Farmor Inc. Case Study - Accounting & Finance Assignment Help

Assignment Task

QUESTION 1: Answer each of the below scenarios independently.

Scenario A:
On January 1, 2020, Farmor Inc. entered into a five-year lease agreement. The asset has an expected useful life of 8 years and returns back to the lessor at the end of the lease. Annual lease payments are $100,000 per year payable at the end of each year. The implicit rate in the lease is 6% and is known to the lessee while the incremental borrowing rate is 5%. The asset is depreciated on a straight-line basis.
In addition to the annual lease payments, Farmor Inc. will incur lease costs of 1% of sales during the period. The lessee also guarantees a a residual value of $5,000 and Farmor Inc. expects to pay $0.

Required:
Scenario A
1) Provide the journal entry at inception of lease Jan. 1, 2020?
2) Provide the journal entries for 2020? Actual sales in 2020 were $2 million.
3) How would the initial journal entry change at inception of the lease if there were:

-initial legal costs of $5,000 to obtain the lease?
-decommissioning costs of PV $50,000 required by lease contract

Scenario B:
Rudy Inc. (RI) signed a lease for equipment that had an expected economic life of 10 years and a fair value at the start of the lease of $550,000. The terms of the lease are as follows:
• The lease term begins on January 1, 2020 and is a 6 year lease
• The lease payments of $105,000 every January 1 include $1,000 for maintenance and insurance costs
• At the end of the lease term, RI has a residual value guarantee of $40,000. RI expects to pay $10,000.
• At the end of the lease term, if RI does not renew the lease, the asset reverts back to the lessor.

The implicit rate is 9% and is known to the lessee. RI has an incremental borrowing rate of 8%. RI has a December 31st year-end and uses straight line depreciation for all assets.

Required:
Scenario B
1) Prepare the journal entries at inception of the lease, if any.
2) Prepare the journal entries for the year ended December 31, 2020, year 1 of the lease. 

QUESTION 2: Diversified Incorporated (DI) a public company has both a defined benefit and a defined contribution plan. The following information related to their plans for 2020. Defined Contribution Plan
1. DI paid $120,000 into their defined contribution plan for 2020. The required contribution for the year should have been $100,000.
Defined Benefit Plan
1. The current service cost for DI based on their actuarial valuation was $683,100.
2. DI made a cash contribution of $850,000 to their pension fund.
3. The pension fund paid $67,400 to DI’s pensioners.
4. DI had a net interest expense of $20,200.
5. DI had a net actuarial gain of $62,000.

Required:
1) Provide journal entries for DI’s financial statements for each individual item above. If a journal entry is not required explain why.
2) Assume the company above applied ASPE. How would any of the above journal entries change and why?

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