Exam 15: Leases

Kurtain Corp.leased a new building and land from Harlow Leasing Inc.for 20 years.At the inception of the lease the building and land have fair market values of $150,000 and $20,000,respectively.The building has an expected economic life of 25 years.Which of the following statements is correct regarding Kurtain's treatment of the lease?

Which of the following is true regarding the lease term?

Modesto,Inc.leased machinery with a fair value of $250,000 from Layton Machine Co.on December 31,2014.The contract is a six-year noncancelable lease with an implicit interest rate of 10 percent.The lease requires annual payments of $50,000 beginning December 31,2014.Modesto appropriately accounted for the lease as a capital lease.Modesto's incremental borrowing rate is 12 percent.Assuming the present value of an annuity due of 1 for 6 years at 10 percent is 4.7908 and the present value of an annuity due of 1 for 6 years at 12 percent is 4.6048,what is the lease liability that Modesto should report on the balance sheet at December 31,2014?

Canarsie Company leased equipment to Fulton Inc.on January 1,2014.The lease is for an eight-year period expiring December 31,2021.The first of eight equal annual payments of $900,000 was made on January 1,2014.Canarsie had purchased the equipment on December 29,2013,for $4,800,000.The lease is appropriately accounted for as a sales-type lease by Canarsie.Assume that the present value at January 1,2014,of all rent payments over the lease term discounted at a 10 percent interest rate was $5,280,000.What amount of interest revenue should Canarsie record in 2015 (the second year of the lease period)as a result of the lease?

Nanotech Inc.leased a new machine having an expected useful life of 20 years from Union Co.Terms of the noncancelable 15-year lease were that Nanotech would gain title to the property upon payment of a sum equal to the fair market value of the machine at the termination of the lease.Nanotech accounted for the lease as a capital lease and recorded an asset and a liability in the financial records.The asset recorded under this lease should properly be amortized over

Soundesign Company entered into a lease of special equipment to LabCorp Company.The lease term was six years.The equipment cost Soundesign $40,000 and Soundesign plans to earn a $4,000 dealer profit.Soundesign's implicit rate on the lease is 12 percent. As a result of this agreement,Soundesign will receive year-end lease payments of

Patrol,Inc.,leased a machine from Ravel Company.The lease term was for a five-year period beginning January 1,2014.Equal annual lease payments of $3,000 are due on December 31 of each year.The implicit rate of the lease is 10% and is known to Patrol.Patrol has properly applied the lease capitalization criteria and as a result,accounts for the lease as a capital lease.The first payment under the lease was made on December 31,2014 as scheduled. How much should Patrol classify as the current portion of the lease liability at December 31,2014?

Wrench Repairs acquires equipment under a noncancelable lease at an annual rental of $45,000,payable in advance for five years.After five years,there is a bargain purchase option of $75,000.The appropriate interest rate is 12 percent.What is the total present value of the lease and the first year's interest expense?

Governor Corporation entered into a direct financing lease (interest rate 12 percent)to lease Pleasant an asset that cost Governor $90,000.The lease specified annual year-end payments for seven years.The lease also specified that,along with the last payment,Pleasant could purchase the asset for $8,000 cash.Under this lease agreement,Pleasant will be required to pay annual payments of

Scher Co.leased a machine on December 31,2014.Annual payments under the lease are $110,000 (which includes $10,000 annual executory costs)and are due on December 31 each year,for a ten-year period.The first payment was made on December 31,2014,and the second payment was made on December 31,2015.According to the agreement,the lease payments are discounted at 10 percent over the lease term.Assume the present value of minimum lease payments at the inception of the lease and before the first annual payment was $615,000 and Scher appropriately classified the lease as a capital lease.What is the lease liability Scher should report in its December 31,2015,balance sheet?

The lessee's balance sheet liability for a capital lease would be periodically reduced by the

Which of the following is NOT a required disclosure for lessors?

On January 1,2014,Benjamin Industries leased equipment on an eight-year term at $15,000 annual rental payments,paid in advance.There is a bargain purchase option on December 31,2021 (end of lease),of $24,000.The economic life of the equipment is estimated to be 15 years.The interest rate is 12 percent. (1)Give the necessary entries for 2014 assuming all payments after the initial payment are made on December 31. (2)Give the entry at December 31,2021,assuming the option is permitted to lapse and that there is no residual value because of obsolescence.Assume 2021 amortization entries have been made.

NPR leased a special crane to WLRN that cost NPR $40,000.The lease term was six years and the annual rentals were $10,000 per year,payable at the end of each year.The implicit interest rate was 10 percent.NPR recognized a gross margin of

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

Bayou Inc.leases equipment to its customers under noncancelable leases.On January 1,2014,Bayou leased equipment costing $400,000 to Rockwell Co.,for nine years.The rental cost was $44,000 payable in advance semiannually (January 1 and July 1),plus $2,000 semiannually for executory costs.The equipment had an estimated life of 15 years and sold for $533,025 with an estimated unguaranteed residual value of $80,000.The implicit interest rate is 12 percent. Prepare all journal entries for 2014 on Bayou's and Rockwell's books.Round all calculations to the nearest dollar.Use straight-line depreciation.

A lease contains a bargain purchase option.In determining the lessee's capitalizable cost at the beginning of the lease term,the payment called for by the bargain purchase option would be

Ollie Company entered into a lease agreement with Costello,Inc.,to lease an asset that cost Ollie $120,000.The lease agreement requires five annual year-end rentals of $40,000 each.Ollie's implicit rate on the lease is 15 percent. Ollie's dealer profit on this lease would be

On December 1,2014,Boron Inc.signed an operating lease for a warehouse for ten years at $15,000 per year.Upon execution of the lease,Boron paid $30,000 covering rent for the first two years.How much should be shown in Boron's income statement for the year ended December 31,2014,as rent expense?

Security Inc.manufactures equipment that is sold or leased.On December 31,2014,Security leased equipment to Quirky for a five-year period expiring December 31,2019,at which date ownership of the leased asset will be transferred to Quirky.Equal $40,000 payments under the lease are due on December 31 of each year.The first payment was made on December 31,2014.Collectibility of the remaining lease payments is reasonably assured,and Security has no material cost uncertainties.The normal sales price of the equipment is $144,000 and cost is $110,000.For the year ended December 31,2014,how much income should Security recognize from the lease transaction?