Exam 8: Accounting for Leases

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

The following amortization schedule is for a lease entered into at the start of fiscal 2016 for an asset that will be useful for 5 years.The company uses straight-line depreciation method. Required: Provide the appropriate presentation of this lease in the lessee's balance sheet for December 31,2017,distinguishing amounts that are current from those that are non-current.

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

What is the implicit rate?

The following are the characteristics of a lease: Required: Determine the present value of minimum lease payments (MLP)and the appropriate classification of this lease for the lessee.

Why are there special rules for sale-leaseback transactions?

For the following lease,determine the minimum present value calculation for the lessor.

Kartik 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).Kartik's incremental borrowing rate is 5%.There is no bargain purchase or renewal option.Kartik 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 Kartik for the first year of operations.Assume all payments were made when due.Show your calculations.

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 a 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.

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

Zarlon Leasing Company agrees on January 1,2017 to rent Killington Winery the equipment that Killington requires to expand its production capacity to meet customers' demands for its products.The lease agreement calls for five annual lease payments of $11 0,000 at the end of each year.Killington has identified this as a finance lease.Furthermore,the company has determined that the present value of the lease payments,discounted at 4%,is $489,700.The leased equipment has an estimated useful life of five years and no residual value.Killington uses the straight-line method for depreciating similar equipment that it owns. Required: a.Prepare a lease amortization schedule for this lease. b.Prepare the necessary journal entries for the first year of the lease.

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

List factors that impact the degree to which this agency cost is a factor.

What is the incremental borrowing rate?

Why do lessors generally prefer finance lease treatment? Explain.

What are executory costs?

Which statement is correct about the bargain purchase option (BPO)?

On July 1,2017,Janus Company leased equipment to Pluto Company.The terms of the lease are as follows: Pluto uses straight-line depreciation for its property,plant,and equipment,and its year-end is December 31. Required: Prepare the journal entries for the lessee from July 1 through December 31.

Which condition would result in an operating lease?

On January 1,2017,Rushabh Company entered a lease to rent office space.The lease requires Rushabh to pay $190,000 per year,at the end 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.Rushabh's incremental borrowing rate is 9%. Required: Classify this lease for Rushabh Company and record the journal entries for the first year of the lease.