Exam 18: Accounting for Leases

Which statement is correct for the lessee?

Assume that Speery agrees to lease a new machine from LEERY on January 1,2011,for $30,000 per year,paid in advance (i.e.,at the beginning of the year).The lease term is 10 years and the asset's useful life is 8 years.There is no bargain purchase option.The unguaranteed residual value is $10,000.Which statement is correct?

Here are the terms of a lease agreement: Fair value of leased asset 250,000 Lease term 4 years Payment frequency Annual Payment timing End of year Guaranteed residual value 25,000 Interest rate implicit in lease (known to lessee) 14\% Lessee's incremental borrowing rate 16\% Requirements: a.Determine the amount of lease payment that the lessor would require to lease the asset. b.Compute the present value of minimum lease payments for the lessee. c.Compute the present value of minimum lease payments for the lessor. d.Evaluate whether the lessee should classify the lease as operating or finance.

Assume that Souse agrees to lease a new machine from LAIRD on January 1,2011,for $40,000 per year,paid in advance (i.e.,at the beginning of the year).Executory costs are $1,000.The lease term is 11 years and the asset's useful life is 10 years.There is no bargain purchase option.The guaranteed residual value is $10,000.Which statement is correct?

Which condition would not result in a finance lease?

Which will not reduce the "agency cost of leasing"?

Here are the terms of a lease agreement: Fair value of leased asset 250,000 Lease term 10 years Payment frequency Annual Payment timing End of year Guaranteed residual value 0 Interest rate implicit in lease (known to lessee) 9\% Lessee's incremental borrowing rate 9\% Requirements: a.Determine the amount of lease payment that the lessor would require to lease the asset. b.Compute the present value of minimum lease payments for the lessee. c.Compute the present value of minimum lease payments for the lessor. d.Evaluate whether the lessee should classify the lease as operating or finance.

On January 1,2011,Granite Company entered a lease to rent office space.The lease requires $350,000 per year,at the beginning of each year,for 20 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 30 years,and its current fair value is estimated to be $6 million.The incremental borrowing rate is 5%. Requirement: Classify this lease and record the journal entries for the first year of the lease.

On January 1,2011,Brownee Company entered a lease to rent office space.The lease requires $350,000 per year,at the end of each year,for 20 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 40 years,and its current fair value is estimated to be $6 million.The incremental borrowing rate is 5%. Requirement: Classify this lease for and record the journal entries for the first year of the lease.

On January 1,2011,Pelvisee Company entered a lease to rent office space.The lease requires Pelvisee to pay $390,000 per year,at the beginning of each year,for 15 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 30 years,and its current fair value is estimated to be $6 million.Pelvisee's incremental borrowing rate is 9%. Requirement: Classify this lease for Pelvisee Company and record the journal entries for the first year of the lease.

Channel leased equipment to Montage Company on November I,2010.The terms of the lease are as follows: Lease term 12 years Economic life of leased asset 13 year Fair value of leased asset 105,000 Guaranteed residual value 10,000 Lease payments, due at the end of the year, starting Nov 1, 2011 11,000 Lessee's incremental borrowing rate 5\% Montage uses straight-line depreciation for its property,plant,and equipment. Requirements: Prepare the journal entries for the lease from November 1 through December 31,2010.

Cerebral Corporation started operations on March I,2009.It needs to acquire a special piece of equipment for its manufacturing operations.It is evaluating two options as follows. Option 1: Lease the equipment for 5 years.Lease payments would be $12,000 per year,due at the beginning of each fiscal year (March I).Cerebral's incremental borrowing rate is 5%.There is no bargain purchase or renewal option.Cerebral is responsible for all executory costs of operating the equipment. Option 2: Purchase the equipment for $58,000 by borrowing the full purchase amount at 5% over 5 years.This price is considered the fair value of the equipment.Payments are due at the end of each fiscal year (February 28). The equipment has a useful life of 5 years and would be depreciated on a straight-line basis.No residual value is expected to exist at the end of 5 years. Requirements: a.Calculate the present value of the lease payments (Option 1). b.Calculate the payment that would be required under the purchase option (Option 2). c.Calculate and briefly discuss the financial impact of each option on the non-current assets,total liabilities,and net income of Cerebral for the first year of operations.Assume all payments were made when due.Show your calculations.

Kartik Corporation started operations on March I,2009.It needs to acquire a special piece of equipment for its manufacturing operations.It is evaluating two options as follows. Option 1: Lease the equipment for 5 years.Lease payments would be $12,000 per year,due at the beginning of each fiscal year (March I).Kartik's incremental borrowing rate is 5%.There is no bargain purchase or renewal option.Kartik is responsible for all executory costs of operating the equipment. Option 2: Purchase the equipment for $58,000 by borrowing the full purchase amount at 4% over 5 years.This price is considered the fair value of the equipment.Payments are due at the end of each fiscal year (February 28). The equipment has a useful life of 5 years and would be depreciated on a straight-line basis.No residual value is expected to exist at the end of 5 years. Requirements: a.Calculate the present value of the lease payments (Option 1). b.Calculate the payment that would be required under the purchase option (Option 2). c.Calculate and briefly discuss the financial impact of each option on the non-current assets,total liabilities,and net income of Kartik for the first year of operations.Assume all payments were made when due.Show your calculations.

On April 1,2012,Janus Company entered into a five-year lease for equipment.Annual lease payments are $5,000,payable at the beginning of each lease year (April 1).At the end of the lease,possession of the equipment will revert to the lessor.The equipment has an expected useful life of 5 years.Similar equipment could be purchased for $50,000 cash.Janus's incremental borrowing rate is 6%.The company has a March 31 year-end,and it uses straight-line depreciation for its property,plant,and equipment. Requirements: a.Prepare the journal entries relating to the lease and leased asset for Janus's fiscal year ending March 31,2013. b.State the amounts related to the lease that would be reported on the March 31,2013 balance sheet,indicating the balance sheet classifications,account names,and amounts.

On April 1,2012,Helo Company entered into a five-year lease for equipment.Annual lease payments are $15,000,payable at the beginning of each lease year (April I).At the end of the lease,possession of the equipment will revert to the lessor.The equipment has an expected useful life of 5 years.Similar equipment could be purchased for $250,000 cash.Helo's incremental borrowing rate is 12%.The company has a March 31 year-end,and it uses straight-line depreciation for its property,plant,and equipment. Requirements: a.Prepare the journal entries relating to the lease and leased asset for Helo's fiscal year ending March 31,2013. b.State the amounts related to the lease that would be reported on the March 31,2013 balance sheet,indicating the balance sheet classifications,account names,and amounts.

The following are characteristics of a lease: Price of leased asset from manufacturer 312,100 Lease payments 100,000 Lease term 4 years Lease frequency Annual Payment timing End of year Guaranteed residual value 35,000 Interest rate implicit in the lease agreement 14\% Requirement: Determine the appropriate classification for this lease for the lessor (who is not the manufacturer)and record the journal entries for the lessor for the first year of the lease.

Curtis Corporation started operations on March I,2009.It needs to acquire a special piece of equipment for its manufacturing operations.It is evaluating two options as follows. Option 1: Lease the equipment for 5 years.Lease payments would be $11,000 per year,due at the beginning of each fiscal year (March I).Curtis's incremental borrowing rate is 5%.There is no bargain purchase or renewal option.Curtis is responsible for all executory costs of operating the equipment. Option 2: Purchase the equipment for $58,000 by borrowing the full purchase amount at 5% over 5 years.This price is considered the fair value of the equipment.Payments are due at the end of each fiscal year (February 28). The equipment has a useful life of 5 years and would be depreciated on a straight-line basis.No residual value is expected to exist at the end of 5 years. Requirements: a.Calculate the present value of the lease payments (Option 1). b.Calculate the payment that would be required under the purchase option (Option 2). c.Calculate and briefly discuss the financial impact of each option on the non-current assets,total liabilities,and net income of Curtis for the first year of operations.Assume all payments were made when due.Show your calculations.

For the following lease,determine the minimum lease payments for the lessor. Annual lease payment at the end of the end \ 30,000 Lease term 5 Incremental rate 10\% Implicit rate (unknown to lessee) 8\% Unguaranteed residual value 28,000

On January 1,2011,Troy Company entered a lease to rent office space.The lease requires Troy to pay $190,000 per year,at the beginning of each year,for 10 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 30 years,and its current fair value is estimated to be $6 million.Troy's incremental borrowing rate is 9%. Requirement: Classify this lease for Troy Company and record the journal entries for the first year of the lease.

On January 1,2011,Cory Company sold a building to Billy Board Bank for $52,000,000 and immediately leased it back under a 15-year non-cancellable lease at $5,918,000 per year,payable at the beginning of each year.Billy Board used an implicit rate of 9% to determine the lease payments,and this rate is known to Cory.The building had a carrying value of $34,000,000 on Cory's books. Requirement: Assume that the lease is an operating lease for both the lessee and lessor.Prepare all necessary journal entries for 2011 for Cory (the seller-lessee)and Billy Board (the buyer-lessor).Billy Board will depreciate the building on a straight-line basis over the remaining useful life of 15 years.