Far Company, a dealer in machinery and equipment, leased equipment to A. Inc., on July 1, 2004. The lease is appropriately accounted for as a sale by Far and as a purchase byA. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2014. The first of 10 equal annual payments of P828,000 was made on July 1, 2004. Far had purchased the equipment for P5,200,000 on January 1, 2004, and established a list selling price of P7,200,000 on the equipment. Assume that the present value at July 1, 2004, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was P6,000,000. 13) What is the amount of profit on the sale and the amount of interest income that Far should record for the year ended December 31, 2004? a. PO and P206,880. b. P800,000 and P206,880. C. P800,000 and P240,000. d. P1,200,000 and P480,000. 14) Assuming that A, Inc. uses straight-line depreciation, what is the amount of depreciation and interest expense that A should record for the year ended December 31, 2004? a. P300,000 and P206,880 b. P300,000 and P240,000. C. P360,000 and P206,880. d. P360,000 and P240,000.

Far Company, a dealer in machinery and equipment, leased equipment to A. Inc., on July 1, 2004. The lease is appropriately accounted for as a sale by Far and as a purchase byA. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2014. The first of 10 equal annual payments of P828,000 was made on July 1, 2004. Far had purchased the equipment for P5,200,000 on January 1, 2004, and established a list selling price of P7,200,000 on the equipment. Assume that the present value at July 1, 2004, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was P6,000,000. 13) What is the amount of profit on the sale and the amount of interest income that Far should record for the year ended December 31, 2004? a. PO and P206,880. b. P800,000 and P206,880. C. P800,000 and P240,000. d. P1,200,000 and P480,000. 14) Assuming that A, Inc. uses straight-line depreciation, what is the amount of depreciation and interest expense that A should record for the year ended December 31, 2004? a. P300,000 and P206,880 b. P300,000 and P240,000. C. P360,000 and P206,880. d. P360,000 and P240,000.

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 10P

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Lessee and Lessor Accounting Issues Diego Leasing Company agrees to provide La Jolla Company with equipment under a noncancelable lease for 5 years. The equipment has a 5-year life, cost Diego 25,000, and will have no residual value when the lease term ends. The fair value of the equipment is 30,000. La Jolla agrees to pay all executory costs (500 per year) throughout the lease period directly to a third party. On January 1, 2019, the equipment is delivered. Diego expects a 14% return on its net investment. The five equal annual rents are payable in advance starting January 1, 2019. Required: 1. Assuming this is a sales-type lease for the Diego and a finance lease for the La Jolla, prepare a table summarizing the lease and interest payments suitable for use by either party. 2. Next Level On the assumption that both companies adjust and close books each December 31, prepare journal entries relating to the lease for both companies through December 31, 2020, based on data derived in the table. Assume that La Jolla depreciates similar equipment by the straight line method
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