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Business for Huffman Company Leases

1.Huffman Company leases a machine from Lincoln Corp. under an agreement which meets the criteria to be a capital lease for Huffman. The six-year lease requires payment of $500,000 at the beginning of each year, including $25,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 12%; the lessor's implicit rate is 10% and is known by the lessee. The present value of an annuity due of 1 for six years at 12% is 4.60478. The present value of an annuity due of 1 for six years at 10% is 4.79079. Huffman should record the leased asset at $.... ( provide computation).

2.On January 1, 2005, Neer Co. purchased a patent for $595,000. The patent is being amortized over its remaining legal life of 15 years expiring on January 1, 2020. During 2008, Neer determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2008?(provide computation)

3.Hannah Company began operations on January 1, 2007, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed:
Final Inventory 2007 2008
FIFO $320,000 $360,000
LIFO 240,000 300,000
Net Income (computed under the FIFO method) 500,000 600,000
Based upon the above information, a change to the LIFO method in 2008 would result in net income for 2008 of $.... (provide computation)

4.Handy Company purchased equipment that cost $750,000 on January 1, 2006. The entire cost was recorded as an expense. The equipment had a nine-year life and a $30,000 residual value. Handy uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2008. Handy is subject to a 40 % tax rate.
Question:Before the correction was made and before the books were closed on December 31, 2008, retained earnings was understated by $.... (provide computation)

5.On January 1, 2008, Bosco Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in an $400,000 increase in the January 1, 2008 inventory. Assume that the income tax rate for all years is 20%.
Question: The cumulative effect of the accounting change should be reported by Bosco in its 2008 $.... (provide computation and explain the effect).

6.During 2008, equipment was sold for $54,000. The equipment cost $80,000 and had a book value of $50,000. Accumulated Depreciation?Equipment was $108,000 at 12/31/07 and $107,000 at 12/31/08. Depreciation expense for 2008 was $..... (provide computation)

7.Miloy Corp.'s transactions for the year ended December 31, 2008 included the following:
? Acquired 50% of Gant Corp.'s common stock for $180,000 cash which was borrowed from a bank.
? Issued 5,000 shares of its preferred stock for land having a fair value of $320,000.
? Issued 500 of its 11% debenture bonds, due 2013, for $392,000 cash.
? Purchased a patent for $220,000 cash.
? Paid $120,000 toward a bank loan.
? Sold available-for-sale securities for $796,000.
? Had a net increase in returnable customer deposits (long-term) of $88,000.

Question:Miloy's net cash provided by investing activities for 2008 was $....( provide computation)

8.Talbert Corp.'s balance sheet accounts as of December 31, 2008 and 2007 and information relating to 2008 activities are presented below.
December 31
2008 2007
ASSETS
Cash 440,000 200,000
Short-term investments 600,000 0
Accounts receivable(net) 1,020,000 1,020,000
Inventory 1,380,000 1,200,000
Long-term investments 400,000 600,000
Plan assets 3,400,000 2,000,000
Accumulated depreciation (900,000) (900,000)
Patent 180,000 200,000
Total assets 6,520,000 4,320,000

LIABILITIES and STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities 1,660,000 1,440,000
Notes payable (nontrade) 580,000 0
Common stock, $10 par 1,600,000 1,400,000
Additional paid-in capital 800,000 500,000
Retaining earnings 1,880,000 980,000
Total Liabilites 6,520,000 4,320,000

Information relating to 2008 activities:
? Net income for 2008 was $1,500,000.
? Cash dividends of $600,000 were declared and paid in 2008.
? Equipment costing $1,000,000 and having a carrying amount of $320,000 was sold in 2008 for $360,000.
? A long-term investment was sold in 2008 for $320,000. There were no other transactions affecting long-term investments in 2008.
? 20,000 shares of common stock were issued in 2008 for $25 a share.
? Short-term investments consist of treasury bills maturing on 6/30/09.
Question:
Net cash provided by Talbert's 2008 financing activities was $.... (provide computation)
Net cash used in Talbert's 2008 investing activities was $...... (provide computation)
Net cash provided by Talbert's 2008 operating activities was $.... (provide computation)

9.During 2008, Hogan Company earned net income of $384,000 which included depreciation expense of $78,000. In addition, the company experienced the following changes in the account balances listed below:
DECREASES INCREASES
Accounts payable $45,000 Accounts receivable $12,000
Inventory 36,000 Accrued liabilities 24,000
Prepaid insurance 33,000
Based upon this information what amount will be shown for net cash provided by operating activities for 2008?

10.The following data are provided:
December 31
2008 2007
Cash $ 37,500 $ 25,000
Accounts receivable (net) 40,000 30,000
Inventories 65,000 55,000
Plant assets (net) 200,000 162,500
Accounts payable 27,500 20,000
Taxes payable 5,000 2,500
Bonds payable 35,000 35,000
10% Preferred stock, $50 par 50,000 50,000
Common stock, $10 par 60,000 45,000
Paid-in capital 40,000 32,500
Retained earnings 100,000 87,500
Net credit sales 320,000
Cost of goods sold 210,000
Operating expenses 72,500
Net income 37,500

Additional information:
Depreciation included in cost of goods sold and operating expenses is $30,500. On May 1, 2008, 15,000 shares of common stock were issued. The preferred stock is cumulative. The preferred dividends were not declared during 2008.

Questions:
The receivables turnover for 2008 is ..... (provide computation)
The inventory turnover for 2008 is ...... (provide computation)
The profit margin on sales for 2008 is ...... (provide computation)
The rate of return on common stock equity for 2008 is .... (provide computation)
The book value per share of common stock at 12/31/08 is ..... (provide computation)
At December 31, 2008, the acid-test ratio was...... (provide computation)

11.Information for Morales Corp. is given below:
Morales Corp.
Balance Sheet
December 31,2008
ASSETS
Cash 100,000
Accounts receivable (net) 650,000
Inventories 813,000
Plant and equipment, net of depreciation 661,000
Patents 87,000
Other intangible assets 25,000
TOTAL Asset 2,336,000

EQUITIES
Accounts payable 210,000
Federal Income tax payable 63,000
Miscellaneous accrued payables 75,000
Bonds payable (10% due 2012) 625,000
Preferred stock ($100 par, 6% cumulative
nonparticipating) 250,000
Common stock (no par, 20,000 shares
autorized, issued and outstanding) 375,000
Retaining earnings 813,000
Treasury stock - 500 shares of preferred (75,000)
TOTAL Equities 2,336,000

Morales COrp.
Income Statement
Years Ended December 31,2008
Net Sales 3,000,000
Cost of good sold 2,000,000
Gross profit 1,000,000
Operating expenses (incliding bond interest expense) 500,000
Income before income taxes 500,000
Income tax 150,000
NET INCOME 350,000

Additional information:
There are no preferred dividends in arrears, the balances in the Accounts Receivable and Inventory accounts are unchanged from January 1, 2008, and there were no changes in the Bonds Payable, Preferred Stock, or Common Stock accounts during 2008. Assume that preferred dividends for the current year have not been declared.

Questions:
At December 31, 2008, the current ratio was....(provide computation)
The number of times interest was earned during 2008 was.....(provide computation)
At December 31, 2008, the book value per share of common stock was....(provide computation)
The rate of return for 2008 based on the year-end common stockholders' equity was.....(provide computation)

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Solution is attached.

ANSWERS
1. (500000)*4.60478=2,302,390 => final answer
2. 595000/15*3=119000
595000-119000=476000
476000/(10-3)=68,000
476000-68000=408000 => final answer
3. 360000-300000=60000 increase in COGS under LIFO
600000-60000=540000 => final answer
4. (750000-30000)/9=80000
80000*2=160000
750000-160000=590000
590000*(1-40%)=354000=> final answer
5. 400000*(1-20%)=320000. This amount is to be added to retained earnings as the 400000 increase in beginning inventory for January 1, 2008 decreased cost of goods sold for 2007, and hence net income for that year was understated by 320000
6. 80000-50000=30000
107000-108000+30000=29000 => final answer
7. Purchase of Gant Corp's stock (180,000)
Purchase of patent (220,000)
Sale of AFS 796,000
Net cash provided by investing activities 396,000 => final ...

Solution Summary

The solution examines Huffman Company Leases for leasing a machine from Lincoln Corp. The net accumulated amortization is examined.

$2.19