Burns, Inc. (lessor) agreed to lease a delivery van to Wilmore Corp. (lessee). The lease wa classified as a finance/sales-type lease, but the van will be turned back over to Burns at the end of six years. Which of the following is true regarding the proper treatment of the delivery van's estimated residual value? Multiple Choice In a lease that includes selling profit, the lessor will add the present value of the estimated residual value to sales revenue in the initial entry. In establishing the initial lease payable, Wilmore will include the present value of the full estimated residual value, but only if it is guaranteed. Estimated residual values are ignored by both parties when initially recording a lease. In calculating the required lease payments, estimated residual value regardless of whether it is guaranteed or rns will consider the unguaranteed by Wilmore.

Burns, Inc. (lessor) agreed to lease a delivery van to Wilmore Corp. (lessee). The lease wa classified as a finance/sales-type lease, but the van will be turned back over to Burns at the end of six years. Which of the following is true regarding the proper treatment of the delivery van's estimated residual value? Multiple Choice In a lease that includes selling profit, the lessor will add the present value of the estimated residual value to sales revenue in the initial entry. In establishing the initial lease payable, Wilmore will include the present value of the full estimated residual value, but only if it is guaranteed. Estimated residual values are ignored by both parties when initially recording a lease. In calculating the required lease payments, estimated residual value regardless of whether it is guaranteed or rns will consider the unguaranteed by Wilmore.

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 6P: Sales-Type Lease with Unguaranteed Residual Value Lessor Company and Lessee Company enter into a...

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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
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.
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?
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.
Lukawitz Industries leased non-specialized equipment to Seminole Corporation for a four-year period, at which time possession of the leased asset will revert back to Lukawitz. The equipment cost Lukawitz $4 million and has an expected useful life of six years. Its normal sales price is $5.6 million. The present value of the lease payments for both the lessor and lessee is $5.2 million. The first payment was made at the beginning of the lease. How should this lease be classified (a) by Lukawitz Industries (the lessor) and (b) by Seminole Corporation (the lessee)? Why?
Now suppose that, at the end of the lease term, Kimberly-Clark took good care of the asset and Sheffield agrees that the fair value of the asset is actually $10,500. Record the entry for Kimberly-Clark at the end of the lease to return control of the storage building to Sheffield (assuming the accrual of interest on the lease liability has already been made).
Grygiel Company leases a nonspecialized machine with a fair value of $50,000 to Baker Company. The lease has a life of 6 years and requires a $10,000 payment at the end of each year. The lease does not include a transfer of ownership nor a bargain purchase option, and the life of the lease is less than a major part of the expected economic life of the machine. It is probable that Grygiel will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. Round your answers to the nearest dollar. (Click here to access the PV and FV tables to use with this problem.) Required: 1. If the interest rate implicit in the lease is 10%, compute the machine’s expected residual value.
Sylvan Inc. entered into a non-cancelable lease arrangement with Breton Leasing Corporation for a certain machine. Breton's primary business is leasing. Sylvan will lease the machine for a period of 3 years, which is 50% of the machine's economic life. Breton will take possession of the machine at the end of the initial 3-year lease and lease it to another, smaller company that does not need the most current version of the machine. Sylvan does not guarantee any residual value for the machine and will not purchase the machine at the end of the lease term. Sylvan's incremental borrowing rate is 10%, and the implicit rate in the lease is 9%. Sylvan has no way of knowing the implicit rate used by Breton. Using either rate, the present value of the lease payments is between 90% and 100% of the fair value of the machine at the date of the lease agreement. Breton is reasonably certain that Sylvan will pay all lease payments. Instructions a. With respect to Sylvan (the lessee), answer the…
Grygiel Company leases a nonspecialized machine with a fair value of $40,000 to Baker Company. The lease has a life of 6 years and requires a $6,000 payment at the end of each year. The lease does not include a transfer of ownership nor a bargain purchase option, and the life of the lease is less than a major part of the expected economic life of the machine. It is probable that Grygiel will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. Round intermediate and final answers to the nearest dollar. (Click here to access the PV and FV tables to use with this problem.) Required: 1. If the interest rate implicit in the lease is 10%, compute the machine’s expected residual value.$fill in the blank 1
Eubank Company, as lessee, enters into a lease agreement on July 1, 2018, for equipment. The following data are relevant to the lease agreement: The term of the noncancelable lease is 4 years, with no renewal option. Payments of $978,446 are due on July 1 of each year. The fair value of the equipment on July 1, 2018 is $3,500,000. The equipment has an economic life of 6 years with no salvage value. Eubank depreciates similar machinery it owns on the double-declining balance basis. The lessee pays all executory costs. Eubank’s incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3.57710; at 10%, 3.48685). Instructions (a) Indicate the type of lease Eubank Company has entered into and what accounting treatment is applicable. This is a capital lease; therefore, it should be accounted for by the capital lease method. (b) Prepare the journal…
Assume that on January 1, 2021, Fredder Corporation sells equipment to Finance Co. for $1,700,000 and immediately leases back the equipment. The relevant information is as follows. 1. The equipment was carried on Fredder's books at a value of $1,500,000. 2. The term of the non-cancelable lease is 3 years; title will not transfer to Fredder, and the expected residual value at the end of the lease is $125,000, all of which is unguaranteed. 3. The lease agreement requires equal rental payments of $277,635 at the beginning of each year. 4. The incremental borrowing rate for Fredder is 7%. Fredder is aware that Finance set the annual rental to ensure a rate of return of 7%. 5. The equipment has a fair value of $1,700,000 on January 1, 2021, and an estimated economic life of 10 years. What type of lease is this for Fredder? What type of lease is this for Finance? Explain briefly. Prepare all necessary journal entries for the lessee for 2021. Prepare the 1/1/22 journal entry for the lessee.…
Corinth Co. leased non-specialized equipment to Athens Corporation for an eight-year period, at which time possession of the equipment will revert back to Corinth. The equipment cost Corinth $16 million and has an expected useful life of 12 years. Its normal sales price is $22.4 million. The present value of the lease payments for both the lessor and lessee is $20.6 million. The first payment was made at the beginning of the lease. How should Athens classify this lease?