Determine what type of lease this would be for the lessee and calculate the initial obligation.



1. (TCO A) Adam’s Adorable Creations Company provided the following financial information for its installment sales for the current year.

Financial Data:

Installment sales for current year $3,000,000

Cost of goods sold on installment basis $1,500,000

Repossessed merchandise: Estimated value $18,000

Repossessed merchandise: Unpaid balances $65,000

Payments by customers $2,000,000


a) Prepare journal entries for the end of the year based on the information above.

b) Prepare the entry to record the gross profit realized in the current year.

. (TCO B) The Accent Corporation shows the following information.

On January 1, 2012, Accent purchased a donut machine for $700,000.

A) Pretax financial income is $2,300,000 in 2012 and $2,400,000 in 2013.

B) Taxable income is expected in future years with an expected tax rate of 35%.

C) The company recognized an extraordinary gain of $150,000 in 2013 (which is fully taxable).

D) Tax-exempt municipal bonds yielded interest of $150,000 in 2013.

E) Straight-line basis for 7 years for financial reporting (See Appendix 11A.)

F) Half-year convention basis depreciation for 4 years for tax purposes.


1) Compute taxable income and income taxes payable for 2013.

2) Prepare the journal entries for income tax expense, income taxes payable, and deferred taxes for 2013.

3) Prepare the deferred income taxes presentation for December 31, 2013 balance sheet. (Points : 40)

3. (TCO D) Absolute Leasing, Inc. agrees to lease equipment to Allen, Inc. on January 1, 2012. They agree on the following terms:

1) The normal selling price of the equipment is $1,500,000 and the cost of the asset to Absolute Leasing, Inc. was $1,350,000.

2) At the end of the lease, the equipment will revert to Absolute Leasing, Inc. and have an unguaranteed residual value of $100,000. Their implicit interest rate is 10%.

3) The lease is noncancelable with no renewal option. The lease term is 10 years (the same as the estimated economic life).

4) Absolute Leasing, Inc. incurred costs of $9,000 in negotiating and closing the lease. There are no uncertainties regarding additional costs yet to be incurred and the collectability of the lease payments is reasonably predictable.

5) The lease begins on January 1, 2012 and payments will be in equal annual installments.

6) Allen will pay all maintenance, insurance, and tax costs directly and annual payments of $140,000 on January 1 of each year.


a) Determine what type of lease this would be for the lessee and calculate the initial obligation.

b) Prepare Allen, Inc.’s amortization schedule for the lease terms.

c) Prepare all the journal entries for Allen, Inc. for 2012. Assume a calendar year fiscal year. (Points : 40)

4. (TCO F) Cash flows from operating activities (indirect and direct methods).

Presented below is the income statement of Angola, Inc.

Sales $1,250,000

Cost of goods sold $560,000

Gross profit $690,000

Operating expenses $240,000

Income before income taxes $450,000

Income taxes $180,000

Net income $270,000

In addition, the following information related to net changes in working capital is presented.

Cash $35,000 Debit

Accounts receivable $26,000 Debit

Inventories $14,000 Debit

Salaries payable (operating expenses) $12,000 Credit

Accounts payable $36,000 Credit

Income taxes payable $15,000 Credit

Depreciation expense for the year was $24,500

Deferred tax liability account increased $6,500


Prepare a schedule computing the net cash flow from operating activities that would be shown on a statement of cash flows

(a) using the indirect method.

(b) using the direct method. (Points : 40)

5. (TCO G) Selected financial ratios.

The following information pertains to Allbright, Inc.

Cash $75,000

Accounts receivable $190,000

Inventory $130,000

Plant assets (net) $650,000

Total assets $1,045,000

Accounts payable $140,000

Accrued taxes and expenses payable $32,000

Long-term debt $165,000

Common stock ($10 par) $265,000

Paid-in capital in excess of par $120,000

Retained earnings $323,000

Total equities $1,045,000

Net sales (all on credit) $1,800,000

Cost of goods sold $1,200,000

General & Admin Expenses $430,000

Net income $170,000


Compute the following: (It is not necessary to use averages for any balance sheet figures involved.)

(a) Current ratio

(b) Inventory turnover

(c) Receivables turnover

(d) Book value per share

(e) Earnings per share

(f) Debt to total assets

(g) Profit margin on sales

(h) Return on common stock equity (Points : 40)

(TCO E) Discuss the three approaches for reporting changes in accounting principles. Include additional points about how these approaches may be impacted by the adoption of new IFRS standards. (Points

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