Exam 18: Accounting for Leases

For the following lease,determine the minimum present value calculation for the lessee. Annual payment (due at end of year) \ 23,104 Lease term 5 Incremental rate 10\% Implicit rate (unknown to lessee) 8\% Unguaranteed residual value Guaranteed residual value 20,000

Viribana Corporation started operations on March 1,2017.It needs to acquire a special piece of equipment for its manufacturing operations.It is evaluating two options as follows. Option 1: Lease the equipment for 10 years.Lease payments would be $11,200 per year,due at the beginning of each fiscal year (March 1).Viribana's incremental borrowing rate is 12%.There is no bargain purchase or renewal option.Viribana is responsible for all executory costs of operating the equipment. Option 2: Purchase the equipment for $71,000 by borrowing the full purchase amount at 12% over 10 years.This price is considered the fair value of the equipment.Payments are due at the end of each fiscal year (February 28). The equipment has a useful life of 10 years and would be depreciated on a straight-line basis.No residual value is expected to exist at the end of 10 years. Required: a.Calculate the present value of the lease payments (Option 1). b.Calculate the payment that would be required under the purchase option (Option 2). c.Calculate and briefly discuss the financial impact of each option on the non-current assets,total liabilities,and net income of Viribana for the first year of operations.Assume all payments were made when due.Show your calculations. d.Indicate which option you would recommend for Viribana.Provide one explanation to support your recommendation.

Assume that Souse agrees to lease a new machine from LAIRD on January 1,2017,for $40,000 per year,paid in advance (i.e. ,at the beginning of the year).Executory costs are $1,000.The lease term is 11 years and the asset's useful life is 10 years.There is no bargain purchase option.The guaranteed residual value is $10,000.Which statement is correct?

The following are the characteristics of a lease: Fair value of leased asset 150,000 Lease payments 30,500 Lease term 7 Payment frequency Antual Payment timing End of year Guaranteed residual value None Interest rate implicit in lease 8\% Required: Determine the present value of minimum lease payments (MLP)and the appropriate classification of this lease for the lessee.

For the following lease,determine the minimum present value calculation for the lessee. Annual payment (due at end of year) \ 22,000 Lease term 5 Incremental rate 10\% Implicit rate (unknown to lessee) 8\% Unguaranteed residual value 15,000 Bargain purchase option 5,000

Cerebral Corporation started operations on March 1,2017.It needs to acquire a special piece of equipment for its manufacturing operations.It is evaluating two options as follows. Option 1: Lease the equipment for 5 years.Lease payments would be $12,000 per year,due at the beginning of each fiscal year (March 1).Cerebral's incremental borrowing rate is 5%.There is no bargain purchase or renewal option.Cerebral is responsible for all executory costs of operating the equipment. Option 2: Purchase the equipment for $58,000 by borrowing the full purchase amount at 5% over 5 years.This price is considered the fair value of the equipment.Payments are due at the end of each fiscal year (February 28). The equipment has a useful life of 5 years and would be depreciated on a straight-line basis.No residual value is expected to exist at the end of 5 years. Required: a.Calculate the present value of the lease payments (Option 1). b.Calculate the payment that would be required under the purchase option (Option 2). c.Calculate and briefly discuss the financial impact of each option on the non-current assets,total liabilities,and net income of Cerebral for the first year of operations.Assume all payments were made when due.Show your calculations.

On January 1,2017,Troy Company entered a lease to rent office space.The lease requires Troy to pay $190,000 per year,at the beginning of each year,for 10 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 30 years,and its current fair value is estimated to be $6 million.Troy's incremental borrowing rate is 9%. Required: Classify this lease for Troy Company and record the journal entries for the first year of the lease.

On April 1,2018,Helo Company entered into a five-year lease for equipment.Annual lease payments are $15,000,payable at the beginning of each lease year (April 1).At the end of the lease,possession of the equipment will revert to the lessor.The equipment has an expected useful life of 5 years.Similar equipment could be purchased for $250,000 cash.Helo's incremental borrowing rate is 12%.The company has a March 31 year-end,and it uses straight-line depreciation for its property,plant,and equipment. Required: a.Prepare the journal entries relating to the lease and leased asset for Helo's fiscal year ending March 31,2019. b.State the amounts related to the lease that would be reported on the March 31,2019 balance sheet,indicating the balance sheet classifications,account names,and amounts.

For the following lease,determine the minimum present value calculation for the lessor. Annual payment (due at end of year) \ 32,000 Lease term 5 Incremental rate 11\% Implicit rate (known to lessee) 9\% Executory costs 10,000

Why are there special rules for sale-leaseback transactions?

Which statement is correct about "agency cost of leasing"?

Which will decrease the "agency cost of leasing"?

On January 1,2017,Brownee Company entered a lease to rent office space.The lease requires $350,000 per year,at the end of each year,for 20 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 40 years,and its current fair value is estimated to be $6 million.The incremental borrowing rate is 5%. Required: Classify this lease and record the journal entries for the first year of the lease.

What are the advantages to the lessee of an operating lease?

What are four examples of lease conditions that help mitigate agency costs?

Why do lessors generally prefer finance lease treatment? Explain.

Here are the terms of a lease agreement: Required: a.Determine the amount of lease payment that the lessor would require to lease the asset. b.Compute the present value of minimum lease payments for the lessee.

Salisbury Creamery leases its ice cream making equipment from Little Rock Finance Company under the following lease terms: ∙ The lease term is five years,non-cancellable,and requires equal rental payments of $56,926 due at the beginning of each year starting January 1,2016. ∙ Upon inception of the lease on January 1,2016,Little Rock purchased the equipment at its fair value of $280,000 and immediately transferred it to Salisbury Creamery.The equipment has an estimated economic life of five years,and a $20,000 residual value that is guaranteed by Salisbury Creamery. ∙ The lease contains no renewal options,and the equipment reverts to Little Rock Finance Company upon termination of the lease. ∙ Salisbury's incremental borrowing rate is 4%;the rate implicit in the lease is also 4%. ∙ Salisbury depreciates similar equipment that it owns on a straight-line basis. ∙ Both companies have December 31 year-ends. Required: a.Evaluate how the lessee should account for the lease transaction. b.Evaluate how the lessor should account for the lease transaction. c.Prepare the lessee's amortization schedule for this lease. d.Prepare the journal entries on January 1,2016 for both parties. e.Prepare the journal entries on December 31,2016 and January 1,2017 for both parties.

Curtis Corporation started operations on March 1,2017.It needs to acquire a special piece of equipment for its manufacturing operations.It is evaluating two options as follows. Option 1: Lease the equipment for 5 years.Lease payments would be $11,000 per year,due at the beginning of each fiscal year (March 1).Curtis's incremental borrowing rate is 5%.There is no bargain purchase or renewal option.Curtis is responsible for all executory costs of operating the equipment. Option 2: Purchase the equipment for $50,000 by borrowing the full purchase amount at 5% over 5 years.This price is considered the fair value of the equipment.Payments are due at the end of each fiscal year (February 28). The equipment has a useful life of 5 years and would be depreciated on a straight-line basis.No residual value is expected to exist at the end of 5 years. Required: a.Calculate the present value of the lease payments (Option 1). b.Calculate the payment that would be required under the purchase option (Option 2). c.Calculate and briefly discuss the financial impact of each option on the non-current assets,total liabilities,and net income of Curtis for the first year of operations.Assume all payments were made when due.Show your calculations.

Here are the terms of a lease agreement: Required: Determine the amount of lease payment that the lessor would require to lease the asset.