Exam 18: Accounting for Leases

On January 1,2017,Sheldon Company sold a building to Breezy Board Bank for $52,000,000 and immediately leased it back under a 15-year non-cancellable lease at $5,918,000 per year,payable at the beginning of each year.Breezy Board used an implicit rate of 9% to determine the lease payments,and this rate is known to Sheldon.The building had a carrying value of $34,000,000 on Sheldon's books. Required: Assume that the lease is an finance lease for both the lessee and lessor for both the lessee and lessor,and there is no profit margin for the lessor.Prepare all necessary journal entries for 2017 for Sheldon (the seller-lessee)and Breezy Board (the buyer-lessor).Breezy Board will depreciate the building on a straight-line basis over the remaining useful life of 15 years.Explain the implications to Sheldon's depreciation expense of this transaction.

What is the incremental borrowing rate?

On January 1,2017,Teddy Company sold a building to Breezy Bank for $40,000,000 and immediately leased it back under a 25-year non-cancellable lease at $3,208,000 per year,payable at the beginning of each year.Breezy used an implicit rate of 7% to determine the lease payments,and this rate is known to Teddy.The building had a carrying value of $12,000,000 on Teddy's books. Required: Assume that the lease is a finance lease for both the lessee and lessor,and there is no profit margin for the lessor.Prepare all necessary journal entries for 2017 for Teddy (the seller-lessee)and Breezy (the buyer-lessor).Teddy will continue to depreciate the building on a straight-line basis over the lease term.Explain the implications to Teddy's depreciation expense of this transaction.

Assume that Speery agrees to lease a new machine from LEERY on January 1,2017,for $30,000 per year,paid in advance (i.e. ,at the beginning of the year).The lease term is 10 years and the asset's useful life is 8 years.There is no bargain purchase option.The unguaranteed residual value is $10,000.Which statement is correct?

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.

What entry is needed by the lessor for a finance lease?

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

Which entry is needed by the lessee for an operating lease?

For the following lease,determine the minimum present value calculation for the lessee. Annual payment (due at end of year) \ 25,000 Lease term 5 Incremental rate \%\% Implicit rate (known to lessee) 6\% Executory costs 2,000

What are executory costs?

The following are characteristics of a lease: Price of leased asset from manufacturer 312,100 Lease payments 75,000 Lease term 4 years Lease frequency Annual Payment timing End of year Guaranteed residual value 15,000 Interest rate implicit in the lease agreement 5\% Required: Determine the appropriate classification for this lease for the lessor (who is not the manufacturer)and record the journal entries for the lessor for the first year of the lease.

When is it possible for the present value of the minimum lease payments to exceed the fair value of the leased property.What must the lessee do to prevent recording an overvalued asset?

What entry is required for the lessor in a operating lease?

The following are the characteristics of a lease: Fair value of leased asset 150,000 Lease payments 25,500 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.

On January 1,2017,Cory Company sold a building to Billy Board Bank for $52,000,000 and immediately leased it back under a 15-year non-cancellable lease at $5,918,000 per year,payable at the beginning of each year.Billy Board used an implicit rate of 10.08% to determine the lease payments,and this rate is known to Cory.The building had a carrying value of $34,000,000 on Cory's books. Required: Assume that the lease is an operating lease for both the lessee and lessor.Prepare all necessary journal entries for 2017 for Cory (the seller-lessee)and Billy Board (the buyer-lessor).Billy Board will depreciate the building on a straight-line basis over the remaining useful life of 15 years.

Which statement is correct?

Discuss what is meant by the risk-adjusted rate and which risk adjusted rates the lessee and the lessor should use?

Boris 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).Boris's incremental borrowing rate is 8%.There is no bargain purchase or renewal option.Boris 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 4% 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 Boris for the first year of operations.Assume all payments were made when due.Show your calculations.

Under ASPE,assuming all information is available,which rate is used by the lessee in the lease present value calculations?

Under IFRS,assuming all information is available,which rate is used by the lessee in the minimum lease calculation?