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1—Pension calculations.

Montoya Company has available the following information about its defined-benefit pension plan for the year ending December 31, 2015:

         Service cost for 2015                                                                         $  25,000

         Accumulated benefit obligation                                                            683,000

         Plan assets at fair value                                                                        630,000

         Accumulated OCI (PSC)                                                                      300,000

         Vested benefit obligation                                                                       505,000

         Market-related asset value                                                                   725,000

         Projected benefit obligation                                                                  845,000

         Accumulated OCI net gain                                                                     90,000

         Interest on projected benefit obligation                                                   64,000



(a)  Calculate the pension asset / liability to be recorded at December 31, 2015.

(b)  Calculate the 2016 amortization of the net gain. The average remaining service life of employees is 10 years.



2—Pension plan calculations.

The following information is for the pension plan for the employees of Payne, Inc.

                                                                                   12/31/14             12/31/15 

         Accumulated benefit obligation                      $2,800,000         $3,760,000

         Projected benefit obligation                              3,100,000           4,000,000

         Fair value of plan assets                                   3,130,000           3,630,000

         AOCI – Net (gain) or loss                               (425,000)               (480,000)

         Settlement rate                                                      8%                        8%

         Expected rate of return                                          7%                       6%


Payne estimates that the average remaining service life is 15 years. Payne’s contribution was $520,000 in 2015 and benefits paid were $260,000.



(a)     Calculate the interest cost for 2015.

(b)     Calculate the actual return on plan assets in 2015.

(c)     Calculate the unexpected gain or loss in 2015.

(d)     Calculate the corridor for 2015 and the amortization of the net gain for 2015.




3—Pension plan calculations and entries.

Selected Information about the pension plan of Roman Co. is as follows:

                                                                                                        12/31/14                12/31/15 

         Accumulated benefit obligation                                           $4,700,000            $4,930,000

         Projected benefit obligation                                                   4,950,000              5,150,000

         Accumulated OCI (PSC)                                                       1,800,000              1,500,000

         Fair value of plan assets                                                        4,750,000              4,950,000

         Pension expense                                                                   1,000,000              1,700,000

         Contribution                                                                               985,000              1,350,000

         Discount rate (for year)                                                                    9%                         8%


(a)    What is the corridor for 2015?

(b)    Calculate the pension asset / liability at December 31, 2015.

(c)    Prepare the entry for 2015 to record the pension expense and contribution.




4—Corridor amortization.

Explain corridor amortization.



amortize these gains and losses.



5—Corridor approach (amortization of net gains and losses.)

Gibbs Company has 200 employees who are expected to receive benefits under the company’s defined-benefit pension plan. The total number of service-years of these employees is 2,000. The actuary for the company’s pension plan calculated the following net gains and losses:

            For the Year Ended

                December 31                           (Gain) Or Loss

                      2014                                       $640,000

                      2015                                        (554,000)

                      2016                                         990,000


Prior to 2014, there was no unrecognized net gain or loss.


Information about the company’s projected benefit obligation and market-related (and fair) value of plan assets follows:

                                                                                                         As of January 1                  

                                                                                  2014                   2015                   2016     

         Projected benefit obligation                         $2,100,000         $2,340,000         $2,940,000

         Fair value of plan assets                                1,680,000           2,460,000           2,550,000



Based on the above information about Gibbs Company, prepare a schedule which reflects the amount of net gain or loss to be amortized by the company as a component of pension expense for the years 2014, 2015, and 2016. The company amortizes net gains or losses using the straight-line method over the average service life of participating employees.







6—Lease criteria for classification by lessor.

What are the criteria that must be satisfied for a lessor to classify a lease as a direct-financing or sales-type lease?



Solution 6

In order for a lessor to classify a lease as a direct-financing or a sales-type lease, the lease at the date of inception must satisfy one or more of the following Group I criteria (a, b, c, and d) and both of the following Group II criteria (a and b):

Group I

(a)    The lease transfers ownership of the property to the lessee.

(b)    The lease contains a bargain purchase option.

 (c)   The lease term is equal to 75% or more of the estimated economic life of the leased property.

(d)    The present value of the minimum lease payments (excluding executory costs) equals or exceeds 90% of the fair value of the leased property.


Group II

(a)    Collectibility of the payments required from the lessee is reasonably predictable.

(b)    No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease.



7—Direct-financing lease (essay).

Explain the procedures used to account for a direct-financing lease.




8—Lessor accounting—sales-type lease.

Hayes Corp. is a manufacturer of truck trailers. On January 1, 2014, Hayes Corp. leases ten trailers to Lester Company under a six-year noncancelable lease agreement. The following information about the lease and the trailers is provided:


1.      Equal annual payments that are due on January 1 each year provide Hayes Corp. with an 8% return on net investment (present value factor for 6 periods at 8% is 4.99271).


2.      Titles to the trailers pass to Lester at the end of the lease.


3.      The fair value of each trailer is $50,000. The cost of each trailer to Hayes Corp. is $45,000. Each trailer has an expected useful life of nine years.


4.      Collectibility of the lease payments is reasonably predictable and there are no important uncertainties surrounding the amount of costs yet to be incurred by Hayes Corp.



(a)    What type of lease is this for the lessor? Discuss.

(b)    Calculate the annual lease payment. (Round to nearest dollar.)

(c)    Prepare a lease amortization schedule for Hayes Corp. for the first three years.

(d)    Prepare the journal entries for the lessor for 2014 to record the lease agreement, the receipt of the lease rentals, and the recognition of revenue (assume the use of a perpetual inventory method and round all amounts to the nearest dollar).


9—Lessee and lessor accounting (sale-leaseback).


On January 1, 2015, Morris Company sells land to Lopez Corporation for $8,000,000, and immediately leases the land back. The following information relates to this transaction:

1.   The term of the noncancelable lease is 20 years and the title transfers to Morris Company at the end of the lease term.

2.   The land has a cost basis of $6,720,000 to Morris.

3.   The lease agreement calls for equal rental payments of $754,459 at the beginning of each year.

4.   The land has a fair value of $8,000,000 on January 1, 2015.

5.   The incremental borrowing rate of Morris Company is 10%. Morris is aware that Lopez Corporation set the annual rentals to ensure a rate of return of 8%.

6.   Morris Company pays all executory costs which total $255,000 in 2015.

7.         Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.



(a)    Prepare the journal entries for the entire year 2015 on the books of Morris Company to reflect the above sale and lease transactions (include a partial amortization schedule and round all amounts to the nearest dollar.)

(b)    Prepare the journal entries for the entire year 2015 on the books of Lopez Corporation to reflect the above purchase and lease transactions.



On January 1, 2015, Hester Co. sells machinery to Beck Corp. at its fair value of $720,000 and leases it back. The machinery had a carrying value of $630,000, the lease is for 10 years and the implicit rate is 10%. The lease payments of $106,500 start on January 1, 2015. Hester uses straight-line depreciation and there is no residual value.



(a)     Prepare all of Hester’s entries for 2015.

(b)     Prepare all of Beck’s entries for 2015.







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