Exam 15: Leases

For a capital lease,the amount recorded initially by the lessee as a liability should

On January 1,2014,Bullitt Corporation sold a machine to Sting Corporation and simultaneously leased it back for ten years.The following information is available regarding the lease: How much profit should Bullitt recognize on January 1,2014,on the sale of the machine?

Which of the following statements characterizes an operating lease?

Mercury Package Express Service properly capitalized at $93,598 a large truck it had leased on January 1,2014.The truck has a 14-year useful life.Title to the truck passes to Mercury at the end of the 12-year lease term.Mercury depreciates other similar trucks on the straight-line method with no salvage value.The lease agreement calls for annual payments of $11,500 at the beginning of each year of the lease term.The interest rate implicit in the lease (which is known by the lessee)is 8%. How much depreciation and interest expense should Mercury record for 2015?

Which of the following would be considered an executory cost?

In a lease that is recorded as a direct financing lease by the lessor,unearned revenue

Which of the following statements characterizes lessor accounting for residual values?

Kaye Corporation agreed to lease a computer,at cost,to Lumbar Company for $36,000 payable each year-end for seven years without a bargain purchase option,or,as an equivalent alternative,for $33,000 per year with a bargain purchase option,after the seventh rental.If the lease is a direct financing lease,and Kaye expects to earn a 12 percent return,the amount of cash Lumbar Company would need to pay for the bargain purchase option is

Hydra Company entered into a direct-financing lease with Bridges Company for the use of an asset which cost Hydra $195,000.The lease agreement contained a bargain purchase option effective immediately after the fifth rental,which provided that Bridges could purchase the asset at that time.The estimated life of the asset was 10 years with an estimated residual value of $500.Assuming that Bridges uses straight-line depreciation,Bridges's annual depreciation expense would be

Parlor Company manufactures equipment that they sell or lease.On December 31,2014,Parlor leased equipment to Liner Company for a five-year period after which ownership of the leased asset will be transferred to Liner.The lease calls for equal annual payments of $60,000,due on December 31 of each year.The first payment was made on December 31,2014.The normal sales price of the equipment is $320,000,and cost is $276,000.For the year ended December 31,2014,what amount of income should Parlor report from the lease transaction?

On January 1,Landau Company signed a ten-year noncancelable lease for a new machine,requiring $45,000 annual payments at the beginning of each year.The machine has a useful life of 15 years,with no salvage value.Title passes to Landau at the lease expiration date.Landau uses straight-line depreciation for all of its plant assets.Aggregate lease payments have a present value on January 1 of $352,000,based on an appropriate rate of interest.For the first year,Landau should record depreciation (amortization)expense for the leased machine at

Always Distributing entered into a leasing agreement with R & D Rental.The lease qualifies as a capital lease and calls for payments of $5,000 for 5 years with the first payment being made on January 1,2014,and subsequent payments being made on December 31 of each year.Always's incremental borrowing rate is 12 percent. Prepare a schedule amortizing Always's lease obligation.

If the residual value of a leased asset is greater than the amount guaranteed by the lessee,the lessee

An asset with a market value of $100,000 is leased on January 1,2014.Five annual lease payments are due each January 1 beginning January 1,2014.The lessee guarantees the $40,000 residual value of the asset as of the end of the lease term on December 31,2018.The lessor's implicit interest rate is 8%. What is the annual lease payment?

On December 31,2014,Behring Enterprises leased equipment from R & R Equipment Rental.Pertinent lease transaction data are as follows: •The estimated seven-year useful equipment life coincides with the lease term. •The first of the seven equal annual $300,000 lease payments was paid on December 31,2014. •R & R's implicit interest rate of 12 percent is known to Behring. •Behring's incremental borrowing rate is 14 percent. •Present values of an annuity of 1 in advance for seven periods are 5.11 at 12 percent and 4.89 at 14 percent. Behring should record the equipment on the books at

On January 1,2014,J.M.Rodriguez,owner of JMR Sound,sold the building the studio currently occupies to Rave Up Events Company for the current market value of the building of $9,000,000.Prior to the sale,the carrying value of the building was $7,000,000.The estimated remaining useful life of the building is 10 years,with no residual value at that time.Straight-line depreciation is used to depreciate the building. On the same day as the sale,January 1,2014,Rodriguez signed a 10-year noncancelable leaseback agreement that has a 15 percent implicit rate of return for the lessor.The lessee's incremental borrowing rate also is 15 percent.Annual payments begin on January 1,2014.During 2014,Rodriguez will pay $10,000 executory costs if the transaction qualifies as a direct-financing lease.If the agreement qualifies as an operating lease,this $10,000 will be paid by the buyer-lessor.For convenience,provide all amounts in your solution in $000. Required: 1.Compute the annual lease payments and the gain or loss on the sale of the building. 2.Prepare the 2014 entries for the seller-lessee and the buyer-lessor assuming the agreement qualifies as an operating lease. 3.Prepare the lease amortization schedule and the 2014 entries for the seller-lessee and the buyer-lessor assuming the agreement qualifies as a direct-financing lease.

Pralow,Inc.,leased an asset to Bender Corporation.The cost of the asset to Pralow was $8,000.Terms of the lease specify four-year life for the lease,an annual interest rate of 15 percent,and four year-end rental payments.The lease qualifies as a capital lease and is classified as a direct-financing lease.The asset reverts to Pralow after the fourth year,when its residual value is estimated to be $1,000.The amount of each rental payment is

On January 1,Blalock Company as lessee signed a ten-year noncancelable lease for a machine with annual payments of $60,000.The first payment was also made on January 1.Blalock appropriately treated this transaction as a capital lease.The ten lease payments have a present value of $405,000 at January 1,based on implicit interest of 10 percent.For the first year,Blalock should record interest expense of

What are the three types of period costs that a lessee experiences with capital leases?

A lease agreement included the following provisions: Inception of the lease: 1/1/2014 Annual lease payments of $6,000 are due 12/31/2014,12/31/2015,12/31/2016 Annual lease payments of $4,000 are due 12/31/2017,12/31/2018,12/31/2019 The lease calls for a total of six lease payments. The lessor's implicit rate of return is 12%. The lease is a capital lease to the lessor. How much interest revenue is recognized in 2014 by the lessor,assuming a calendar-year fiscal year?