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
Showing posts with label lease. Show all posts
Showing posts with label lease. Show all posts
Tuesday, April 12, 2016
The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee
E21-9 Lessee and Lessor Accounting Issues
The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee. Assume that the lease payments are made at the ginning of each month, interest and straight-line depreciation are recognized at the end of each month, and the residual value of the leased asset is zero at the end of a three-year life.
REQUIRED:
1. Record the lease (including the initial receipt of $2,000) and the receipt of the second and third installments of $2,000 in the accounts of the Anson Company. Carry computations to the nearest dollar.
Click here for the solution: The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee
The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee. Assume that the lease payments are made at the ginning of each month, interest and straight-line depreciation are recognized at the end of each month, and the residual value of the leased asset is zero at the end of a three-year life.
REQUIRED:
1. Record the lease (including the initial receipt of $2,000) and the receipt of the second and third installments of $2,000 in the accounts of the Anson Company. Carry computations to the nearest dollar.
Click here for the solution: The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee
On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease
P21-1 Determining Type of Lease and Subsequent Accounting
On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease. Superior Equipment Company, the lessor, agrees to pay $70,000 annually at the beginning of each year under the non-cancelable lease. Superior Equipment Company, the lessor, agrees to pay all executor costs, estimated to be $3,450 per year. The cost and also fair value of the equipment is 305,000. Its estimated life is 10 years. The estimated residual value at the end of five years is $64,000 and is not guaranteed by Alice; at the end of 10 years, it is $5,000. There is no bargain purchase option in the lease or any agreement to transfer ownership at the end of the lease to the lessee. The implicit interest rate is 12%. During 2010, Superior Equipment pays property taxes of $650, maintenance costs of $1,600, and insurance of $1,200. There are no important uncertainties surrounding the amount of un-reimbursable costs yet to be incurred by the lessor. Straight-line depreciation is considered the appropriate method both companies.
REQUIRED:
1.Identify the type of lease involved for Alice Company and Superior Equipment Company and give reasons for your classifications.
2.Prepare appropriate journal entries for 2010 for the lessee and lessor.
3.If the residual value at the end of five years is guaranteed by Alice, identify the type of lease. Prepare journal entries for 2010 and 2011 for the lessee and lessor. Also prepare the journal entries for the lessee and the lessor when the lessee pays the guaranteed residual value.
Click here for the solution: On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease
On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease. Superior Equipment Company, the lessor, agrees to pay $70,000 annually at the beginning of each year under the non-cancelable lease. Superior Equipment Company, the lessor, agrees to pay all executor costs, estimated to be $3,450 per year. The cost and also fair value of the equipment is 305,000. Its estimated life is 10 years. The estimated residual value at the end of five years is $64,000 and is not guaranteed by Alice; at the end of 10 years, it is $5,000. There is no bargain purchase option in the lease or any agreement to transfer ownership at the end of the lease to the lessee. The implicit interest rate is 12%. During 2010, Superior Equipment pays property taxes of $650, maintenance costs of $1,600, and insurance of $1,200. There are no important uncertainties surrounding the amount of un-reimbursable costs yet to be incurred by the lessor. Straight-line depreciation is considered the appropriate method both companies.
REQUIRED:
1.Identify the type of lease involved for Alice Company and Superior Equipment Company and give reasons for your classifications.
2.Prepare appropriate journal entries for 2010 for the lessee and lessor.
3.If the residual value at the end of five years is guaranteed by Alice, identify the type of lease. Prepare journal entries for 2010 and 2011 for the lessee and lessor. Also prepare the journal entries for the lessee and the lessor when the lessee pays the guaranteed residual value.
Click here for the solution: On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease
Wednesday, November 11, 2015
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
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
Sunday, September 27, 2015
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
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
Tuesday, September 15, 2015
After securing lease commitments from several major stores, Auer Shopping Center, Inc was organized and built a shopping center in a growing suburb
After securing lease commitments from several major stores, Auer
Shopping Center, Inc was organized and built a shopping center in a
growing suburb. The shopping center would had opened on scheduled
January 1, 2020 if it had not been struck by a severe tornado in
December. Instead, it opened for business on October 1, 2010. All of the
additional construction costs were incurred as a result of the tornado
were covered by insurance.
In July 2009, in anticipation of the scheduled January opening a permanent staff had been hired to promote the shopping center, obtain tenants for the uncommitted space and manager the property. A summary of some of the costs incurred in 2009 and the firs nine months of 2010 follows:
2009 January 1, 2010 to September 30, 2010
Interest on Mortgage Bonds 720,000 540,000
Cost of obtaining tenants 300,000 360,000
Promotional Advertising 540,000 557,000
The promotional advertising campaign was designed to familiarize shoppers the center. Had it been known in time that the center would not open until October 2010, the 2009 expenditure would not had been made. The advertising had to be repeated in 2010 .
All of the tenants who had leased space in the shopping center at the time of the tornado had accepted the October occupancy date on condition the rental charge for the first 9 months of 2010 was cancelled.
Instructions:
Explain how each of the costs for 2009 and the first 9 months of 2010 should be treated in the accounts of the shopping center corporation. Give reasons for each treatment?
Click here for the solution: After securing lease commitments from several major stores, Auer Shopping Center, Inc was organized and built a shopping center in a growing suburb
In July 2009, in anticipation of the scheduled January opening a permanent staff had been hired to promote the shopping center, obtain tenants for the uncommitted space and manager the property. A summary of some of the costs incurred in 2009 and the firs nine months of 2010 follows:
2009 January 1, 2010 to September 30, 2010
Interest on Mortgage Bonds 720,000 540,000
Cost of obtaining tenants 300,000 360,000
Promotional Advertising 540,000 557,000
The promotional advertising campaign was designed to familiarize shoppers the center. Had it been known in time that the center would not open until October 2010, the 2009 expenditure would not had been made. The advertising had to be repeated in 2010 .
All of the tenants who had leased space in the shopping center at the time of the tornado had accepted the October occupancy date on condition the rental charge for the first 9 months of 2010 was cancelled.
Instructions:
Explain how each of the costs for 2009 and the first 9 months of 2010 should be treated in the accounts of the shopping center corporation. Give reasons for each treatment?
Click here for the solution: After securing lease commitments from several major stores, Auer Shopping Center, Inc was organized and built a shopping center in a growing suburb
Thursday, August 13, 2015
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
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
Sunday, July 19, 2015
Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class
Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized over the truck's 4-year life. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck, its after tax cash flows would be the following: (Year 1) - 6,339; (Year 2) -4,764; (Year 3)-9,943; (Year 4) -5,640; all occurring at the end of respective years. The lease terms, call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax rate is 40%. Should the firm lease or buy?
Click here for the solution: Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class
Click here for the solution: Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class
Wednesday, July 15, 2015
Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement
Lease versus purchase decision (LO4) Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If the company purchases the asset, the cost will be $10,000. It can borrow funds for four years at 12 percent interest. The firm will use the three-year MACRS depreciation category (with the associated four-year write-off). Assume a tax rate of 35 percent.
The other alternative is to sign two operating leases, one with payments of $2,600 for the first two years, and the other with payments of $4,600 for the last two years. In your analysis, round all values to the nearest dollar.
a. Compute the aftertax cost of the leases for the four years.
b. Compute the annual payment for the loan (round to the nearest dollar).
c. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan due to rounding.)
d. Determine the depreciation schedule (see Table 12–9).
e. Compute the aftertax cost of the borrow–purchase alternative.
f. Compute the present value of the aftertax cost of the two alternatives. Use a discount rate of 8 percent.
g. Which alternative should be selected, based on minimizing the present value of aftertax costs?
Click here for the solution: Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement
The other alternative is to sign two operating leases, one with payments of $2,600 for the first two years, and the other with payments of $4,600 for the last two years. In your analysis, round all values to the nearest dollar.
a. Compute the aftertax cost of the leases for the four years.
b. Compute the annual payment for the loan (round to the nearest dollar).
c. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan due to rounding.)
d. Determine the depreciation schedule (see Table 12–9).
e. Compute the aftertax cost of the borrow–purchase alternative.
f. Compute the present value of the aftertax cost of the two alternatives. Use a discount rate of 8 percent.
g. Which alternative should be selected, based on minimizing the present value of aftertax costs?
Click here for the solution: Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement
Wednesday, June 24, 2015
(Lessee Entries, Capital lease with Unguaranteed Residual Value) On January 1, 2011, Adams Corporation signed a 5-year non-cancelable lease for a machine
Exercise 21-1 (E21-1) (Lessee Entries, Capital lease with Unguaranteed
Residual Value) On January 1, 2011, Adams Corporation signed a 5-year
non-cancelable lease for a machine. The terms of the lease called for
Adams to make annual payments of $ 9,968 at the beginning of each year,
starting 01/01/11. The machine has an estimated useful life of six years
and a $ 5,000 unguaranteed residual value. The machine reverts back to
the lessor at the end of the lease term. Adams uses the straight-line
method of depreciation for all of its plant assets. Adam's incremental
borrowing rate is 10%, and the Lessor's implicit rate is unknown.
Instructions:
(A.) What type of lease is this? Explain
(B.) Compute the present value of the minimum lease payments.
(C.) Prepare all necessary journal entries for Adams for this lease through January 1, 2012
Click here for the solution: (Lessee Entries, Capital lease with Unguaranteed Residual Value) On January 1, 2011, Adams Corporation signed a 5-year non-cancelable lease for a machine
Instructions:
(A.) What type of lease is this? Explain
(B.) Compute the present value of the minimum lease payments.
(C.) Prepare all necessary journal entries for Adams for this lease through January 1, 2012
Click here for the solution: (Lessee Entries, Capital lease with Unguaranteed Residual Value) On January 1, 2011, Adams Corporation signed a 5-year non-cancelable lease for a machine
Brecker Company lease an automobile with a fair value of $10,906 from Emporia Motors, Inc, on the following terms
Exercise 21-2 (E21-2) (Lessee Computation and Entries, Capital Lease
with Guaranteed Residual Value) Brecker Company lease an automobile with
a fair value of $10,906 from Emporia Motors, Inc, on the following
terms:
1. Noncancelable term of 50 months
2. Rental of $250 per month (at end of each month). (The present value at 1% per month is $9,800.)
3. Estimated residual value after 50 months is $ 1,180.(the present value at 1% per month is $715.) Brecker Company guarantees the residual value of $ 1,180.
4. Estimated economic life of the automobile is 60 months
5. Brecker Company's incremental borrowing rate is 12% a year (1% a month). Emporia's implicit rate is unknown.
Instructions:
(a.) What is the nature of the lease to Brecker Company?
(b.) What is the present value of the minimum lease payments?
(c.) Record the lease on Brecker Company's books a the date of inception.
(d.) Record the first month's depreciation on Brecker Company's books (assume straight lined)
(e.) Record the first month's lease payment.
Click here for the solution: Brecker Company lease an automobile with a fair value of $10,906 from Emporia Motors, Inc, on the following terms
1. Noncancelable term of 50 months
2. Rental of $250 per month (at end of each month). (The present value at 1% per month is $9,800.)
3. Estimated residual value after 50 months is $ 1,180.(the present value at 1% per month is $715.) Brecker Company guarantees the residual value of $ 1,180.
4. Estimated economic life of the automobile is 60 months
5. Brecker Company's incremental borrowing rate is 12% a year (1% a month). Emporia's implicit rate is unknown.
Instructions:
(a.) What is the nature of the lease to Brecker Company?
(b.) What is the present value of the minimum lease payments?
(c.) Record the lease on Brecker Company's books a the date of inception.
(d.) Record the first month's depreciation on Brecker Company's books (assume straight lined)
(e.) Record the first month's lease payment.
Click here for the solution: Brecker Company lease an automobile with a fair value of $10,906 from Emporia Motors, Inc, on the following terms
(Lessee-Lessor Entries, Sales-Type Lease) Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2010
Problem 21-1 (P21-1) (Lessee-Lessor Entries, Sales-Type Lease) Glaus
Leasing Company agrees to lease machinery to Jensen Corporation on
January 1, 2010. The following information relates to the lease
agreement.
1 The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years
2 The cost of the machinery is $ 525,000, and the fair value of the asset on January 1, 2010, is $700,000.
3 At the end of the lease term the asset reverts to the lessor. At the end of the lease term the asset has guaranteed residual value of $ 100,000. Jensen depreciates all if its equipment on a straight-line basis
4 The lease agreement requires equal annual rental payments, beginning on January 1, 2010.
5 The collectability of the lease payments is reasonable predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
6 Glaus desires a 10% rate of return on its investments. Jensen's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown.
Instructions:
(Assume the accounting period ends on December 31)
(a.) Discuss the nature of this lease for both the lessee and the lessor.
(b.) Calculate the amount of the annual rental payment required.
(c.) Compute the present value of the minimum lease payments.
(d.) Prepare the journal entries Jensen would make in 2010 and 2011 related to the lease arrangements.
(e.) Prepare the journal entries Glaus would make in 2010 and 2011.
Click here for the solution: (Lessee-Lessor Entries, Sales-Type Lease) Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2010
1 The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years
2 The cost of the machinery is $ 525,000, and the fair value of the asset on January 1, 2010, is $700,000.
3 At the end of the lease term the asset reverts to the lessor. At the end of the lease term the asset has guaranteed residual value of $ 100,000. Jensen depreciates all if its equipment on a straight-line basis
4 The lease agreement requires equal annual rental payments, beginning on January 1, 2010.
5 The collectability of the lease payments is reasonable predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
6 Glaus desires a 10% rate of return on its investments. Jensen's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown.
Instructions:
(Assume the accounting period ends on December 31)
(a.) Discuss the nature of this lease for both the lessee and the lessor.
(b.) Calculate the amount of the annual rental payment required.
(c.) Compute the present value of the minimum lease payments.
(d.) Prepare the journal entries Jensen would make in 2010 and 2011 related to the lease arrangements.
(e.) Prepare the journal entries Glaus would make in 2010 and 2011.
Click here for the solution: (Lessee-Lessor Entries, Sales-Type Lease) Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2010
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