Exam 18: Accounting for Leases

What journal entry does Incentive make on January 1, 2019 to record the annual lease payment?

Lexus Company rents a copier from Heavenly Co on January 1, 2017. Under the terms of the agreement, Lexus Company will pay rentals of $7,000 per month for a 6-month period. Lexus Company will make these payments at the beginning of every month, beginning on January 1, 2017. Lexus Company elects to apply the exemption for short-term leases. That is, Lexus Company makes a policy election not to record the lease liability and the right-of-use asset. What journal entry will Lexus Company make each month to record the rental payments?

In instances where there is not an observable standalone selling price, the lessor must use an estimate of the standalone selling price and allocate it based on which of the following methods?

Assuming that this is classified as an operating lease, what is the annual lease expense reported on the income statement?

Assuming that this is classified as an operating lease, create an amortization table for periodic interest and reduction in the liability. Periodic Interest and Reduction in the Liability Payment Interest Reduction Balance Lease commencement: 1/1/2019 1/1/2020 1/1/2021 1/1/2022 1/1/2023

Kataran Company enters into a 4-year lease transaction, with payments due at the beginning of each year. The lease payments are $68,000 per year. The fair value of the leased asset is $280,000. The lessor's deferred initial direct costs are equal to $14,000. The lessor's estimate of the unguaranteed residual asset is $125,000. Based on the information above, what is the implicit rate?

Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $6,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 10%. Initial direct costs of $1,100 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $41,608. Collection of all lease payments is reasonably assured. What is the reduction in the lease liability recorded with the first and second lease payments, respectively?

On January 1, 2019, Precision Pumps leases nonspecialized pumping equipment to Mega Construction. The equipment is delivered on January 1. The lease term is 4 years with no renewal or purchase options, and title to the leased asset is retained by the lessor at the end of the lease term. The lease requires annual fixed rental payments of $9,000 per year beginning on January 1, 2019, and then December 31 of each year starting on December 31, 2019. The fair value of the equipment is $41,627 and has a carrying amount on Precision's books of $28,306. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $15,000. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $15,000; collection of this guaranteed residual value and lease payments are reasonably certain. The rate implicit in the lease is 10%. There are no prepaid rentals, and neither party to the agreement pays initial direct costs. What amount of Sales Revenue is recorded at commencement of the lease?

Elton Electronics leases testing equipment to Startup Corporation. The equipment is not specialized and is delivered on January 1, 2019. The fair value of the equipment is $118,000. The cost of the equipment to Elton is $113,000 and the expected life of the testing equipment is 8 years. Elton incurs initial direct costs of $10,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2019 and ending on December 31, 2025. Elton's implicit rate is 5% and they expect that collection of the $14,500 lease payments is probable. What is the principal balance in the Net Investment in Lease - Sale Type account after the second payment on December 31, 2019?

Plessings Company leased a piece of machinery to Banana, Inc. on January 1, 2019. The lease is correctly classified as a sales-type lease. Plessings will receive three annual lease payments of $20,100, with the first one received on January 1, 2019. There is no guaranteed or unguaranteed residual value. The fair value of the machine is $50,000 and Plessings incurs initial direct costs of $5,000. What is the implicit rate assuming the initial direct costs are expensed?

Northern Equipment leases cooling towers to Warmup Corporation. The equipment is not specialized and is delivered on January 1, 2019. The fair value of the equipment is $180,000. The cost of the equipment to Northern is $170,000 and the expected life of the testing equipment is 8 years. At the end of the useful life, it is expected that the equipment will have a residual value of $20,000, although the lessee guarantees only $15,000. Northern incurs initial direct costs of $20,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2019 and ending on December 31, 2025. Northern's implicit rate is 8% and they expect that collection of the $30,000 payments is probable. The lease is properly classified as a sales-type lease. What is Northern's implicit rate for the lease? (Round any intermediate calculations to the nearest dollar, and round your final percentage two decimal places, X.XX%.)

When there are several assets as part of the lease, only some must be separately identified.

Precision Pumps On January 1, 2019, Precision Pumps leases nonspecialized pumping equipment to Mega Construction. The equipment is delivered on January 1. The lease term is 4 years with no renewal or purchase options, and title to the leased asset is retained by the lessor at the end of the lease term. The lease requires annual fixed rental payments of $7,000 per year beginning on January 1, 2019, and then December 31 of each year starting on December 31, 2019. The fair value of the equipment is $37,592 and has a carrying amount on Precision's books of $22,000. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $15,000. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $15,000; collection of this guaranteed residual value and lease payments is reasonably certain. The rate implicit in the lease is 6%. There are no prepaid rentals, and neither party to the agreement pays initial direct costs. -What is the proper classification of this lease for Precision Pumps?

How does a residual value affect accounting for a sales-type lease?

Lessees often incur costs related to the ownership of the leased asset. These costs, referred to as, ________ include items such as property tax, insurance, and maintenance.

Prepare the journal entry required on December 31, 2019. Assume this is an operating lease.

Nice Manufacturing Company Nice Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $8,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have a $5,000 residual value at the end of the lease term on December 31, 2028, which is guaranteed by Nice. Nice's incremental borrowing rate is 9%. Initial direct costs of $2,000 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $27,000. Collection of all lease payments is reasonably assured. -What is the amount of the lease liability recorded by Nice at the lease's commencement?

Leewin Brokerage Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $75,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $2,000. -Based on the above information, what is the journal entry Leewin made to record the initial payment of $10,000?

Group I criteria provide guidance to operationalize the concept of ownership and control of an asset. To meet the Group I criteria, a transaction only needs to meet one of the five criteria. List those five criteria.

Alpha Company has three components in their lease agreement: the building, the equipment and the maintenance service. Total consideration in the contract is $500,000 per year. Alpha Company has identified the following standalone prices: Corapanent Stondalane Prire Building \ 400,000 Equipment 100,000 Maintenance/Service \ 50,000 Total \ 550,000 Calculate the percentages and allocate the consideration to each component.