The following information pertains to a non-cancelable lease agreement between Kimono Leasing Company (lessor) and Clayton Company (lessee).
January 1, 2014 Lease Inception date with annual lease payment due at the beginning of each year starting with January 1, 2014.
$81,365 Annual lease payment due at the beginning of each year starting with January 1, 2014.
$50,000 Residual value of equipment at end of lease term; amount is guaranteed by the lessee.
6 years Lease term
6 years Economic life of leased equipment
$400,000 Fair value of asset at January 1, 2014
12% Lessor’s implicit rate
12% Lessee’s incremental borrowing rate
$4,000 Executory costs per year which the lessee assumes responsibility to pay.
In addition to the above information, the asset will revert to the lessor at the end of the lease term. The
lessee uses the straight-line depreciation method for all equipment.
Use the spreadsheet Lease Amort Schedule to prepare an amortization schedule that would be suitable for the lessee for the lease term.
Using the spreadsheet Journal Entries to prepare the journal entries for the lessee for 2014 and 2015 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.
Complete the following exercise. Label each question clearly.
Sonta Corp. provides a defined benefit pension plan for its employees. The balances below are on its books as of January 1, 2014.
Plan assets $480,000
Projected benefit obligation (PBO) $625,000
Accumulated OCI (Prior Service Cost) $100,000*
* Prior Service Cost has a debit balance on January 1, 2014.
The actuary has provided the following information:
2014 Service cost $90,000
Amortization of prior service cost $19,000
Settlement rate 9%
Actual return on plan assets in 2014 $57,000
Unexpected loss from change in PBO due to actuarial
predictions’ change $76,000
Contributions in 2014 $99,000
Benefits paid to retirees in 2014 $85,000
Use the spreadsheet Pensionsto prepare a pension worksheet. On the pension worksheet, compute pension expense, pension asset/liability, projected benefit obligation, plan assets, prior service cost, and net gain or loss. Recall that settlement rate is 9%.
Compute the same items as in (1), assuming that the settlement rate is now 7% and the expected rate of return is 10%. Hint: Simply change the interest cost to 7%; change actual/expected return to balance of plant asset on January 1, 2014*10%.
Prepare the journal entry using the spreadsheet Journal Entriesto record pension expense in 2014.
Indicate the reporting of the 2014 pension amounts in the income statement and balance sheet for Sonta Corp. using the spreadsheet Pensions.