperial Corporation issued $ 1,000,000, 6%, 10-year bonds. Interest is payable annually with the first payment due on September 1, 2022. Instructions a) Provide the appropriate journal entry on September 1, 2021 to record the issuance of the bonds if the market rate of interest is 5%. Round your answer to the nearest dollar. b) Assuming Imperial has a December 31 year end, prepare the 2021 year-end adjusting entry to account for accrued interest on the bonds. Round your answer to the nearest dollar. c) Prepare a partial balance sheet at December 31, 2021 for Imperial Corporation displaying all amounts related to the bonds. d) Prepare the journal entry on September 1, 2022 to record the first interest payment. e) Assume the bonds were redeemed for $ 1,050,000 at September 30, 2024 when the amortized cost was $ 1,035,000. Record the redemption of the bonds.

Presented below are three different aircraft lease transactions that occurred for Canada Airways in 2021. All the leases start on January 1, 2021. In no case does Canada receive title to the aircraft during or at the end of the lease period. Canada Airways is a public company. Instructions Which of the above leases are operating leases and which are finance leases? Explain your answer.

On September 1, 2021, Bear Corporation issued $ 1,000,000, 6%, 10-year bonds. Interest is payable annually with the first payment due on September 1, 2022. Instructions a) For each of the following market rate assumptions, identify whether Bear would issue the bonds at face value, at a discount, or at a premium: (1) 5%, (2) 6%, and (3) 7%. b) Provide the appropriate journal entry on September 1, 2021 to record the issuance of the bonds if the market rate of interest is 7%. Round your answer to the nearest dollar. c) Assuming Bear has a December 31 year end, prepare the year-end adjusting entry to account for accrued interest on the bonds.

Numbered Company Inc. issued $ 600,000, 6%, 20-year bonds on January 1, 2021, at 102. Interest is payable semi-annually on July 1 and January 1. Numbered Company has a December 31 year end. Assume amortization of $ 250 and $ 260, respectively for the first two semi-annual interest periods. Instructions Prepare all journal entries made in 2021 related to the bond issue.

Millet Sales Corp., a public company, is planning to acquire new computers with a total value of $ 60,000 on January 1, 2021. They have a choice of leasing the computers for a three-year period, or purchasing them and financing the purchase by issuing a note payable. Details of the two alternative arrangements are as follows: Lease option: Three annual lease payments of $ 22,446 due on December 31 of each year. Millet would purchase the computers at the end of the three years for $ 2.00. Financing option: Millet would make a down payment of $ 10,000 and issue a 6%, 3-year note payable for the remaining balance, with annual blended payments of $ 18,705 required on December 31 of each year. Instructions a) Is the lease arrangement an operating or finance lease? Explain your choice. Record any entry required on January 1, 2021. b) Prepare the amortization table for the note payable. Record any entry required on January 1, 2021.

Company A has a high debt to total assets ratio and a high interest coverage ratio. Company B has a low debt to total assets ratio and a high interest coverage ratio. Company C has a high debt to total assets ratio and a low interest coverage ratio. Company D has a low debt to total assets ratio and a low interest coverage ratio. Instructions Based solely on the information provided above, which company or companies would you consider loaning money to? Explain your reasoning.

The adjusted trial balance for Raines Corporation at the end of the 2021 fiscal year contained the following accounts: Other information: The mortgage note is payable in monthly payments of $ 700 principal plus interest. Instructions a) Prepare the non-current liabilities section of the balance sheet. b) Indicate the proper balance sheet classification for the accounts listed above that do not belong in the non-current liabilities section.

On February 1, 2021, Mary Miles Corporation issued $ 100,000, 5%, 5-year bonds. Interest is payable semi-annually on August 1 and February 1. Instructions a) Prepare the journal entries that Mary Miles would make on February 1 if it issued the bonds at (1) 100, (2) 98, and (3) 102. a)? b) How much interest would Mary Miles Corporation pay on August 1, 2021 under each of the three issue prices listed in

Three plans for financing a $ 20,000,000 corporation are under consideration by its organizers. The bonds will be issued at their face value and the income tax rate is estimated at 20%. It is estimated that profit before interest and taxes will be $ 4,000,000. Instructions For each plan, determine the expected profit and the earnings per share. Prior to obtaining financing, there are no common shares outstanding.

Novacore Manufacturing Inc. intends to finance the acquisition of new manufacturing equipment that costs $ 150,000 by issuing a 5-year, 3.5% note payable. The note would be issued on January 1, 2021. Novacore's year end is December and the note would require annual payments on December 31. The finance company has given Novacore the choice of making blended payments of $ 33,222, or making fixed payments of $ 30,000 plus interest. Instructions a) Assuming the blended payment option is selected; prepare the amortization table for the first two years of the note payable. Record the issue of the note and the December 31, 2021 payment under this alternative. b) Assuming the fixed principal payment option is selected; prepare the amortization table for the first two years of the note payable. Record the December 31, 2021 payment under this alternative.

The following is a summarized balance sheet of Falcon Corporation at December 31, 2021. All amounts are in $ 000's. Falcon requires additional financing of $ 5,000,000 to finance an expansion of its business. The two choices are: Alternative 1: Issue a 20-year, $ 5,000,000 5% bond payable at face value. Alternative 2: Issue 250,000 common shares at $ 20 each. In Falcon's industry, a safe debt to total assets ratio is considered to be between 50% and 60%. Falcon's board of directors is risk adverse. Assume that the financing is made at the beginning of the year. Instructions a) Calculate the debt to total assets ratio under the two proposed financing methods. b) Make a recommendation to Falcon on the better financing alternative and explain your choice.