Exam 6: Financing Activities

Assume that you are currently negotiating a lease transaction in the role of the lessee. Discuss whether you would rather structure the lease as an operating lease or a capital lease and why. In addition, provide the conditions that would require that the lease be accounted for as a capital lease. Normally most managers would probably want to structure a lessee transaction as an operating lease in order to keep the asset and liability off the balance sheet. In addition, if structured properly an operating lease would shift expense recognition later, as opposed to earlier with a capital lease.

Under the fair value method of accounting for stock options, firms must value stock options on the

Assume that a start-up manufacturing company raises capital through a series of equity issues. Required: a. Using the financial statement template below, summarize the financial statement effects of the following transactions. (1) Issues 80,000 shares of $1 par value common stock for $10 per share. (2) Receives land in exchange for 8,000 shares of $1 par common stock when the common stock is trading in the market at $20 per share. The land has no readily determinable market value. (3) (a) Receives subscriptions for the issue of 30,000 shares of $1 par value common. The share issue price is $20, of which 30 percent is received as a down payment. (3) (b) Subsequently, the remaining 70 percent is received from the transaction in 3(a). Journal entry (optional): b. In each case, how does the company measure the transaction? What measurement attribute is used?

In the chart below, assign the directional effect (I = increase, D = decrease, or NE = no effect) of each of the following four transactions on the components of the book value of common shareholders' equity. a. Treasury stock acquired (company uses the cost method). b. Treasury stock in transaction a. reissued at an amount greater than original acquisition price. c. Treasury stock in transaction a. reissued at an amount less than the original acquisition price. d. Restricted stock issued (grant date). Item a. b. c. d Common Stock Additional Paid-In Capital Deferred Compensation Retained Earrings Treasury Stock at Cost Total Common Shareholders' Equity