The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010

E21-2 Lessee Accounting Issues

The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010. The lease terms, provision, and related events are as follows:

a)The lease term is five years. The lease is non-cancelable and requires equal rental payments to be made at the end of each year.
b)The computers have an estimated life of five years, a fair value of $300,000, and a zero estimated residual value.
c) Sax Company agrees to pay all executor costs.
d) The lease contains no renewal or bargain purchase option.
e) The annual payment is set by Appleton at $83,222.92 to earn a rate of return of 12% on its net investment. The Sax Company is aware of this rate, which is equal to its borrowing rate.
f) Sax Company uses the straight-line method to record depreciation on similar equipment.

REQUIRED:
1. Determine what type of lease this is for Sax Company.
2. Calculate the amount of the asset and liability of the Sax Company at the inception of the lease (round to the nearest dollar).

Click here for the solution: The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010

Assume that on January 1, 2008, Kimberly Clark Corp. signs a 10 year noncancelable lease agreement to lease a storage building from Sheffield Storage Company

E21-3 (Lessee Entries; Capital Lease with Executory Costs) Assume that on January 1, 2008, Kimberly Clark Corp. signs a 10 year noncancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement.

1.) The agreement requires equal rental payments of $72,000 beginning on January 1, 2008.
2.) The fair value of the building on January 1, 2008 is $440,000
3.) The building has an estimated economic life of 12 years, with an unguaranteed residual value of $10,000. Kimberly Clark depreciates similar buildings on the straight line method.
4.) The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
5.) Kimberly Clark's incremental borrowing rate is 12% per year. The lessor’s implicit rate is not known by Kimberly Clark.
6.) The yearly rental payment includes $2,470.51 of executory costs related to taxes on property.

Instructions
Prepare the journal entries on the lessee's books to reflect the signing of the lease agreement and to record payments and expenses related to this lease for the years 2008 and 2009, Kimberly Clark's corporate year end is December 31.

Click here for the solution: Assume that on January 1, 2008, Kimberly Clark Corp. signs a 10 year noncancelable lease agreement to lease a storage building from Sheffield Storage Company

A lease agreement between Mooney Leasing Company and Rode Company is described in E21-8

E21-9 (Lessor Entries with Bargain Purchase Option) A lease agreement between Mooney Leasing Company and Rode Company is described in E21-8.

Instructions
(Round all numbers to the nearest cent.)
Refer to the data in E21-8 and do the following for the lessor.
(a) Compute the amount of the lease receivable at the inception of the lease.
(b) Prepare a lease amortization schedule for Mooney Leasing Company for the 5-year lease term.
(c) Prepare the journal entries to reflect the signing of the lease agreement and to record the receipts and income related to this lease for the years 2007, 2008, and 2009. The lessor’s accounting period ends on December 31. Reversing entries are not used by Mooney.


Click here for the solution: A lease agreement between Mooney Leasing Company and Rode Company is described in E21-8

The agreement under which Patterson, Inc., issued its long-term debt requires the restriction of $200,000 of the company's retained earnings balance

The agreement under which Patterson, Inc., issued its long-term debt requires the restriction of $200,000 of the company's retained earnings balance. Total retained earnings is $250,000 and total paid in capital is $500,000.

Required
Show how to report stockholder's equity on Patterson's balance sheet, assuming the following:
A. Patterson discloses the restrictions in a note. Write the note.
B. Patterson appropriates retained earnings in the amount of the restriction and includes no note in its statements.
C. Patterson's cash balance is $100,000. What is the maximum amount of dividends Patterson can declare?

Click here for the solution: The agreement under which Patterson, Inc., issued its long-term debt requires the restriction of $200,000 of the company's retained earnings balance

Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston’s specifications

Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston’s specifications. Upon completion of the engines, Winston has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is non-cancelable, becomes effective on January 1, 2011, and requires annual rental payments of $413,971 each January 1, starting January 1, 2011. Winston’s incremental borrowing rate is 10%. The implicit interest rate used by Ewing Inc. and known to Winston is 8%. The total cost of building the three engines is $2,600,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Winston depreciates similar equipment on a straight-line basis. At the end of the lease, Winston assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to un-reimbursable lessor costs.

(Round all numbers to the nearest dollar.)
(a) Discuss the nature of this lease transaction from the viewpoints of both lessee and lessor.
(b) Prepare the journal entry or entries to record the transaction on January 1, 2011, on the books of Winston Industries.
(c) Prepare the journal entry or entries to record the transaction on January 1, 2011, on the books of Ewing Inc.
(d) Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2011.
(e) Prepare the journal entries for both the lessee and lessor to record interest expense (revenue) at December 31, 2011. (Prepare a lease amortization schedule for 2 years.)
(f) Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2011, for both the lessee and the lessor.


Click here for the solution: Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston’s specifications

An Alfalfa co-op has an agreement with its farmers to purchase alfalfa at a price that is currently 5% above the existing market price

15-37 (Accounting Estimates) An Alfalfa co-op has an agreement with its farmers to purchase alfalfa at a price that is currently 5% above the existing market price. In addition, the co-op has agreed to pay the farmers interest at 2% for each month delivery is delayed beyond December 31, 2009. Management expects that at least 14,500 tons will be delivered sometime after the balance sheet date.

Required
A. What factors should be considered in making an estimate of the loss accrual?
B. Assuming the amount of the purchase commitment is material, what information should management disclose in the footnotes to the financial statements concerning this purchase commitment?


Click here for the solution: An Alfalfa co-op has an agreement with its farmers to purchase alfalfa at a price that is currently 5% above the existing market price

On December 31, 2010, Federal Bank enters into a debt restructuring agreement with Carson Company which is experiencing financial difficulties

On December 31, 2010, Federal Bank enters into a debt restructuring agreement with Carson Company which is experiencing financial difficulties. The bank restructures a $3,000,000 note receivable by:

1. Reducing the principal obligation from $3,000,000 to $2,400,000.
2. Extending the maturity date from 12/31/10 to 12/31/13, and
3. Reducing the interest rate from 12% to 6%.
Interest has been paid up to date as of 12/31/10

Instructions
Discuss the nature of this transaction, indicating whether any gain or loss is recognized by either party and preparing any 12/31/10 journal entries that may be required by the debtor (Carson).


Click here for the solution: On December 31, 2010, Federal Bank enters into a debt restructuring agreement with Carson Company which is experiencing financial difficulties

Assume that on January 1, 2012, Kimberly-Clark Corp. signs a 10-year non-cancelable lease agreement to lease a storage building from Trevino Storage Company

E21-3 (Lessee Entries, Capital Lease with Executory Costs and Un-guaranteed Residual Value) Assume that on January 1, 2012, Kimberly-Clark Corp. signs a 10-year non-cancelable lease agreement to lease a storage building from Trevino Storage Company. The following information pertains to this lease agreement.

1. The agreement requires equal rental payments of $90,000 beginning on January 1, 2012.
2. The fair value of the building on January 1, 2012 is $550,000.
3. The building has an estimated economic life of 12 years, with an un-guaranteed residual value of $10,000. Kimberly-Clark depreciates similar buildings on the straight-line method.
4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
5. Kimberly-Clark’s incremental borrowing rate is 12% per year. The lessor’s implicit rate is not known by Kimberly-Clark.
6. The yearly rental payment includes $3,088 of executory costs related to taxes on the property.

Instructions
Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2012 and 2013. Kimberly-Clark’s corporate year end is December 31.

Click here for the solution: Assume that on January 1, 2012, Kimberly-Clark Corp. signs a 10-year non-cancelable lease agreement to lease a storage building from Trevino Storage Company

Jackson Industries has borrowed $125,000 under a line-of-credit agreement

E16–4 Jackson Industries has borrowed $125,000 under a line-of-credit agreement. While the company normally maintains a checking account balance of $15,000 in the lending bank, this credit line requires a 20% compensating balance. The stated interest rate on the borrowed funds is 10%. What is the effective annual rate of interest on the line of credit?

Click here for the solution: Jackson Industries has borrowed $125,000 under a line-of-credit agreement