Exam 15: Leases

On July 1, 2011, Hawkeye Aviation leased two helicopters from Honnicutt Aircraft for an initial period of 12 months with a provision for a continuation on a month-to-month basis. The lease is properly classified as an operating lease. Lease payments are to be made as follows: After the first year, the rent continues at $6,000 per month. Provide the entries required to record the lease payments for the first year on the books of

Epson Distributing leased a machine for a period of eight years, contracting to pay $200,000 at the beginning of the lease term on December 31, 2011, and $200,000 annually on December 31 for each of the next seven years. The present value of the eight rent payments over the lease term, appropriately discounted at 10 percent, is $1,174,000. On its December 31, 2012, balance sheet, Epson should report a liability under capital lease of

Hazard Inc. manufactures equipment that is sold or leased. On December 31, 2011, Hazard leased equipment to Robards for a five-year period expiring December 31, 2016, at which date ownership of the leased asset will be transferred to Robards. Equal $40,000 payments under the lease are due on December 31 of each year. The first payment was made on December 31, 2011. Collectibility of the remaining lease payments is reasonably assured, and Hazard has no material cost uncertainties. The normal sales price of the equipment is $154,000 and cost is $120,000. For the year ended December 31, 2011, how much income should Hazard recognize from the lease transaction?

Rawlings Company entered into a direct-financing lease with Zubin Corporation, which called for seven annual rentals of $3,500 at an interest rate of 12 percent. The payments are to be paid and the end of each year. The lease also contained a bargain purchase option allowing Zubin to purchase the asset for $2,500 after making the seventh annual rental payment. What was the cost of the asset?

Jordan Co. leased a machine on December 31, 2011. Annual payments under the lease are $110,000 (which includes $10,000 annual executory costs) and are due on December 31 each year, for a ten-year period. The first payment was made on December 31, 2011, and the second payment was made on December 31, 2012. According to the agreement, the lease payments are discounted at 10 percent over the lease term. Assume the present value of minimum lease payments at the inception of the lease and before the first annual payment was $615,000 and Jordan appropriately classified the lease as a capital lease. What is the lease liability Jordan should report in its December 31, 2012, balance sheet?

On January 1, 2011, Shak, Inc. signed a noncancelable lease for a sneaker shining machine. The machine has an estimated useful life of nine years. The term of the lease is a six-year term with title passing to Shak at the end of the lease. The agreement called for annual payments of $40,000 starting at the end of the first year. Assume aggregate lease payments were determined to have a present value of $200,000, based on implicit interest of 12 percent. What amount of interest expense should Shak report in its 2011 income statement from this lease transaction?

Standard Distributing entered into a leasing agreement with R & D Rental. The lease qualifies as a capital lease and calls for payments of $5,000 for 5 years with the first payment being made on January 1, 2011, and subsequent payments being made on December 31 of each year. Standard's incremental borrowing rate is 12 percent. Prepare a schedule amortizing Standard's lease obligation.

Draper Corp. leased a new building and land from Baylor Leasing Inc. for 25 years. At the inception of the lease the building and land have fair market values of $200,000 and $25,000, respectively. The building has an expected economic life of 30 years. Which of the following statements is correct regarding Draper's treatment of the lease?

Which one of the following items is not part of the minimum lease payments from the standpoint of the lessee?

The lessee's balance sheet liability for a capital lease would be periodically reduced by the

Marshall, Inc., leased equipment to Gadsby Company on January 1, 2011. The lease is for a five-year period ending January 1, 2016. The first equal annual payment of $1,200,000 was made on January 1, 2011. The cash selling price of the equipment is $5,174,552, which is equal to the present value of the lease payments at 8%. Marshall purchased the equipment for $4,300,000. Marshall should account for this lease as

Stockton, Inc. leased machinery with a fair value of $250,000 from Layton Machine Co. on December 31, 2011. The contract is a six-year noncancelable lease with an implicit interest rate of 10 percent. The lease requires annual payments of $50,000 beginning December 31, 2011. Stockton appropriately accounted for the lease as a capital lease. Stockton's incremental borrowing rate is 12 percent. Assuming the present value of an annuity due of 1 for 6 years at 10 percent is 4.7908 and the present value of an annuity due of 1 for 6 years at 12 percent is 4.6048, what is the lease liability that Stockton should report on the balance sheet at December 31, 2011?

Baxter Company leased equipment to Fritz Inc. on January 1, 2011. The lease is for an eight-year period expiring December 31, 2018. The first of eight equal annual payments of $900,000 was made on January 1, 2011. Baxter had purchased the equipment on December 29, 2010, for $4,800,000. The lease is appropriately accounted for as a sales-type lease by Baxter. Assume that the present value at January 1, 2011, of all rent payments over the lease term discounted at a 10 percent interest rate was $5,280,000. What amount of interest revenue should Baxter record in 2012 (the second year of the lease period) as a result of the lease?

On January 2, 2011, Boston Corporation entered into a 10-year noncancelable lease requiring year-end payments of $60,000. The incremental borrowing rate for Boston is 10%. The lessor's implicit rate (which is known by Boston) is 12%. The lease contains no transfer of title or bargain purchase option provisions. The leased property has an estimated economic life of 12 years. At what amount should the lease be capitalized by Boston?

Which of the following is (are) not correct regarding disclosure requirements lessees?

On January 2, 2011, the Wilcox Studios leased six computers for use in the engineering department. The lease period is for 13 years and the estimated economic life of the leased property is 15 years. The lease does not contain automatic title transfer or a bargain purchase option. Lease payments are $9,000 per year, payable each December 31. The incremental borrowing rate for Wilcox is 12 percent and the implicit interest rate (known by Wilcox) is 10 percent. The company uses straight-line depreciation for this type of equipment. Provide the necessary journal entries to record the transactions for Wilcox for the period January 2, 2011 through December 31, 2012.

An asset with a market value of $100,000 is leased on January 1, 2011. Five annual lease payments are due each January 1 beginning January 1, 2011. The lessee guarantees the $40,000 residual value of the asset as of the end of the lease term on December 31, 2015. The lessor's implicit interest rate is 8%. What is the annual lease payment?

On December 1, 2011, Blake Inc. signed an operating lease for a warehouse for ten years at $24,000 per year. Upon execution of the lease, Blake paid $48,000 covering rent for the first two years. How much should be shown in Blake's income statement for the year ended December 31, 2011, as rent expense?

Slice Company manufactures equipment that they sell or lease. On December 31, 2011, Slice leased equipment to Hook Company for a five-year period after which ownership of the leased asset will be transferred to Hook. The lease calls for equal annual payments of $50,000, due on December 31 of each year. The first payment was made on December 31, 2011. The normal sales price of the equipment is $220,000, and cost is $176,000. For the year ended December 31, 2011, what amount of income should Slice report from the lease transaction?

A lessee wants to lease an asset on a long-term noncancelable basis, but wants to avoid capitalizing the lease. The lessee is considering the following strategies to accomplish its objective: Which of the strategies above will provide the desired result?