Exam 21: Accounting for Leases

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. -From the lessor's viewpoint, what type of lease is involved?

Use the following information for questions 91 and 92. Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July 1, 2015. The lease is appropriately accounted for as a sales-type lease by Metro and as a capital lease by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2025. The first of 10 equal annual payments of $552,000 was made on July 1, 2015. Metro had purchased the equipment for $3,500,000 on January 1, 2015, and established a list selling price of $4,800,000 on the equipment. Assume that the present value at July 1, 2015, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $4,000,000. -What is the amount of profit on the sale and the amount of interest revenue that Metro should record for the year ended December 31, 2015?

Harter Company leased machinery to Stine Company on July 1, 2015, for a ten-year period expiring June 30, 2025. Equal annual payments under the lease are $150,000 and are due on July 1 of each year. The first payment was made on July 1, 2013. The rate of interest used by Harter and Stine is 9%. The cash selling price of the machinery is $1,050,000 and the cost of the machinery on Harter's accounting records was $930,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Harter, what amount of interest revenue would Harter record for the year ended December 31, 2015?

IFRS for leases is more "rules-based" than U.S. GAAP and includes many bright-line criteria to determine ownership.

To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria. Which of the following is not one of the ways to accomplish this goal?

An essential element of a lease is that the

On December 31, 2014, Lang Corporation leased a ship from Fort Company for an eight-year period expiring December 30, 2022. Equal annual payments of $300,000 are due on December 31 of each year, beginning with December 31, 2014. The lease is properly classified as a capital lease on Lang 's books. The present value at December 31, 2014 of the eight lease payments over the lease term discounted at 10% is $1,760,528. Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total obligation under capital leases on its December 31, 2015 balance sheet is

Krause Company on January 1, 2015, enters into a five-year noncancelable lease, with four renewal options of one year each, for equipment having an estimated useful life of 10 years and a fair value to the lessor, Daly Corp., at the inception of the lease of $2,000,000. Krause's incremental borrowing rate is 8%. Krause uses the straight-line method to depreciate its assets. The lease contains the following provisions:1. Rental payments of $146,000 including $13,000 for property taxes, payable at the beginning of each six-month period.2. A termination penalty assuring renewal of the lease for a period of four years after expiration of the initial lease term.3. An option allowing the lessor to extend the lease one year beyond the last renewal exercised by the lessee."4. A guarantee by Krause Company that Daly Corp. will realize $100,000 from selling the asset at the expiration of the lease. However, the actual residual value is expected to be $60,000. Instructions (a) What kind of lease is this to Krause Company? (b) What should be considered the lease term? (c) What are the minimum lease payments?(d) What is the present value of the minimum lease payments? (PV factor for annuity due of 20 semi-annual payments at 8% annual rate, 14.13394; PV factor for amount due in 20 interest periods at 8% annual rate, .45639.) (Round to nearest dollar.)(e) What journal entries would Krause record during the first year of the lease? (Include an amortization schedule through 1/1/16 and round to the nearest dollar.)"