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Exam 15: Leases

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Question 111

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On June 30, 2018, Hercule, Inc. leased warehouse equipment from Marble, Inc. The lease agreement calls for Hercule to make semiannual lease payments of $1,688,721 over a three-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Hercule's incremental borrowing rate is 10%, the same rate Marble used to calculate lease payment amounts. Marble manufactured the equipment at a cost of $7.5 million. Required: Round your answers to the nearest whole dollar amounts. 1. Determine the price at which Marble is "selling" the equipment (present value of the lease payments) at June 30, 2018 (to the nearest $000). 2. What amounts related to the lease would Marble report in its balance sheet at December 31, 2018? (Ignore taxes.) 3. What amounts related to the lease would Marble report in its income statement for the year ended December 31, 2018? (Ignore taxes.)

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1. Calculation of the present value of l...

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Question 112

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Elf Leasing purchased a machine for $500,000 and leased it to IGA, Inc. on January 1, 2018. Required: Prepare appropriate entries for both IGA and Elf Leasing from the beginning of the lease through the second rental payment on April 1, 2018. Amortization is recorded at the end of each fiscal year (December 31). Round your answers to the nearest whole dollar amounts.

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IGA (Lessee)
January 1, 2018
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Question 113

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When the lessee guarantees an estimated residual value of $75,000, the amount the lessee records as a right-of-use asset and as a lease liability is increased by $75,000.

What makes up a lessor's net investment?

Which of the following statements characterizes a sale-leaseback arrangement?

On June 30, 2018, Atlas, Inc. leased a warehouse facility from LT Leasing Corporation. The lease agreement calls for Atlas to make semiannual lease payments of $1,688,721 over a three-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Atlas's incremental borrowing rate is 10%, the same rate LT uses to calculate lease payment amounts. The fair value of the warehouse is $9 million. LT recently purchased the warehouse for $9 million -Required: Round your answers to the nearest whole dollar amounts. 1. What amounts related to the lease would LT report in its balance sheet at December 31, 2018? (Ignore taxes.) 2. What amounts related to the lease would LT report in its income statement for the year ended December 31, 2018? (Ignore taxes.)

How do U.S. GAAP and International Financial Reporting Standards (IFRS) compare to classifying a lease as a finance lease?

GAAP requires that some lease agreements be accounted for as purchases of assets. The theoretical justification for this treatment is that a lease of this type:

Peridot Leasing entered into an agreement to lease warehouses to AMC Foods. a. The agreement calls for ownership of the warehouses to be transferred to AMC Foods at the end of the lease term. b. The fair value of the warehouses is expected to be $400,000 at the end of the lease term. AMC has the option to purchase the warehouses at the end of the lease term for $80,000. c. The warehouses have a useful life of 10 years and the term of the lease is 4 years. d. The present value of the lease payments is $4,400,000 and the fair value of the leased warehouses is $5,000,000. e. The warehouses were manufactured to meet specifications provided by AMC to optimize its unique food delivery processes. Required: For each independent scenario listed (a-e), indicate whether AMC would classify the lease as an operating lease or finance lease. Assume the lease agreement has not met any of the other indicators of a finance lease. Provide brief explanations.

Merlin Co. leased equipment to Houdini Inc. The equipment cost the lessor $200,000. The appropriate interest rate for this lease is 15%. The annual lease payments are made at the end of each year. The lease term is three years. The residual value at the end of the lease term is expected to be $40,000. Houdini has the option to purchase the equipment at that time for $20,000. Assume this is a sales-type lease without selling profit. Round your answers to the nearest whole dollar amounts. Required: 1. For this lease: (a) The lease payment computed by the lessor is $________. (b) The amount the lessee should record as an asset is $________. 2. How much interest should be recognized at the end of year 1 by the: (a) Lessor? $________ (b) Lessee? $________

Which of the following statements regarding lessee-guaranteed residual values is true for the lessee?

M 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 direct method will report:

P Corp. leased an asset to L Corp. using an operating lease in February of Year 1. P Corp.'s statement of cash flows for the year ending December 31, Year 1 will report:

Lotsa Bucks leased equipment to Shannon Company on January 1, 2018. The lease payments were calculated to provide the lessor a 10% return. Ten annual lease payments of $20,000 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: 1. Prepare the journal entries to record the lease by Shannon at January 1, 2018, and at December 31, 2018, the end of the reporting period. Consider this to be a finance lease. Round your answers to the nearest whole dollar amounts. 2. Prepare the journal entries to record the lease by Shannon at January 1, 2018, and at December 31, 2018, the end of the reporting period. Consider this to be an operating lease. Round your answers to the nearest whole dollar amounts.

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 incurred by the lessee are:

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. -What would be the outstanding balance after payment 10?

Omega leased a machine for a ten-year non-cancelable term. At the end of the ten-year term, Omega has five consecutive one-year renewal options. A replacement machine can be acquired at the end of the term for the leased machine, but due to an expensive installation process and Omega's lease term for its store, Omega expects to lease the machine for 12 years. What is the lease term?

The following relate to an operating lease agreement: a. The lease term is 3 years, beginning January 1, 2018. b. The leased asset cost the lessor $4,000,000 and had a useful life of eight years with no residual value. The lessor uses straight-line depreciation for its depreciable assets. c. Annual lease payments at the beginning of each year were $685,000. d. Direct costs incurred by the lessor to consummate the completed lease transaction were $12,000. Required: Prepare the appropriate journal entries for the lessor from the beginning of the lease through the end of the lease term. Round your answers to the nearest whole dollar amounts.

Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years. -What is the effective annual interest rate?

Rumsfeld Corporation leased a machine on December 31, 2018, for a three-year period. The lease agreement calls for annual payments in the amount of $16,000 on December 31 of each year beginning on December 31, 2018. Rumsfeld has the option to purchase the machine on December 31, 2021, for $20,000 when its fair value is expected to be $40,000. The machine's estimated useful life is expected to be five years with no residual value. The appropriate interest rate for this lease is 12%. $\begin{array} { l r r r } \text { n, i } & \text { PV of \$1 } & \text { PV, ordinary annuity } & \text { PV, annuity due } \\\text { 1 period, 12\% } & 0.89286 & 0.89286 & 1.00000 \\\text { 2 periods, 12\% } & 0.79719 & 1.69005 & 1.89286 \\\text { 3 periods, 12\% } & 0.71178 & 2.40183 & 2.69005\end{array}$ -Required: Round your answers to the nearest whole dollar amounts. 1. Calculate the amount to be recorded as a right-of-use asset and the associated lease liability. 2. Prepare an amortization schedule for this lease.