Accounting Q.2 A company entered into two different leases on Ist January 2012: Machine 1 A total of 24 monthly instalments of £1,500 payable in advance and terminable at any time by either party. The cash price of this machine is £50,000 and its estimated useful life is 7 years. Machine 2 The cash price of the machine is £31,700 and is expected to last 5 year with no terminal value. Primary period of lease is 4 years, with rentals payable annually in arrears at £10,000. Implicit interest rate at 10%. Company's policy is to depreciate the machine on a straight-line basis. (a) Using information provided above, explain what the differences are between finance and operating leases. (b) For the lease of machine 1, identify the amount of interest charge for the financial year 2012 using straight-line method. (c) For machine 2, show the effect of this lease, on the statements of comprehensive income and statements of financial position for the four years to 31 December 2015, under the following headings: (i) lease creditor (ii) finance charge, allocated using actuarial method (iii) depreciation charge, and (iv) net book value of assets

Accounting Q.2 A company entered into two different leases on Ist January 2012: Machine 1 A total of 24 monthly instalments of £1,500 payable in advance and terminable at any time by either party. The cash price of this machine is £50,000 and its estimated useful life is 7 years. Machine 2 The cash price of the machine is £31,700 and is expected to last 5 year with no terminal value. Primary period of lease is 4 years, with rentals payable annually in arrears at £10,000. Implicit interest rate at 10%. Company's policy is to depreciate the machine on a straight-line basis. (a) Using information provided above, explain what the differences are between finance and operating leases. (b) For the lease of machine 1, identify the amount of interest charge for the financial year 2012 using straight-line method. (c) For machine 2, show the effect of this lease, on the statements of comprehensive income and statements of financial position for the four years to 31 December 2015, under the following headings: (i) lease creditor (ii) finance charge, allocated using actuarial method (iii) depreciation charge, and (iv) net book value of assets

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 1P: Determining Type of Lease and Subsequent Accounting On January 1, 2019, Ballieu Company leases...

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Leased Assets Koffman and Sons signed a four-year lease for a forklift on January 1, 2016. Annual lease payments of $1,510, based on an interest rate of 8%, are to be made every December 31, beginning with December 31, 2016. Required Assume that the lease is treated as an operating lease. Will the value of the forklift appear on Koffmans balance sheet? What account will indicate that lease payments have been made? Assume that the lease is treated as a capital lease. Prepare any journal entries needed when the lease is signed. Explain why the value of the leased asset is not recorded at $6,040 (1,5104). Prepare the journal entry to record the first lease payment on December 31, 2016. Calculate the amount of depreciation expense for the year 2016. At what amount would the lease obligation be presented on the balance sheet as of December 31, 2016?
Sales-Type Lease with Guaranteed Residual Value Calder Company, the lessor, enters into a lease with Darwin Company, the lessee, to provide heavy equipment beginning January 1, 2017. The lease is appropriately classified as a sales-type lease. The lease terms, provisions, and related events are as follows: The lease is noncancelable, has a term of 8 years, and has no renewal or bargain purchase option. The annual rentals are 65,000, payable at the end of each year. The interest rate implicit in the lease is 15%. Darwin agrees to pay all executory costs directly to a third party. The cost of the equipment is 280,000. The fair value of the equipment to Calder is 308,021.03. Calder incurs no material initial direct costs. Calder expects that it will be able to collect all lease payments. Calder estimates that the fair value at the end of the lease term will be 50,000 and that the economic life the equipment is 9 years. This residual value is guaranteed by Darwin. The following present value factors are relevant: PV of an ordinary annuity n = 8, i = 15% = 4.487322 PV n = 8, i = 15% = 0.326902 PV n = 1, i = 15% = 0.869565 Required: 1. Determine the proper classification of the lease. 2. Prepare a table summarizing the lease receipts and interest income earned by Calder for this lease. 3. Prepare journal entries for Calder for the years 2019, 2020, and 2021. 4. Next Level Prepare partial balance sheets for December 31, 2019, and December 31, 2020, showing how the accounts should be reported. Use the present value of next years payment approach to classify the lease receivable as current and noncurrent. 5. Next Level Prepare partial balance sheets for December 31, 2019, and December 31, 2020, showing how the accounts should be reported. Use the change in present value approach to classify the lease receivable as current and noncurrent.
Use the information in RE20-3. Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. However, assume that Garvey is now required to make the 65,949.37 payments on January 1 each year and that the fair value at the lease inception is now 275,000 (65,949:37 4:169865).
Owens Company leased equipment for 4 years at 50,000 a year with an option to renew the lease for 6 years at 2,000 per month or to purchase the equipment for 25,000 (a price considerably less than the expected fair value) after the initial lease term of 4 years. Why would this lease qualify as a finance lease?
Determining Type of Lease and Subsequent Accounting On January 1, 2019, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions: The lease is noncancelable and has a term of 8 years. The annual rentals arc 35,000, payable at the beginning of each year. The interest rate implicit in the lease is 14%. Anderson agrees to pay all executory costs directly to a third party and is given an option to buy the equipment for 1 at the end of the lease term, December 31, 2026. The cost of the equipment to the lessee is 150,000, and the fair value is approximately 185,100. Ballieu incurs no material initial direct costs. It is probable that Ballieu will collect the lease payments. Ballieu estimates that the fair value is expected to be significantly greater than 1 at the end of the lease term. Ballieu calculates that the present value on January 1, 2019, of 8 annual payments in advance of 35,000 discounted at 14% is 185,090.68 (the 1 purchase option is ignored as immaterial). Required: 1. Next Level Identify the classification of the lease transaction from Ballices point of view. Give the reasons for your classification. 2. Prepare all the journal entries tor Ballieu for the years 2019 and 2020. 3. Discuss the disclosure requirements for the lease transaction in Ballices notes to the financial statements.
Sales-Type Lease with Unguaranteed Residual Value Lessor Company and Lessee Company enter into a 5-year, noncancelable, sales-type lease on January 1, 2019, for equipment that cost Lessor 375,000 (useful life is 5 years). The fair value of the equipment is 400,000. Lessor expects a 12% return on the cost of the asset over the 5-year period of the lease. The equipment will have an estimated unguaranteed residual value of 20,000 at the end of the fifth year of the lease. The lease provisions require 5 equal annual amounts, payable each January 1, beginning with January 1, 2019. Lessee pays all executory costs directly to a third party. The equipment reverts to the lessor at the termination of the lease. Assume there are no initial direct costs, and the lessor expects to be able to collect all lease payments. Required: 1. Show how Lessor should compute the annual rental amounts. 2. Prepare a table summarizing the lease and interest receipts that would be suitable for Lessor. 3. Prepare a table showing the accretion of the unguaranteed residual asset. 4. Prepare the journal entries for Lessor for the years 2019, 2020, and 2021.
Use the information in RE20-3. Prepare the journal entries that Richie Company (the lessor) would make in the first year of the lease assuming the lease is classified as a sales-type lease. Assume that the lessee is required to make payments on December 31 each year. Also assume that Richie had purchased the equipment at a cost of 200,000.
FRM Ltd acquired an item of equipment and enters into a non-cancellable lease agreement with FEN Equipment Ltd on 1 January 2015. The lease consists of the following: Date of inception: 1/1/15 Duration of lease: 4 years Life of leased asset: 5 years Lease payments (annual): $550,000 (annual) which includes $80,000 for Maintenance and insurance costs per annum. Guaranteed residual value (Added to final payment): $190,000 Interest rate: 7% Formula for PV of $1 in n periods =1/(1+k)nFormula for present value of annuity of $1 per period for n periods = (1- (1/(1+k)n)) / k where, k is the discount rate expressed in decimal Required: a) Determine the present value of minimum lease rental payment. b) Prepare the journal entries for FRM Ltd (the Lessee) using the Net Method for the following; i. Transfer of control ii. Payment of annual payments for 2015 and 2016.
FRM Ltd acquired an item of equipment and enters into a non-cancellable lease agreement with FENEquipment Ltd on 1 January 2015. The lease consists of the following: Date of inception: 1/1/15 Duration of lease: 4 years Life of leased asset: 5 years Lease payments (annual): $550 000 (annual) which includes $80 000 forMaintenance and insurance costs per annum. Guaranteed residual value(Added to final payment): $190 000 Interest rate: 7%Formula for PV of $1 in n periods =1/(1+k)nFormula for present value of annuity of $1 per period for n periods =(1-1/(1+k)n)/kwhere, k is the discount rate expressed in decimal a) Determine the present value of minimum lease rental payment. b) Prepare the journal entries for FRM Ltd (the Lessee) using the Net Method for the following;i. Transfer of controlii. Payment of annual payments for 2015 and 2016.
FRM Ltd acquired an item of equipment and enters into a non-cancellable lease agreement with FENEquipment Ltd on 1 January 2015. The lease consists of the following: Date of inception: 1/1/15 Duration of lease: 4 years Life of leased asset: 5 years Lease payments (annual): $550 000 (annual) which includes $80 000 forMaintenance and insurance costs per annum. Guaranteed residual value(Added to final payment): $190 000 Interest rate: 7%Formula for PV of $1 in n periods =1/(1+k)nFormula for present value of annuity of $1 per period for n periods =kk n 11/(1 )where, k is the discount rate expressed in decimalRequired:a) Determine the present value of minimum lease rental payment. b) Prepare the journal entries for FRM Ltd (the Lessee) using the Net Method for the following;i. Transfer of controlii. Payment of annual payments for 2015 and 2016.
BAE Ltd On 1 July 2017, ABE Ltd entered into an agreement to lease a vehicle from Cat Ltd. The present value of the vehicle on this date was $92,910. The lease agreement contained the following information. Lease term: five yearsEconomic life of vehicle: six yearsAn initial deposit of $10,000Five annual lease payments of $23,000 on 30 June each year in arrears.Interest rate implicit in the lease: 12%The vehicle will be returned to Cat Ltd at the end of the lease period. Required: Prepare a lease schedule for ABE Ltd for the lease period. Prepare general journal entries to record the lease in the books of the lessee for the year ending June 2018. Provide an extract of the income statement and
FRM Ltd acquired an item of equipment and enters into a non -cancellable lease agreement with FEN Equipment LTd on 1January 2015. The lease consists of the following: Date of inception. 1/1/15 Duration of Lease 4 years Life of Leased asset. 5 years Lease payments (annual) $550000(annual) which includes $80000 for Maintenance and insurance costs per annum Guaranteed residual value (Added to final payment). $190000 Interest rate. 7% Formula for PV of $1/(1+k)n Formula for present value of annuity of $1 per period for n periods= 1-1/(1+k)n /k Where k is the discount rate expressed in decimal Required 1. Determine the PV of minimum lease rental payment. 2. Prepare the journal entries for FRM Ltd (The lessee) using the Net method for the following a) Transfer of control b) Payment of annual payments for 2015 and 2016.