Exam 21: Accounting for Leases

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2015 it leased equipment with a cost of $320,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an expected useful life of 5 years. If the selling price of the equipment is $520,000, and the rate implicit in the lease is 8%, what are the equal annual payments?

Hayes Corp. is a manufacturer of truck trailers. On January 1, 2014, Hayes Corp. leases ten trailers to Lester Company under a six-year noncancelable lease agreement. The following information about the lease and the trailers is provided:1. Equal annual payments that are due on January 1 each year provide Hayes Corp. with an 8% return on net investment (present value factor for 6 periods at 8% is 4.99271).2. Titles to the trailers pass to Lester at the end of the lease.3. The fair value of each trailer is $50,000. The cost of each trailer to Hayes Corp. is $45,000. Each trailer has an expected useful life of nine years."4. Collectibility of the lease payments is reasonably predictable and there are no important uncertainties surrounding the amount of costs yet to be incurred by Hayes Corp. Instructions (a) What type of lease is this for the lessor? Discuss. (b) Calculate the annual lease payment. (Round to nearest dollar.)(c) Prepare a lease amortization schedule for Hayes Corp. for the first three years.(d) Prepare the journal entries for the lessor for 2014 to record the lease agreement, the receipt of the lease rentals, and the recognition of revenue (assume the use of a perpetual inventory method and round all amounts to the nearest dollar)."

Direct-financing leases are in substance the financing of an asset purchase by the lessee.

In a sale-leaseback transaction where none of the four leasing criteria are satisfied, which of the following is false?

Use the following information for questions 54 through 59. (Annuity tables on page 21-25.) On January 1, 2015, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2015 is $4,000,000; however, the book value to Holt is $3,300,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property. -Yancey, Inc. would record depreciation expense on this storage building in 2015 of (Rounded to the nearest dollar.)

Use the following information for questions 75 through 80. (Annuity tables on page 21-25.) Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2015 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $287,432 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2015, is $800,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. -Which of the following lease-related revenue and expense items would be recorded by Yates if the lease is accounted for as an operating lease?

Leasing equipment reduces the risk of obsolescence to the lessee and in many cases passes the risk of residual value to the lessor.

Use the following information for questions 104 and 105. On January 2, 2015, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $200,000 starting at the beginning of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $1,200,000, based on implicit interest of 10%. -In a lease that is recorded as a sales-type lease by the lessor, interest revenue

Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor?Transfers Ownership Contains Bargain Collectibility of Lease Any Important

Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $172,076, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pisa, Inc. in the first year of the asset's life?

The FASB requires lessees and lessors to disclose certain information about leases in their financial statements or in the notes.

A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the

When the lessee agrees to make up any deficiency below a stated amount that the lessor realizes in residual value, that stated amount is the guaranteed residual value.

From the lessee's perspective, in the earlier years of a lease, the use of the

Use the following information for questions 54 through 59. (Annuity tables on page 21-25.) On January 1, 2015, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2015 is $4,000,000; however, the book value to Holt is $3,300,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property. -What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.)

A lessee had a ten-year capital lease requiring equal annual payments. The reduction of the lease liability in year 2 should equal

In computing the present value of the minimum lease payments, the lessee should

On December 1, 2015, Goetz Corporation leased office space for 10 years at a monthly rental of $90,000. On that date Goetz paid the landlord the following amounts: Rent deposit \ 90,000 First month's rent 90,000 Last month's rent 90,000 Installation of new walls and offices 720,000 \ 990,000 The entire amount of $990,000 was charged to rent expense in 2015. What amount should Goetz have charged to expense for the year ended December 31, 2015?

Companies must periodically review the estimated unguaranteed residual value in a sales-type lease.

On January 2, 2014, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $80,000 each, payable beginning January 2, 2014. Brick Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease term. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What journal entry would Brick Co. make at January 1, 2015 to record the second lease payment?