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    Capital leases, sale leaseback, pension worksheet, EPS, DEPS

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    Corp Inc signed a lease for equipment with an expected economic life of seven years and a fair market value $380,00. The lessor is the leasing subsidiary of a national bank. The terms of the lease are as follows:
    - The lease term begins on April 30, 2005 and runs for 3 years.
    - The lease requires payments of $108,700 each April 30, with includes $3,700 for maintenance and insurance costs.
    - At the end of the initial lease term, the lease is renewable for another 2 years at the option of Corp Inc for $34,900 per year, including $3,99 for maintenance and insurance costs. The normal rental of similar used equipment is approximately $45,000 per year.
    - The guaranteed residual value is $4,000 at the end of the lease term and the equipment reverts to the lessor.
    - Corp Inc's incremental borrowing rate is 8% and uses straight-line depreciation.

    1. Is this a capital lease or an operating lease? Why
    2. What is meant by the expression "Substance Over Form"?
    3. Prepare a lease amortization schedule with supporting calculations.
    4. Prepare Corp Inc's relevant journal entries for its year ending December 31, 2005.
    5. Assume that Corp Inc had sold the equipment to the lessor at FMV immediately prior to the above lease. Also assume the book value of the equipment was $355,000 and the cost to Corp Inc was $410,000. Prepare Corp Inc's journal entries for
    A) the sale of the equipment
    b) the amortization of the gain on the Sale and Leaseback.

    Benefits Inc has a defined benefit pension plan. The following is partial information related to the plan.
    Projected benefit obligation Jan 1, 2012 = $96,000
    Unrecognized past service cost Jan 1, 2012 = $45,000
    Unrecognized actuarial losses Jan 1, 2012 = $10,500
    Pension plan assets Jan 1, 2012 = $90,000
    Expected return on plan assets = $ 7.5%
    Discount rate = 9%
    Current service cost = $6,000
    Benefit payments to retired employees for 2012 = $22,000
    Contributions to pension fund for 2012 = $29,000
    Average period for vesting = 3 years
    Actual return on plan assets for 2012 = $4,000
    Employees' expected period to full eligibility, Jan 1, 2012 = 17 years

    1. Prepare the pension plan spreadsheet based on the above information.
    2. Prepare the journal entries to record pension expense and plan funding for 2012.

    EPS Presentations
    Schedule A contains data referable to A Ltd's 2012 year. Prepare the Basic and Diluted EPS presentations.
    Schedule A:
    A Ltd's Capital Structure and R/E as at December 31, 2010
    $20 million 6 year convertible debentures issued at par: interest at 7% per annum payable annually not in advance. Each $1000 debenture convertible into 40 common shares. 20,000,000
    Series T Preferred, no par, non-participating, 7% cumulative: 400,000 shares issued and outstanding. Each share is convertible into one common share. 1,200,000
    Common 3,000,000 issued and outstanding. 18,000,000
    300,000 stock warrants entitling warrant holders to purchase 4 common shares for each warrant held at $5 per share: warrants exercisable any time prior to expiration date January 25 2015. 600,000
    Retained Earnings. 17,785,000
    GAAP Pre-tax net income. 9,500,000
    Average tax rate: 30%
    The average common share price for 2010 was $10.

    Capital Related Transactions for 2012
    April 30, 11: Common Shares, Issued 200,000 shares at $5.50 per share
    June 15, 11: All Shares, Declared dividend of $1 million to shareholders of record Midnight, June 30th, 2012 (no other dividend declared in year)
    June 30, 11: Warrant Shares, 100,000 warrants exercised
    July 31, 11: Series T Shares, 100,000 shares converted
    September 1, 11: Common Shares, Shares split 3 for 1
    October 31, 11: Common Shares, Retired 100,000 shares at $7 per share.
    A Ltd has an agreement to issue an additional 2,000,000 common shares if the share price exceeds $10 by December 31, 2012. The share price at December 31, 2012 is $12.

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    Solution Summary

    The following problem helps with questions regarding capital lease, operating lease, lease amortization, and journal entries. Instructional notes indicate why each step was taken.