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Exam 15: Leases

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Question 61

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On January 1, 2018, Rastall Co. signed a long-term finance lease for an office building. The terms of the lease required Rastall to pay $30,000 annually, beginning December 31, 2018, and continuing each year for 30 years. On January 1, 2018, the present value of the lease payments is $337,500 discounted at the 8% interest rate implicit in the lease. In Rastall's December 31, 2018, balance sheet, the lease payable should be

A) $307,500
B) $334,500
C) $337,500
D) $870,000

E) A) and B)
F) A) and C)

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Question 62

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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 outstanding balance after payment 5?

A) $1,818.
B) $2,000.
C) $2,182.
D) $3,818.

E) A) and C)
F) A) and B)

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Question 63

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Terms of a lease agreement and related facts were: a. The lease asset had a retail cash selling price of $200,000. Its useful life was six years with no residual value (straight-line depreciation). b. Annual lease payments at the beginning of each year were $41,746, beginning January 1. c. Lessor's implicit rate when calculating annual rental payments was 10%. d. Incremental costs of negotiating costs of negotiating and consummating the completed lease transaction incurred by the lessor were $4,124. Required: Round your answers to the nearest whole dollar amounts. Prepare the appropriate journal entries for the lessor to record the lease, the initial payment at its beginning, and at the December 31 fiscal year-end under each of the following three independent assumptions: 1. The lease term is three years and the lessor paid $200,000 to acquire the asset (operating lease). 2. The lease term is six years and the lessor paid $200,000 to acquire the asset. Also assume that adjusting the lease receivable (net investment) by initial direct costs reduces the effective rate of interest to 9%. 3. The lease term is six years and the lessor paid $170,000 to acquire the asset.

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. -For a finance lease, an amount equal to the present value of the lease payments should be recorded by the lessee as a(n) :

In accounting for an operating lease, describe how the lessee's and lessor's income statements are affected.

On January 1, 2018, Marlon's Transport leased a car from Fiat Motors for a six-year period with an option to extend the lease for three years. Marlon's had no significant economic incentive as of the beginning of the lease to exercise the 3-year extension option. Annual lease payments are $5,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate. Assume that at the beginning of the third year, January 1, 2020, Marlon's had made significant improvements to the car whose cost could be recovered only if it exercises the extension option, creating an expectation that extension of the lease was "reasonably certain." The relevant interest rate at that time was 6%. Required: Round your answers to the nearest whole dollar amounts. 1. Prepare the journal entry, if any, at the end of the second year for the lessee to account for the reassessment. 2. Prepare the journal entry, if any, at the end of the second year for the lessor to account for the reassessment.

If the lessee is expected to take ownership of a leased asset at the end of the lease term, the lessor must use an estimated residual value when calculating the lease payments necessary to achieve a desired rate of return.

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

Occasionally, a lease agreement includes a guarantee by the lessee that the lessor will recover a specified residual value when custody of the asset reverts back to the lessor at the end of the lease term. Under what circumstance can the guaranteed residual value influence the amounts recorded by the lessee and lessor? In that circumstance, how are the amounts affected?

M & O Company is preparing an Excel spreadsheet for a 5-year finance lease. The implicit interest rate in the lease is 6%. The beginning of the lease is January 1. Lease payments are made each December 31. A portion of the spreadsheet appears as follows: - What formula should M & O use in cell C8?

Crystal Corporation makes $2,000 payments every month for leasing office equipment. Crystal recorded a lease payment as follows: $\begin{array}{|c|r|r|}\hline \text { Lease payable } & 1,200 \\\hline \text { Interest expense } & 800 \\\hline \text { Cash } &&2,000 \\\hline\end{array}$ $\begin{array}{|c|r|r|}\hline \text { Amortization expense } & 1,200 \\\hline \text { Right-of-use asset } && 1,200 \\\hline\end{array}$ Crystal must have a(n) :

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 finance lease. Amortization is recorded on a straight-line basis at the end of each year. Required: Round your answers to the nearest whole dollar amounts. 1. Determine the present value of the lease payments at June 30, 2018, (to the nearest $000) that Blue uses to record the right-of-use asset and lease liability. 2. What would be the amounts related to the lease that Blue would report in its balance sheet at December 31, 2018? (Ignore taxes.) 3. What would be the amounts related to the lease that Blue would report in its income statement for the year ended December 31, 2018? (Ignore taxes.)

Which of the following might shorten the term of the lease?

C Corp., a lessee, has a rate of return on assets of 10%. The rate of return on assets is immediately increased when C records:

Needham Industries leased manufacturing equipment from Burlington Leasing on January 1, 2018. Needham has the option to renew the lease at the end of two years for an additional three years. Needham is subject to a $135,000 penalty after two years if it fails to renew the lease. Burlington Leasing purchased the equipment from Springfield Machines at a cost of $250,177. Required: Prepare appropriate journal entries for Needham Industries from the beginning of the lease through March 31, 2018. Appropriate adjusting entries are made quarterly. Round your answers to the nearest whole dollar amounts.

On January 1, 2018, Granite State Hospital leased medical equipment from Forest Corp. which had purchased the equipment at a cost of $2,874,474. The lease agreement specifies six annual payments of $600,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2022. The six-year lease term ending December 31, 2023 (a year after the final payment), is equal to the estimated useful life of the equipment. The contract specifies that lease payments for each year will increase on the basis of the increase in the Consumer Price Index for the year just ended. Thus, the first payment will be $600,000, and the second and subsequent payments might be different. The CPI at the beginning of the lease is 120. Forest routinely acquires medical equipment for lease to other firms. The interest rate in these financing arrangements is 10%. Required: Round your answers to the nearest whole dollar amounts. 1. Prepare the appropriate journal entries for Granite State and Forest to record the lease at its beginning. 2. Assuming the CPI is 124 at that time, prepare the appropriate journal entries for Granite State at December 31, 2018, related to the 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 added to the Lease Receivable in:

A bargain purchase option is defined as the option of purchasing leased property at a price that is equal to the expected fair value of a leased asset.

At January 1, 2018, Gem Finder leased mining equipment from Emerald 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 Emerald at a cost of $540,000 (its fair value) and was expected to have a useful life of 12 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.). Both (a) the present value of the lease payments and (b) the present value of the residual value (i.e., the residual asset) are included in the lease receivable because the two amounts combine to allow the lessor to recover its net investment. Emerald seeks a 10% return on its lease investments. By this arrangement, the lease is deemed to be a finance lease. Required: 1. What will be the effect of the lease on Emerald'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 Emerald (ignore taxes)?

Karla Salons leased equipment from Smith Co. on July 1, 2018, in a finance lease. The present value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000 are due each year beginning July 1, 2018. Smith Co. had constructed the equipment recently for $66,000, and its retail fair value was $80,000. - The total decrease in earnings (pretax) in Karla's December 31, 2018, income statement would be (ignore taxes) :