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Exam 15: Leases

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Question 131

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Maker Corp. manufactures imaging equipment. Easy Leasing purchased an MRI machine from Maker for $1,000,000 and leased it to Imaging Group, Inc. on January 1, 2018. Required: Round your answers to the nearest whole dollar amounts. 1. How should this lease be classified by Imaging Group and by Easy Leasing? 2. Prepare appropriate entries for both Imaging Group and Easy Leasing from the beginning of the lease through the second rental payment on April 1, 2018. Depreciation and amortization are recorded at the end of each fiscal year (December 31). 3. Assume Imaging Group leased the machine directly from the manufacturer, Maker Corp., which produced the machine at a cost of $700,000. Prepare appropriate entries for Maker from the beginning of the lease through the second rental payment on April 1, 2018.

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1. Finance lease to lessee; Sales-type l...

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Question 132

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Francisco leased equipment from Julio on December 31, 2018. The lease is a 10-year lease with annual payments of $150,000 due on December 31 of each year beginning December 31, 2018. The present value of the lease payments is $1,020,000. Francisco's incremental borrowing rate is 12% for this type of lease. The implicit rate of 10% is known by the lessee. What should be the balance in Francisco lease liability at December 31, 2019?

A) $824,400.
B) $807,000.
C) $806,400.
D) $792,000.

E) B) and D)
F) B) and C)

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Question 133

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On January 1, 2018, Burrito Bill's leased restaurant equipment from Oval Corporation under a twelve-year lease agreement. The lease agreement specifies annual payments of $75,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2025. The equipment was acquired recently by Oval at a cost of $540,000 (its fair value) and was expected to have a useful life of 17 years with no salvage value at the end of its life. (Because the lease term is only 12 years, the asset does have an expected residual value at the end of the lease term of $33,684.) Oval seeks a 10% return on its lease investments. By this arrangement, the lease is deemed to be an operating lease. Required: (a) What will be the effect of the lease on Burrito Bill's earnings for the first year? Show the separate components as well as the total amount. (ignore taxes) (b) What journal entries will the lessee record during 2018 relating to this lease? (c) What will be the balances in the balance sheet accounts related to the lease at the end of the first year for Burrito Bill's? (ignore taxes)

On June 30, 2018, Blue, Inc. leased a machine from Large Leasing Corporation. The lease agreement calls for Blue to make semiannual lease payments of $281,454 over a three-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Blue's incremental borrowing rate is 10%, the same rate Big uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. Large constructed the machine at a cost of $1,250,000. Required: Round your answers to the nearest whole dollar amounts. 1. Determine the price at which Large is "selling" the machine (present value of the lease payments) at June 30, 2018 (to the nearest $000). 2. What would be the amounts related to the lease that Large would report in its balance sheet at December 31, 2018? (Ignore taxes.) 3. What would be the amounts related to the lease that Large would report in its income statement for the year ended December 31, 2018? (Ignore taxes.)

Lancaster Services, Inc. leased equipment from Phillips Corporation. Phillips completed construction of the machine on January 1, 2018. The lease agreement for the $8 million (fair value and present value of the lease payments) machine specified four equal payments at the end of each year. The useful life of the machine was expected to be four years with no residual value. Phillip's implicit interest rate was 10%. Required: 1. Prepare the journal entry for Lancaster Services at the beginning of the lease on January 1, 2018. 2. Prepare an amortization schedule for the four-year term of the lease. Round your answers to the nearest whole dollar amounts. 3. Prepare the appropriate journal entries related to the lease on December 31, 2018. 4. Prepare the appropriate journal entries related to the lease on December 31, 2020.

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. -A sales-type lease is reported in the lessor's balance sheet as:

On January 1, Smith Industries leased equipment to a customer for a four-year period, at which time possession of the leased asset will revert back to Smith. The equipment cost Smith $350,000 and has an expected useful life of six years. Its normal sales price is $350,000. The residual value after four years is $50,000. Lease payments are due on December 31 of each year, beginning with the first payment at the end of the first year. The interest rate is 5%. Calculate the amount of the annual lease payments. (Round your answer to the nearest whole dollar amount.) The present value of $1: n = 4, i = 5% is 0.82270. The present value of an ordinary annuity of $1: n = 4, i = 5% is 3.54595. The present value of an annuity due of $1: n = 4, i = 5% is 3.72325.

To raise operating funds, Azure Sailing sold a boat on January 1, 2018, to a finance company for $2,310,000. Azure immediately leased the plane back for a 13-year period, at which time ownership of the airplane will transfer to Azure. The boat has a fair value of $2,400,000. Its cost and its book value were $1,800,000. Its useful life is estimated to be 15 years. The lease requires Azure to make payments of $308,313 to the finance company each January 1. Signal depreciates assets on a straight-line basis. The lease has an implicit rate of 11%. Required: Round your answers to the nearest whole dollar amounts. Prepare the appropriate journal entries for Azure on: 1. January 1, 2018, to record the transaction. 2. December 31, 2018, to record necessary adjustments.

Each of the four independent situations below describes a lease requiring annual lease payments of $30,000. Required: For each situation, determine the appropriate lease classification by the lessee and indicate why. Round your answers to the nearest whole dollar amounts.

The lessee's option to purchase a leased asset at a price that is sufficiently lower than the asset's expected fair value so that the exercise of the option appears reasonably certain sometimes is called a:

J Corp. is a lessee that entered into an operating lease in February of Year 1. The company's statement of cash flows for the year ending December 31, Year 1 will report:

Deal Leasing leased equipment to Hand Company on January 1, 2018. The lease payments were calculated to provide the lessor a 10% return. Ten annual lease payments of $60,000 are due at the beginning of each year beginning January 1, 2018. The present value of an annuity due of $1 at 10% for ten periods is 6.75902. -Required: Consider this to be an operating lease. Round your answers to the nearest whole dollar amounts. 1. Prepare the journal entries to record the lease by Hand (lessee) at January 1, 2018. 2. Prepare the journal entries to record the lease by Hand (lessee) at December 31, 2018, the end of the first reporting period.

At the beginning of a finance lease, a guaranteed residual value should be:

At January 1, 2018, Ruby, Inc. leased mining equipment from Sapphire Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $75,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2025. The equipment was acquired recently by Sapphire at a cost of $540,000 (its fair value) and was expected to have a useful life of 13 years with no salvage value at the end of its life. (Because the lease term is only 9 years, the asset does have an expected residual value at the end of the lease term of $33,684.) Sapphire seeks a 10% return on its lease investments. By this arrangement, the lease is deemed to be an operating lease. -Required: Round your answers to the nearest whole dollar amounts. 1. What will be the effect of the lease on Sapphire's (lessor's) earnings for the first year (ignore taxes)? 2. What will be the balances in the balance sheet accounts related to the lease at the end of the first year for Sapphire (ignore taxes)?

L Corp. recorded a finance lease in February of Year 1 using an annuity due present value table. The company's statement of cash flows for the year ending December 31, Year 1 using the indirect method will report:

Ira Bates Corp. entered into a 9-year finance lease on a warehouse on December 31, 2018. Lease payments of $39,000, which includes maintenance service of $1,500, are due annually, beginning on December 31, 2019, and every December 31 thereafter. The interest rate implicit in the lease is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should Bates record as the lease payable at December 31, 2018?

On June 30, 2018, Blue, Inc. leased a machine from Big Leasing Corporation. The lease agreement qualifies as a capital lease and calls for Blue to make semiannual lease payments of $281,454 over a three-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Blue's incremental borrowing rate is 10%, the same rate Big uses to calculate lease payment amounts. -The lease agreement qualifies as a sales-type lease without selling profit. Depreciation is recorded on a straight-line basis at the end of each fiscal year. Required: Round your answers to the nearest whole dollar amounts. 1. What would be the amounts related to the lease that Big would report in its balance sheet at December 31, 2018? (Ignore income taxes). 2. What would be the amounts related to the lease that Big would report in its income statement for the year ended December 31, 2018? (Ignore income taxes.)

What amounts are considered to be lease payments when the lessee calculates the right-of-use asset and lease payable?

In a sale-leaseback arrangement, the lessee also is:

Use the information below to answer the following questions. On December 31, 2017, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2023. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease. Reagan's lease amortization schedule appears below: -What is the effective annual interest rate charged to Reagan on this lease?