Exam 15: Leases

The inception of a lease is January 1,2014.A third party guarantees the residual value of the asset under the lease,estimated to be $12,000 at January 1,2019,the end of the lease term.Annual lease payments are $10,000 due each December 31,beginning December 31,2014.The last payment is due December 31,2018.Both the lessor and lessee use 10% as the interest rate.The remaining useful life of the asset was six years at the inception of the lease. What is the net asset balance for the lessor,and net liability balance for the lessee,at the date of the inception of the lease?

Glenn Manufacturing entered into a noncancelable lease for an office building on January 1,2014.The lease calls for payments of $24,000 a year for eight years.The first payment is due on January 1,2014,with the other payments due on December 31 of each year.Glenn has an incremental borrowing rate of 8 percent.The building is amortized by Glenn over eight years using the straight-line method and assuming no salvage value. Prepare a partial balance sheet for Glenn for the year ending December 31,2014,disclosing the asset and the liability related to the leased building.

One of the four general criteria for a capital lease specifies that the lease term be equal to or greater than

Narcissus Corporation has entered into a debt agreement that restricts its debt-to-equity ratio to less than two-to-one.The corporation is planning to expand its facilities,creating a need for additional financing.The board of directors is considering leasing the additional facilities but is concerned that leasing may violate its existing debt agreement.A violation of the debt agreement would place the corporation in default.The potential lessor insists that the lease be structured in such a way that it can be accounted for as a capital lease by the lessor (the lessor is a dealer and wants to recognized the dealer's gross profit on the transaction immediately).In addition,the lessor requires that the residual value of the leased asset be guaranteed when it reverts to the lessor at the end of the lease term.Narcissus's board has asked you to analyze the following alternative: Alternative 1--Narcissus would enter into a lease that qualifies as a capital lease (to Narcissus).If this alternative is selected,Narcissus's reported debt-to-owners'-equity ratio would be 1.9,and its ability to issue debt in the future would be seriously constrained. Alternative 2--Narcissus would enter into a lease and pay a third party to guarantee the residual value of the leased property.The lease would be structured in such a way as to qualify as an operating lease to Narcissus and as a capital lease to the lessor.In this case,Narcissus's reported debt-to-equity ratio would be unaffected by the lease contract. Required: Explain the consequences of each of these alternatives,including any ethical considerations that might exist.

On January 2,2014,the Clapton Studios leased six computers for use in the engineering department.The lease period is for 13 years and the estimated economic life of the leased property is 15 years.The lease does not contain automatic title transfer or a bargain purchase option.Lease payments are $11,000 per year,payable each December 31.The incremental borrowing rate for Clapton is 12 percent and the implicit interest rate (known by Clapton)is 10 percent.The company uses straight-line depreciation for this type of equipment. Provide the necessary journal entries to record the transactions for Clapton for the period January 2,2014 through December 31,2015.

On January 1,2014,A1A Company leased a warehouse to Elisha under an operating lease for ten years at $80,000 per year,payable the first day of each lease year.A1A paid $36,000 to a real estate broker as a finder's fee.The warehouse is depreciated at $20,000 per year.During 2014,A1A incurred insurance and property tax expense totaling $15,000.A1A's net rental income for 2014 should be

In a lease that is recorded as an operating lease by the lessee,the equal monthly rental payments should be

Lease X does not contain a bargain purchase option,but the lease term is equal to 90 percent of the estimated economic life of the leased property.Lease Y does not transfer ownership of the property to the lessee by the end of the lease term,but the lease term is equal to 75 percent of the estimated economic life of the leased property.How should the lessee classify these leases?

Celestion, Inc., leased equipment to Speaker Company on January 1, 2014. The lease is for a five-year period ending January 1, 2019. The first equal annual payment of $1,200,000 was made on January 1, 2014. The cash selling price of the equipment is $5,174,552, which is equal to the present value of the lease payments at 8%. Celestion purchased the equipment for $4,300,000. -For 2014,Celestion should report interest revenue of

Business leasing has become a large market.Banks,other lending institutions,and commercial leasing companies represent the largest share of the business leasing market with the remainder consisting of manufacturers,dealers,and distributors. Identify the advantages and disadvantages to lessors of leasing rather than selling property.

In order for a lease to be considered a finance (or capital)lease,international accounting standards require that a lease agreement

The lessor capitalizes and amortizes initial direct costs for all types of leases except

Neils Company leased an asset for use in its factory.The lease agreement specifies that Neils is to make annual payments of $2,818 payable at the end of each year.The lessor classified the lease as a direct-financing lease since Neils was allowed to lease the asset at its cost of $14,000 (the present value of the lease payments).The lessor receives a 12 percent rate of return on the lease.The estimated residual value at the end of the lease term is zero. If the lease was classified as a capital lease by Neils,how much annual depreciation would Neils record using the straight-line method?

Equal monthly rental payments for a particular lease should be charged to Rental Expense by the lessee for which of the following?

An eight-year capital lease specifies equal minimum annual lease payments.Part of this payment represents interest and part represents a reduction in the net lease liability.The portion of the minimum lease payment in the fourth year applicable to the reduction of the net lease liability should be

Sanborn,Inc.,leased equipment from Chase Supply on December 31,2014.The lease term is for the 10-year period expiring December 30,2021.The useful life of the leased asset is 10 years.Equal annual payments under the lease are $100,000 due on December 31 of each year.The first payment was made on December 31,2014.Sanborn's incremental borrowing rate was 12% at December 31,2014.Chase's implicit rate for the lease is 10% and is known by Sanborn.Sanborn appropriately accounts for the lease as a capital lease. What is the balance in Sanborn's "Liability Under Lease Agreements" account at December 31,2015?

On March 1,2014,Hardy Corp.became the lessee of new equipment under a noncancelable six-year lease.The total estimated economic life of this equipment is ten years.The fair value of this equipment on March 1,2014,was $100,000.The lease does not meet the criteria for classification as a capital lease with respect to transfer of ownership of the leased asset,or bargain purchase option,or lease term.Nevertheless,Hardy must classify this lease as a capital lease if,at inception of the lease,the present value of the minimum lease payments (excluding executory costs)is equal to at least

Which of the following statements concerning guaranteed residual values is appropriate for the lessee?

Brooke Distributing leased a machine for a period of eight years,contracting to pay $200,000 at the beginning of the lease term on December 31,2014,and $200,000 annually on December 31 for each of the next seven years.The present value of the eight rent payments over the lease term,appropriately discounted at 10 percent,is $1,174,000.On its December 31,2015,balance sheet,Brooke should report a liability under capital lease of

We-Lease-All,Inc.leased a chroming machine to Fernando's Choppers.The lease qualifies as a direct financing lease and requires lease payments of $74,502 per year,payable in advance,over a ten-year period.There is no expected residual value.The fair market value of the packing machine is $430,000--the same amount paid by Choppers to purchase the asset.The lease term begins on January 1,2014. Provide the journal entries required on Choppers' books to (1)record the lease transaction and the first lease payment. (2)recognize interest revenue at the end of the first year.Washington uses a calendar-year accounting period.(Round all computations to the nearest dollar.)