Exam 15: Leases

On December 31, 2011, Cooke Company leased a machine under a capital lease for a period of ten years, contracting to pay $100,000 on signing the lease and $100,000 annually on December 31 of the next nine years. The present value at December 31, 2011, of the ten lease payments over the lease term discounted at 10 percent was $676,000. At December 31, 2012, Cooke's total capital lease liability is

Roscoe Company entered into a lease of special equipment to Mac Company. The lease term was six years. The equipment cost Roscoe $40,000 and Roscoe plans to earn a $4,000 dealer profit. Roscoe's implicit rate on the lease is 12 percent. As a result of this agreement, Roscoe will receive year-end lease payments of

What are the three types of period costs that a lessee experiences with capital leases?

Which of the following is true regarding the lease term?

Current generally accepted accounting principles do not require operating leases to be shown on the balance sheet. Consider the case of Company A. If the operating leases of A Company were added to the company's liabilities at December 31, 2011, the company's current ratio would decline from 0.69 to 0.57 and total debt would increase from $239 million to $1,105 million. Significant changes would also occur in the return on assets since assets would be increased and the related increase in depreciation and interest expense would exceed the rent expense currently included in the company's income statement. Required:

If the lessee and the lessor use different interest rates to account for a capital lease, then

Alvin Company entered into a lease agreement with Theodore, Inc., to lease an asset that cost Alvin $120,000. The lease agreement requires five annual year-end rentals of $40,000 each. Alvin's implicit rate on the lease is 15 percent. Alvin's dealer profit on this lease would be

Barnum, Inc., leased equipment from Baily Supply on December 31, 2011. The lease term is for the 10-year period expiring December 30, 2021. The useful life of the leased asset is 10 years. Equal annual payments under the lease are $100,000 due on December 31 of each year. The first payment was made on December 31, 2011. Barnum's incremental borrowing rate was 12% at December 31, 2011. Baily's implicit rate for the lease is 10% and is known by Barnum. Barnum appropriately accounts for the lease as a capital lease. What is the balance in Barnum's "Liability Under Lease Agreements" account at December 31, 2012?

On January 1, 2011, Franklin Industries leased equipment on an eight-year term at $15,000 annual rental payments, paid in advance. There is a bargain purchase option on December 31, 2018 (end of lease), of $24,000. The economic life of the equipment is estimated to be 15 years. The interest rate is 12 percent.

Farewell Inc. leases equipment to its customers under noncancelable leases. On January 1, 2011, Farewell leased equipment costing $400,000 to Norman Co., for nine years. The rental cost was $44,000 payable in advance semiannually (January 1 and July 1), plus $2,000 semiannually for executory costs. The equipment had an estimated life of 15 years and sold for $533,025 with an estimated unguaranteed residual value of $80,000. The implicit interest rate is 12 percent. Prepare all journal entries for 2011 on Farewell's and Norman's books. Round all calculations to the nearest dollar. Use straight-line depreciation.

On March 1, 2011, Sturdy Corp. became the lessee of new equipment under a noncancelable six-year lease. The total estimated economic life of this equipment is ten years. The fair value of this equipment on March 1, 2011, was $100,000. The lease does not meet the criteria for classification as a capital lease with respect to transfer of ownership of the leased asset, or bargain purchase option, or lease term. Nevertheless, Sturdy must classify this lease as a capital lease if, at inception of the lease, the present value of the minimum lease payments (excluding executory costs) is equal to at least

Wallace Corporation entered into a direct financing lease (interest rate 12 percent) to lease Grommit an asset that cost Wallace $90,000. The lease specified annual year-end payments for seven years. The lease also specified that, along with the last payment, Grommit could purchase the asset for $8,000 cash. Under this lease agreement, Grommit will be required to pay annual payments of

On January 1, 2011, Collins Company leased a warehouse to Cuthbert under an operating lease for ten years at $80,000 per year, payable the first day of each lease year. Collins paid $36,000 to a real estate broker as a finder's fee. The warehouse is depreciated at $20,000 per year. During 2011, Collins incurred insurance and property tax expense totaling $15,000. Collins' net rental income for 2011 should be

Initial direct costs incurred by a lessor in consummating a sales-type lease are

Washington Financing, Inc. purchased a packing machine to lease to Puyallup Fruits. The lease qualifies as a direct financing lease and requires lease payments of $58,860 per year, payable in advance, over a ten-year period. There is no expected residual value. The fair market value of the packing machine is $330,000--the same amount paid by Washington to purchase the asset. The lease term begins on January 1, 2011. Provide the journal entries required on Washington's books to

One of the four general criteria for a capital lease specifies that the lease term be equal to or greater than

Henri Retail Stores is negotiating three leases for store locations. Henri's incremental borrowing rate is 12 percent. Each store will have an economic useful life of 30 years. Lease payments will be made at the end of each year. Based on the data below, properly classify each of the leases as an operating lease or a capital lease. The purchase price for each property is listed as an alternative to leasing. Determine whether each of the leases should be classified by Henri as an operating lease or a capital lease. Show computations and reasons to support your answers.

In order for a lease to be considered a finance (or capital) lease, international accounting standards require that a lease agreement

Garrison leased a special crane to Keillor that cost Garrison $40,000. The lease term was six years and the annual rentals were $10,000 per year, payable at the end of each year. The implicit interest rate was 10 percent. Garrison recognized a gross margin of

One of the four general criteria for a capital lease is that the present value at the beginning of the lease term of the minimum lease payments equals or exceeds