Chapter 10: Q17QS (page 475)
Jin Li, an employee of ETrain.com, leases a car at O’Hare airport for a three-day business trip. The rental cost is $250. Prepare the entry by ETrain.com to record Jin Li’s short-term car lease cost.
Rental expense is debited, and the cash is credited.
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Question: Describe the debt-to-equity ratio and explain how creditors and owners would use this ratio to evaluate a company’s risk.
Your business associate mentions that she is considering investing in corporate bonds currently selling at a premium. She says that since the bonds are selling at a premium, they are highly valued, and her investment will yield more than the going rate of return for the risk involved. Reply with a memorandum to confirm or correct your associate’s interpretation of premium bonds.
Rogers Company signs a five-year capital lease with Packer Company for office equipment. The annual year-end lease payment is \(10,000, and the interest rate is 8%.
Required
Period ending date | Beginning balance of lease liability | Interest on lease liability | Reduction on lease liability | Cash lease payment | Ending balance of lease liability |
4.Use straight-line depreciation and prepare the journal entry to depreciate the leased asset at the end of year 1. Assume zero salvage value and a five-year life for the office equipment.
Traverse County needs a new county government building that would cost \(10 million. The politicians feel that voters will not approve a municipal bond issue to fund the building because it would increase taxes. They opt to have a state bank issue \)10 million of tax-exempt securities to pay for the building construction. The county then will make yearly lease payments (of principal and interest) to repay the obligation. Unlike conventional municipal bonds, the lease payments are not binding obligations on the county and, therefore, require no voter approval.
Required
1.Do you think the actions of the politicians and the bankers in this situation are ethical?
2.In terms of risk, how do the tax-exempt securities used to pay for the building compare to a conventional municipal bond issued by Traverse County?
Use the information in Exercise 10-10 to prepare the journal entries for Eagle to record the loan on January 1, 2017, and each of the four payments from December 31, 2017, through December 31, 2020.
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