Question

1) Lease Calculations



Assume that the following facts pertain to a noncancelable lease agreement between Fifth-Third Leasing Company and Bob Evans Farms, a lessee.

Inception date


January 1, 2012

Annual lease payment due at the beginning of each year, beginning with January 1, 2012


$81,365

Residual value of equipment at end of lease term, guaranteed by the lessee


$50,000

Lease term


6 years

Economic life of leased equipment


6 years

Fair value of asset at January 1, 2012


$400,000

Lessor’s implicit rate


12%

Lessee’s incremental borrowing rate


12%

The lessee assumes responsibility for all executory costs, which are expected to amount to $4,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straight-line depreciation method for all equipment.

Using the spreadsheet Lease Amort Schedule, prepare an amortization schedule that would be suitable for the lessee for the lease term.
Using the spreadsheet Journal Entries, prepare the journal entries for the lessee for 2012 and 2013 to record the lease agreement and all expenses related to the lease. Assume the lessee’s annual accounting period ends on December 31 and that reversing entries are used when appropriate.



2) Average Cost Method Calculations

Garner Company began operations on January 1, 2010, and uses the average cost method of pricing inventory. Management is contemplating a change in inventory methods for 2013. The following information is available for the years 2010–2012.

Net Income Computed Using




Average Cost Method


FIFO Method


LIFO Method

2010


$15,000


$20,000


$12,000

2011


18,000


24,000


14,000

2012


20,000


27,000


17,000

On January 1, 2012, Garner issued 10-year, $200,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 30 shares of Garner common stock. The company has had 10,000 common shares outstanding throughout its life. None of the bonds have been exercised as of the end of 2013. (Ignore tax effects.)

Using the spreadsheet Journal Entries, prepare the journal entry necessary to record a change from the average cost method to the FIFO method in 2013.
Assume Garner Company used the LIFO method instead of the average cost method during the years 2010–2012. In 2013, Garner changed to the FIFO method. Using the spreadsheet Journal Entries, prepare the journal entry necessary to record the change in accounting principle.
Assuming Garner had the accounting change described in (2), Garner’s income in 2013 was $30,000. Compute basic and diluted earnings per share for Garner Company for 2013. Show how income and EPS will be reported for 2013 and 2012.





3) Statement of Cash Flows

Ellwood House, Inc. had the following condensed balance sheet at the end of 2012.

ELLWOOD HOUSE, INC.

Balance Sheet

December 31, 2012

Cash


$ 10,000


Current liabilities


$ 14,500

Current assets (non-cash)


34,000


Long-term notes payable


30,000

Investments


40,000


Bonds payable


32,000

Plant assets


57,500


Common stock


80,000

Land


38,500


Retained earnings


23,500




$180,000





$180,000

During 2013, the following occurred.

Ellwood House, Inc., sold part of its investment portfolio, which was classified as available-for-sale, for $15,500, resulting in a gain of $500 for the firm.
Dividends totaling $19,000 were paid to stockholders.
A parcel of land was purchased for $5,500.
$20,000 of common stock were issued at par.
$10,000 of bonds payable were retired at par.
Heavy equipment was purchased through the issuance of $32,000 of bonds.
Net income for 2013 was $42,000 after deducting depreciation of $13,550.
Both current assets (other than cash) and current liabilities remained at the same amount.
Prepare a statement of cash flows for 2013, using the indirect method. Assume that current assets (excluding cash) and current liabilities have remained the same on December 31, 2013. The cash balance on December 31, 2013 is $66,050.
Draft a one-page letter to Gerald Brauer, president of Ellwood House, Inc., briefly explaining the changes within each major cash flow category. Refer to your cash flow statement whenever necessary. Provide reference(if any) in APA-format
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