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Exam 15: Leases

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Question 41

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On January 1, Porter Moving and Storage leased a truck for a four-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $30,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate. If Porter's revenues exceed a specified amount during the lease term, Porter will pay an additional $12,000 lease payment at the end of the lease. Porter estimates a 60% probability of meeting the target revenue amount. What amount, if any, should be added to the right-of-use asset and lease payable under the contingent rent agreement?

A) No additional amount should be added.
B) An additional $6,000 should be added.
C) An additional $7,200 should be added.
D) An additional $12,000 should be added.

E) None of the above
F) All of the above

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Question 42

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Discuss the economic advantages of leasing.

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The lessor may find some benefits to lea...

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Question 43

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United Health Group leased a life support machine on January 1, 2018, for a three-year period ending December 31, 2020. The lease agreement specified annual payments of $144,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2019. The company had the option to purchase the machine on December 30, 2020, for $180,000 when its fair value was expected to be $240,000, a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. United Health was aware that the lessor's implicit rate of return was 12%. Required: Round your answers to the nearest whole dollar amounts. 1. Calculate the amount United Health should record as a right-of-use asset and lease liability for this finance lease. 2. Prepare the appropriate journal entries for United Health from the beginning of the lease through the end of the lease term.

When the total expenses over the life of an operating lease are compared to the total expenses over the life of a finance lease, one will find that:

Fisher Company leased equipment from Orkney Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $26,269 over a six-year lease term (also the asset's useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 5%. The asset being leased cost Mann $115,000 to produce. Required: Round your answers to the nearest whole dollar amounts. 1. Determine the price at which the lessor is "selling" the asset (present value of the lease payments). 2. What would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31? (Ignore taxes.)

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 Ruby'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 Ruby (ignore taxes)?

Jagadison Co. leases computer equipment to customers under sales-type leases. The equipment has no residual value at the end of the lease and the leases do not contain purchase options. Jagadison desires a return of 8% interest on a five-year lease of equipment with a fair value of $970,425. The present value of an annuity due of $1 at 8% for five years is 4.313. What is the total amount of interest revenue that Jagadison will earn over the life of the lease?

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2018. The manufacturing cost of the computers was $12 million. This noncancelable lease had the following terms: • Lease payments: $2,466,754 semiannually; first payment at January 1, 2018; remaining payments at June 30 and December 31 each year through June 30, 2022. • Lease term: five years (10 semiannual payments) . • No residual value; no purchase option. • Economic life of equipment: five years. • Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually. • Fair value of the computers at January 1, 2018: $20 million. -What is the interest revenue that Technoid would report for this lease in its 2018 income statement?

One of the five criteria for a finance lease specifies that the present value of the lease payments be equal to or greater than:

Peters Company leased a machine from Johnson Corporation on January 1, 2018. The machine has a fair value of $20,000,000. The lease agreement calls for 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. The appropriate interest rate for this lease is 10%. Other information: PV of an ordinary annuity @10% for 4 periods: 3.16987 PV of an annuity due @ 10% for 4 periods: 3.48685 Required: Round your answers to the nearest whole dollar amounts. 1. Determine the amount of each lease payment. 2. Prepare the journal entry for Peters Company at the beginning of the lease. 3. Prepare the journal entry for the first lease payment (ignore amortization). 4. Prepare the journal entry for the second lease payment (ignore amortization).

In a finance lease:

The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs are expensed at the beginning of the lease in:

Neely BBQ leased equipment from Smoke Industries on January 1, 2018. Smoke Industries had manufactured the equipment at a cost of $810,000. Other information: Required: Round your answers to the nearest whole dollar amounts. 1. Prepare the appropriate entries for Neely BBQ (Lessee) on January 1, 2018, and December 31, 2018. 2. Prepare the appropriate entries for Smoke Industries (Lessor) on January 1, 2018, and December 31, 2018. Assume that control is transferred to the lessee. 3. Prepare the appropriate entries for Smoke Industries (Lessor) on January 1, 2018, and December 31, 2018. Assume that control is not transferred to the lessee.

The appropriate asset value reported in the balance sheet by the lessee for an operating lease is:

On January 1, 2018, Morris Production leased a machine from Werner Leasing under a finance lease. Lease payments are made annually. Title does not transfer to the lessee and there is no purchase option or guarantee of a residual value by Morris. Portions of the Werner Leasing's lease amortization schedule appear below: Required: 1. What is Morris's lease liability at the beginning of the lease (after the first payment)? 2. What amount would Majestic record as a right-of-use asset? 3. What is the lease term in years? 4. What is the effective annual interest rate? 5. What is the total amount of lease payments? 6. What is the total effective interest expense recorded over the term of the lease?

On January 1, 2018, Gibson Corporation entered into a four-year operating lease. The payments were as follows: $20,000 for 2018, $18,000 for 2019, $16,000 for 2020, and $14,000 for 2021. What is the correct amount of total lease expense for 2019?

What is a purchase option? How does it affect accounting for a lease?

National Leasing leases equipment to a variety of businesses. The company's primary service is providing alternate financing by acquiring equipment and leasing it to customers under long-term leases. National earns interest under these arrangements at a 10% annual rate. The company leased production equipment it purchased on December 31, 2017 for $270,000 to a local company, Madison Inc. The six-year operating lease term commenced January 1, 2018, and the lease contract specified annual payments of $24,000 beginning December 31, 2018 and each December 31 through 2023. The machine's estimated useful life is 15 years with no estimated residual value. Madison had the option to terminate the lease after four years. At the beginning of the lease, there was no reason to believe the lease would be terminated. Required: Round your answers to the nearest whole dollar amounts. 1. Prepare the appropriate journal entries for National Leasing from the beginning of the lease through the end of 2018. 2. At the beginning of 2019, there was a significant indication that Madison's economic incentive to terminate the lease had changed causing both companies to believe termination of the lease at the end of four years (three years remaining) is "reasonably certain". Prepare any appropriate entries for National Leasing at January 1, 2019, to reflect the change in the lease term. 3. Prepare the appropriate journal entries pertaining to the lease for National Leasing at December 31, 2019.

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2018. The manufacturing cost of the computers was $12 million. This noncancelable lease had the following terms: • Lease payments: $2,466,754 semiannually; first payment at January 1, 2018; remaining payments at June 30 and December 31 each year through June 30, 2022. • Lease term: five years (10 semiannual payments) . • No residual value; no purchase option. • Economic life of equipment: five years. • Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually. • Fair value of the computers at January 1, 2018: $20 million. -What is the outstanding balance of the lease liability in Lone Star's June 30, 2018, balance sheet? (Round your answer to the nearest dollar.)

Lessee Company enters into a lease on January 1, 2018, that is accounted for as a finance lease. The lease calls for quarterly payments of $15,000, beginning on January 1, 2018, and continuing for 5 years. The last payment is due on October 1, 2022. The lease has an implicit annual interest rate of 8%. The present value of an annuity due at 8% per period for 5 periods is 4.312; the present value of an annuity due at 2% per period for 20 periods is 16.678. What amount will Lessee report as a lease payable (not including accrued interest) in its financial statements dated December 31, 2018?