Advanced Accounting Problem 5A-1 (LO 7) 80%, equity, financing leases with ungua
ID: 3261958 • Letter: A
Question
Advanced Accounting Problem 5A-1 (LO 7) 80%, equity, financing leases with unguaranteed residual value, fixed asset profit. Steven Truck Company has been an 80%-owned subsidiary of Paulz Heavy Equipment since January 1, 2013, when Paulz acquired 128,000 shares of Steven common stock for $832,000, an amount equal to the book value of Steven’s net assets at that date. Steven’s net income and dividends paid since acquisition are as follows:
Year 2013 2014 2015 Totals Net Income $ 70,000 75,600 81,650 Total $227,250 Dividends $25,000 25,000 30,000 Total $80,000
On January 1, 2015, Paulz leased a truck from Steven. The 3-year financing-type lease pro- vides for payments of $10,000 each January 1 (including present value of unguaranteed residual value of $4,763). On January 1, 2015, the present value of the truck at Steven’s 8% implicit rate, including the unguaranteed residual value of $6,000 at the end of the third year, was $32,596. Paulz has used the 8% implicit rate to record the lease. The truck is being depreciated over three years on a straight-line basis. What effect on the income distribution schedule?
On January 1, 2016, Steven signed a 4-year financing-type lease with Paulz for the rental of specialized production machinery with an 8-year life. There is a $7,000 purchase option at the end of the fourth year. The lease agreement requires lease payments of $30,000 each January 1 plus $1,500 for maintenance of the equipment. It also calls for contingent payments equal to 10% of Steven’s cost savings through the use of this equipment, as reflected in any increase in net income (excluding gains or losses on sale of assets) above the previous growth rate of Steven’s net income. The present value of the equipment on January 1, 2016, at Paulz’s 10% implicit rate was $109,388. What effect on the income distribution schedule?
On October 1, 2016, Steven sold Paulz a warehouse having a 20-year remaining life, a book value of $135,000, and an estimated salvage value of $20,000. Paulz paid $195,000 for the building, which is being depreciated on a straight-line basis. What effect on the income distribution schedule?
Income distribution schedules: Subsidiary: DR CR Internally generated net income depreciation depreciation Total NCI share Controlling share Parent Internally generated net income Controlling share of subsidiary Total $344,656.00Explanation / Answer
Subsidiary Steven Truck Company Income Distribution
Unrealized gain on sale
Internally generated net
of warehouse......................... $60,000
income....................................... $155,000
Unearned interest on
Gain realized through use
residual................................... 412
of warehouse...................................... 750
Adjustment of depreciation
on lease.............................................. 413
Adjusted income.............................. $ 95,751
NCI share........................................ × 20%
NCI.................................................. $ 19,150
Parent Paulz Heavy Equipment Income Distribution
Internally generated net
income....................................... $268,055
80% × Steven adjusted
income of $95,751........................ 76,601
Controlling interest........................... $344,656
Unrealized gain on sale
Internally generated net
of warehouse......................... $60,000
income....................................... $155,000
Unearned interest on
Gain realized through use
residual................................... 412
of warehouse...................................... 750
Adjustment of depreciation
on lease.............................................. 413
Adjusted income.............................. $ 95,751
NCI share........................................ × 20%
NCI.................................................. $ 19,150
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