Posted: August 31st, 2023

Problem 5A-1 (LO7)80%, equity, financing leases with unguaranteed residual

Problem 5A-1 (LO7)80%, equity, financing leases with unguaranteed residual, fixed asset profit. Steven Truck Company has been an 80%-owned subsidiary of Paulz Heavy Equipment since January 1, 20X3, when Paulz acquired 128,000 shares of Steven com- mon 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:YearNet IncomeDividends20X3$70,000$25,00020X475,60025,00020X581,65030,000On January 1, 20X5, Paulz leased a truck from Steven. The 3-year financing-type lease pro- vides for payments of $10,000 each January 1. On January 1, 20X5, 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 on a straight-line basis.On January 1, 20X6, 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, 20X6, at Paulz’s 10% implicit rate was $109,388.On October 1, 20X6, 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.The trial balances were prepared by the separate companies on December 31, 20X6, as follows:Paulz Heavy EquipmentSteven Truck CompanyCash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90,485123,307Accounts Receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .228,000120,000Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .200,000140,000Minimum Lease Payments Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .97,00010,000Unguaranteed Residual Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6,000Unearned Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(9,673)(444)Assets Under Capital Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27,833109,388Accumulated Depreciation—Assets Under Capital Lease . . . . . . . . . . . .(18,556)(13,674)Property, Plant, and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,075,0001,145,000Accumulated Depreciation—Property, Plant, and Equipment . . . . . . . . .(713,000)(160,000)Investment in Steven Truck Company. . . . . . . . . . . . . . . . . . . . . . . . . . . .1,045,800Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(100,000)(85,000)Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(740)(7,939)Obligations Under Capital Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(9,260)(79,388)Common Stock ($5 par) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1,800,000)(800,000)Retained Earnings, January 1, 20X6. . . . . . . . . . . . . . . . . . . . . . . . . . . .(864,834)(387,250)Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(3,200,000)(1,400,000)Gain on Sale of Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(60,000)Interest Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(7,939)(1,152)Rent Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(2,182)Paulz Heavy EquipmentSteven Truck Company.transtutors.com/qimg/dd5ba5d4-1f29-45d4-8f01-371e275bb88c.png”>Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,882,000 770,000Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 740 7,939Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,000 45,000Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 924,326 483,213Subsidiary Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (124,000)Dividends Declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,000 35,000.transtutors.com/qimg/2b9704c2-197e-4231-9814-93e516ec3c9a.png”> .transtutors.com/qimg/2b9704c2-197e-4231-9814-93e516ec3c9a.png”>Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0.transtutors.com/qimg/ca7cd20f-248a-43f5-90f1-496f112ae1d2.png”> .transtutors.com/qimg/f259992d-6119-4e94-9f74-dfb055e53ee0.png”>Prepare the worksheet necessary to produce the consolidated financial statements of Paulz Heavy Equipment and its subsidiary for the year ended December 31, 20X6. Include income distribution schedules.

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