Advanced Financial Accounting - II - Preston University

ISU Company adopted a stock option plan on November 30, 2005, that provided that 70,000 shares of $. .Tarvalue stock be designated as available for the granting of options to officers of the corporation at a price of $S ashare. The market value was $ 12 a share on November 30,2005.On January 2,2006. options to purchase 28,000 shares were granted to president Don Pedro - 15,000 forservices to be rendered in 2006 and 13,000 for services to be rendered in 2007. Also on that date, options topurchase 14,000 shares were granted to vice president Beatrice Leonato - 7,000 for services to be rendered in2006 and 7,000 for services be rendered in 2007. The market value of the stock was $14 a share on January 2,2006. The options were exercisable for a period of one year following the year in which the services wererendered. The fair value of the options on the grant date was $3 per option.In 2007 neither the president nor the vice president exercised their options because the market price of the stockwas below the exercise price. The market value of the stock was $7 a share on December 31, 2007, when theoptions for 2006 services lapsed.On December, 31, 2008. both president Pedro and vice president Leonato exercised their options for 13,000 and7,000 shares, respectively, when the market price was $16 a share.INSTRUCTIONS:Prepare the necessary journal entries in 2005 when the stock option plan was adopted, in 2006 when optionswere granted, in 2007 when options lapsed, and in 2008 when options were exercised.On January 1,2007, Rob Wilco Company purchased $200,000, 8% bonds of Mercury Co. for $ 184,557. Thebonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1. The bondsmature on January 1, 2012. Rob Wilco Company uses the effective-interest method to amortize discount orpremium. On January 1,2009, Rob Wilco Company sold the bonds for $185,363 after receiving interest to meetits liquidity needs. . . .ISNTRUCTIONS:i. Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classifiedas available-for-sale.ii. Prepare the amortization schedule for the bonds.iii. Prepare the journal entries to record the semiannual interest on July I, 2007, and December 31,2007.iv. If the fair value of Mercury bonds is $ 186,363 on December 31, 2008, prepare the necessary adjusting .entry.(Assume the securities fair value adjustment balance on January 1, 2008, is a debit of $3,375.)v. Prepare the journal entry to record the sale of the bonds of January 1, 2009.Cascade Industries and Hardy Inc. enter into an agreement that requires Hardy Inc. to build three diesel-electricengines to Cascade's specifications. Upon completion of the engines, Cascade has agreed to lease them for aperiod of 10 years and to assume all costs and risks of ownership. The lease is noncancelable, becomes effective. on January 1, 2008, and requires annual rental payments of $620,956 each January 1, starting January 1,2008.Cascade's incremental borrowing rate is 10%. The implicit interest rate used by Hardy Inc. and known toCascade is 8%. The total cost of building the three engines is $3,900,000. The economic life of the engines isestimated to be 10 years, with residual value set at zero. Cascade depreciates similar equipment on a straight-linebasis. At the end of the lease. Cascade assumes title to the engines. Collectibility of the lease payments isreasonably certain; no uncertainties exist relative to unreimbursable lessor costs.INSTRUCTIONS:(Round all numbers to the nearest dollar.)i. Discuss the nature of this lease transaction from the viewpoints of both lessee and lessor.ii. Prepare the journal entry or entries to record the transaction on January 1, 2008, on .the books of CascadeIndustries.iii. Prepare the journal entry or entries to record thetransaction on January 1 2008, on the books of Hardy Inc.iv. Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2008.v. Prepare the journal entries for both the lessee and lessor to record interest expense (revenue) at December 31,2008. (Prepare a lease amortization schedule for 2 years).vi. Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2008,for both the lessee and the lessor.Page 2 of3