Accounting Problem Number 3

 (CREDIT):

--written by thewirter197
--employed by Ashford University



 --------------------------------------PROBLEMS-----------------------------------------------------------------

Develop two lease examples, operating and capital which includes the lease terms. State the requirements for determining whether a lease is an operating or capital lease. Provide journal entries that set up the lease and entries for payments. Show how the lease would be disclosed, if required on the balance sheet. State the reasons why you classified the lease as operating or capital.




-------------------------------------------ANSWER-----------------------------------------------------------------


(Operating Lease):
On Feb. 23 2007, Clank and Bots made a 2-year leased. The lease was for a 18-Wheeker truck. The life of the truck is expected to last 8 years. The truck has a value of $12,000. The end of year rental payment for year 1 was $3,000. The end of year rental payment for year 2 was $3,500. Maintenance fees for year 1 was $1700. Maintenance fees for year 2 was $1100. After a couple years, Clank and Bots brought the truck back and paid for additional truck maintenance.



Year 1, Feb. 23 2007:
                  Rental Expense:                                3,000
                  Additional Maintenance Fees:         1, 700
                  Check from Clank and Bots:                             4,700

Year 2, Feb. 23 2008:
                  Rental Expense:                                3,500
                  Additional Maintenance Fees:          1,100
                  Check from Clank and Bots:                           4,600



(Capital Lease):

On March 31 2001, Mr. Tim Smith purchased a condo from Light Ocean Apartments. He made a payment of $200 for security deposit. He also Deposited $700 for first month rent and utilities for the next 5 years to March 31 2006. (700X5=$3,500).



Year 1 March 31 2001:
                             Security Deposit:    200
                             Rent:                       700
                             Smith Check:                    900
Year 2 March 31 2002:
                              Rent:                      700
                              Smith Check:                   700
Year 2 March 31 2003:
                              Rent:                      700
                              Smith Check:                   700
Year 2 March 31 2004:
                              Rent:                      700
                              Smith Check:                   700
Year 2 March 31 2005:
                              Rent:                      700
                              Smith Check:                   700
Year 2 March 31 2006:
                              Rent:                      700
                              Smith Check:                   700





1. Why operating? Operating related to things you lease for work purposes.
2. Why capital? Capital is funds that are used to support a project or business. Things you buy month to month like food or rent. Things you buy for survival and luxury expenses.

Accounting Problem Number 2

 (CREDIT):

--written by thewirter197
--employed by Ashford University



------------------------------------------PROBLEM--------------------------------------------------------------

• The difference between the cost, par and constructive retirement method.
• For the cost and par value methods, prepare journal entry examples of each using the following information:
• 1000 shares of $5 par stock were sold for $7.
• 500 shares were repurchased at a price of $6.
• The 500 shares were later sold for $3500.
• For the constructive retirement method prepare the following journal entry:
• The shares were retired. 

------------------------------------------ANSWER---------------------------------------------------------------


(The Cost Method):

The cost method used for the repurchased of stock (Bragg). First, you record the entire amount of purchase in the treasury stock account (Bragg). Then, you make sure the sale profit is higher then the repurchase stock price (Bragg). If the sale profit is lower then the repurchase of stock cost, then you make adjustments and add additional fees to upscale the ratio for the repurchase of stock (Bragg). If management decides to retire a stock completely, then take the paid in capital and charge it to retained earnings. The cost method is used for making sure the sale outweighs the repurchase value. If companies use this method, they will most likely try to make adjustments to make a profit. They do not want to purchase a stock when they are losing money. So, they usually re-purchase a stock after a profit. They try to do things to make sure there is a profit for re-purchase value.

(Par Method):

Is a method used for purchase and resale of treasury stock (Jan). The treasury stock is debited by the total par value of shares (Jan). Cash account is only credited by the actual amount paid for the treasury stock (Jan). The left over amount used for treasury stock is credited to paid in capital account (Jan).

(Retirement Method):

Method used for stock that is not going to be repurchased in the future (Bragg). You reverse the amount of the original price for the treasury stock (Bragg). The stock is usually not issued again after the stock ran its course (Bragg). This method is basically for stock that is not going to be repurchased related tot eh treasury stock. So, people or companies who do not plan to repurchase a stock would use this method.


Par Value Journal Entry 1:

Cash                                           $7,000
Treasury Stock-Par Value $5                    $5,000
 Additional Paid-in Capital                        $2,000


Par Value Journal Entry 2:

Treasury Stock       $3,000
Cash                                        $3,000



Par Value Journal Entry 3:

Cash                                                                                              $3,500
Treasury Stock - Repurchased Price                                                          $3,000
Additional Paid - in Capital  from Treasury Stock Transaction                      $50        

Retirement Journal Entry 1:

Treasury Stock- $6 Par                                                               $3,000
Additional Paid - in Capital from Treasury Stock Transaction                $500
Treasury Stock - 500 shares at $7 cost                                                   $3,500          






Reference:

Bragg, S. (n.d.). Treasury stock accounting - Cost method and constructive retirement method. Retrieved from http://www.accountingtools.com/treasury-stock-accounting
Jan, I. (n.d.). Treasury stock – Par value method. Retrieved from http://accountingexplained.com/financial/equity/treasury-stock-par-value-method

Accounting Problem Number 1

 (CREDIT):

--written by thewirter197
--employed by Ashford University


 ---------------------------------------PROBLEM------------------------------------------------------------------

• What effect will this have on interest expense if the bonds are issued at a premium and a discount?
• If you issue $10,000,000, 30 year callable bonds at a 5% premium, with a call feature at 10 years, what effect will this have on interest expense the first ten years? Provide journal entries and a comparative table to explain the differences.
• If you issue $10,000,000, 30 year callable bonds at a 5% discount, with a call feature at 10 years, what effect will this have on interest expense the first ten years? Provide journal entries and a comparative table to explain the differences.

------------------------------------------ANSWER------------------------------------------------------------------

Part 1: The interest expense would be the same rate given to the bonds. This applies to interest expense bonds that are discount or premium. The bond will go down in value because of amortization. Amortization is the purpose cost of a intangible asset over a certain amount of time.

Part 2: Question 1: If you issue $10,000,000, 30 year callable bonds at a 5% premium, with a call feature at 10 years, what effect will this have on interest expense the first ten years? Provide journal entries and a comparative table to explain the differences.
Answer 1: The interest expense for the first ten years would be the same. The cash account would be cash debited for 10,500,000. The bonds payable account would be credited for 10,000,000. The premium on bonds payable account would be credited for 500,000. To calculate the premium, you would take 10,000,000 X 5% X 1/12. The equation would equal $41,666.67. Use calculator to do math.


(Journal Example):

Cash                                                                            $10,500,000
            Bonds Payable                                                 $10,000,000

Interest Expense                                                            $41,666.67
            Interest Payable                                                 $41,666.67
            Premium on Bonds Payable                                 $500,000


(After 10 Years):

Bonds Payable                                                                   $500,000
            Cash                                                                       $500,000



Part 3: Question 2: If you issue $10,000,000, 30 year callable bonds at a 5% discount, with a call feature at 10 years, what effect will this have on interest expense the first ten years? Provide journal entries and a comparative table to explain the differences.
Answer:  A bond with a discount would have a payment made with interest. The interest would be lower then the actual interest paid. The amortization would decrease the premium on the payable bond account. Each year, the amortization reduces the premium on the payable bond account. To put bluntly, every time interest is paid on the bond payable account the amount will be credited with a discount amount of 5%. Amortization will lower the premium vale more so less money will be spent year after year.


(Journal Entry):

part 1:

Cash                                                                      9,500,000
Discount on bonds payable                                      500,000
                              Bonds Payable                                         10,000,000

part 2:

Interest Expense                    50,000
Discount on bonds payable                 50,000





Reference:

http://www.ssctech.com/eBriefings/eBriefingArticle/tabid/597/Default.aspx?V=17&A=4534 (Links to an external site.)Links to an external site.
http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/amortization-2073