Exam 15: Leases

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. For 2011, Marshall should report interest revenue of

K Corporation agreed to lease a computer, at cost, to L Company for $36,000 payable each year-end for seven years without a bargain purchase option, or, as an equivalent alternative, for $33,000 per year with a bargain purchase option, after the seventh rental. If the lease is a direct financing lease, and K expects to earn a 12 percent return, the amount of cash L Company would need to pay for the bargain purchase option is

In a lease that is recorded as an operating lease by the lessee, the equal monthly rental payments should be

Which of the following would be considered an executory cost?

On January 1, Gregory Company signed a ten-year noncancelable lease for a new machine, requiring $40,000 annual payments at the beginning of each year. The machine has a useful life of 15 years, with no salvage value. Title passes to Gregory at the lease expiration date. Gregory uses straight-line depreciation for all of its plant assets. Aggregate lease payments have a present value on January 1 of $252,000, based on an appropriate rate of interest. For the first year, Gregory should record depreciation (amortization) expense for the leased machine at

Walker, Inc., leased a machine from Holden Company. The lease term was for a five-year period beginning January 1, 2011. Equal annual lease payments of $3,000 are due on December 31 of each year. The implicit rate of the lease is 10% and is known to Walker. Walker has properly applied the lease capitalization criteria and as a result, accounts for the lease as a capital lease. The first payment under the lease was made on December 31, 2011 as scheduled. How much should Walker classify as the current portion of the lease liability at December 31, 2011?

If the residual value of a leased asset is greater than the amount guaranteed by the lessee, the lessee

Johnson Manufacturing entered into a noncancelable lease for an office building on January 1, 2011. The lease calls for payments of $24,000 a year for eight years. The first payment is due on January 1, 2011, with the other payments due on December 31 of each year. Johnson has an incremental borrowing rate of 8 percent. The building is amortized by Johnson over eight years using the straight-line method and assuming no salvage value. Prepare a partial balance sheet for Johnson for the year ending December 31, 2011, disclosing the asset and the liability related to the leased building.

Potter Corporation leased used equipment to Weasley, Inc. The equipment originally had a 10-year life and the lease to Weasley is for the last two of the ten-year life of the asset. The lease calls for four semiannual lease payments of $2,000 to be made at the end of each year in the life of the lease. The lease agreement contains no transfer of title or bargain purchase option provisions. What is the amount of the leased asset that should be recorded on Weasley's books at the beginning of the lease?

From the standpoint of the lessee, the minimum lease payment includes all of the following except

State Repairs acquires equipment under a noncancelable lease at an annual rental of $45,000, payable in advance for five years. After five years, there is a bargain purchase option of $75,000. The appropriate interest rate is 12 percent. What is the total present value of the lease and the first year's interest expense?

A lease contains a bargain purchase option. In determining the lessee's capitalizable cost at the beginning of the lease term, the payment called for by the bargain purchase option would be

Aerotech Inc., a dealer in machinery and equipment, leased equipment to Quality Products on July 1, 2011. The lease is appropriately accounted for as a sale by Aerotech and as a purchase by Quality. The lease is for a ten-year period (the useful life of the asset) expiring June 30, 2021. The first of ten equal annual payments of $250,000 was made on July 1, 2011. Aerotech had purchased the equipment for $1,337,500 on January 1, 2011, and established a list selling price of $1,687,500 on the equipment. Assume that the present value at July 1, 2011, of the rent payments over the lease term discounted at 12 percent (the appropriate interest rate) was $1,582,500. What is the amount of profit on the sale and the amount of interest income that Aerotech should record for the year ended December 31, 2011?

Which of the following statements characterizes a sales-type lease?

Which of the following statements characterizes lessor accounting for residual values?

For a capital lease, the amount recorded initially by the lessee as a liability should

Waters Company entered into a direct-financing lease with Toll Company for the use of an asset which cost Waters $240,000. The lease agreement contained a bargain purchase option effective immediately after the fifth rental, which provided that Toll could purchase the asset at that time. The estimated life of the asset was 10 years with an estimated residual value of $400. Assuming that Toll uses straight-line depreciation, Toll's annual depreciation expense would be

On January 1, 2011, R. L. Bowman, owner of Dick's Market, sold the building the store currently occupies to Adams Investing Company for the current market value of the building of $9,000,000. Prior to the sale, the carrying value of the building was $7,000,000. The estimated remaining useful life of the building is 10 years, with no residual value at that time. Straight-line depreciation is used to depreciate the building. On the same day as the sale, January 1, 2011, Bowman signed a 10-year noncancelable leaseback agreement that has a 15 percent implicit rate of return for the lessor. The lessee's incremental borrowing rate also is 15 percent. Annual payments begin on January 1, 2011. During 2011, Bowman will pay $10,000 executory costs if the transaction qualifies as a direct-financing lease. If the agreement qualifies as an operating lease, this $10,000 will be paid by the buyer-lessor. For convenience, provide all amounts in your solution in $000. Required:

A lease agreement included the following provisions: How much interest revenue is recognized in 2011 by the lessor, assuming a calendar-year fiscal year?

An eight-year capital lease specifies equal minimum annual lease payments. Part of this payment represents interest and part represents a reduction in the net lease liability. The portion of the minimum lease payment in the fourth year applicable to the reduction of the net lease liability should be