FOUR Inc. leases computer equipment to customers under a direct financing lease. The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options. FOUR wishes to earn 8% interest on a 5-year lease of equipment with a fair value of P323,400. The present value of an annuity due of 1 at 8% for 5 years is 4.312.

FOUR Inc. leases computer equipment to customers under a direct financing lease. The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options. FOUR wishes to earn 8% interest on a 5-year lease of equipment with a fair value of P323,400. The present value of an annuity due of 1 at 8% for 5 years is 4.312.

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 10GI: Owens Company leased equipment for 4 years at 50,000 a year with an option to renew the lease for 6...

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Comprehensive Landlord Company and Tenant Company enter into a noncancelable, direct financing lease on January 1, 2019, for nonspecialized equipment that cost the Landlord 280,000 (useful life is 6 years with no residual value). The fair value of the equipment is 300,000. The interest rate implicit in the lease is 14%. The 6-year lease requires 6 equal annual amounts payable each January 1, beginning with January 1, 2019. Tenant pays all executory costs directly to a third party on December 1 of each year. The equipment reverts to the lessor at the termination of the lease. Assume that there are no initial direct costs. Landlord expects to collect all rental payments. Required: 1. Next Level (a) Show how landlord should compute the annual rental amounts, (b) Discuss how the Tenant Company should compute the present value of the lease payments. What additional information would be required to make this computation? 2. Next Level Prepare a table summarizing the lease and interest receipts that would be suitable for Landlord. Under what conditions would this table be suitable for Tenant? 3. Assuming that the table prepared in Requirement 2 is suitable for both the lessee and the lessor, prepare the journal entries for both firms for the years 2019 and 2020. Use the straight-line depreciation method for the leased equipment. The executory costs paid by the lessee are in 2019: insurance, 700 and property taxes, 800; in 2020: insurance, 600 and property taxes, 750. 4. Next Level Show the items and amounts that would be reported on the comparative 2019 and 2020 income statements and ending balance sheets for both the lessor and the lessee, using the change in present value approach.
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
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).
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.
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.
Glade Co. leases computer equipment to customers under direct-financing leases. The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options. Glade wishes to earn 8% interest on a five-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for five years is 4.312. What is the total amount of interest revenue that Glade will recognize over the life of the lease? a. $ 51,600 b. $ 75,000 c. $129,360 d. $139,450
Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of P86,038, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pisa, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. 1. What is the amount of principal reduction recorded when the second lease payment is made in Year 2? 2. What is the amount of depreciation expense recorded by Pisa, Inc. in the first year of the asset’s life?
Faye Company leases computer equipment to customers under directfinancing lease. The equipment has no residual value at the end of thelease and the leases do not contain bargain purchase options. Faye wishesto earn 8% interest on a five-year lease of equipment with a fair value ofP323,400. The present value of an annuity due of P1 at 8% for five years is4.312. What is the total amount of interest that Faye will earn over the lifeof the lease? A. P51,600B. P75,000C. P60,000D. P55,000
Glade Co. leases computer equipment to customers under direct-financing leases.The equipment has no residual value at the end of the lease, and the leases do not contain bargain purchase options. Glade wishes to earn 8% interest on a 5-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for 5 years is 4.312. At what amount should the lease receivable be initially recognized? a. ₱ 323,400 b. ₱ 278,900 c. ₱ 375,000 d. ₱ 1,617,000
Morgan Corp enters into a lease of nonspecialized equipment with Hoffman Corp. The following is information about the lease: Lease term five years, no renewal option Economic life of equipment is 6 years no purchase option annual lease payments $11,000 Morgan Corp's incremetal borrowing rate is 7% Title to the asset remains with Hoffman Corm upon lease expiration The fair value of equipment is $50,000 Morgan Corp does not guarantee the residual value of equipment at end of lease term Morgan Corp pays for all maintenance of equipment separate from lease No initial direct costs incurred by Morgan corp Hoffman Corp does not provide any incentives 1. How should Morgan Corp classify the lease? 2. How would Morgan Corp measure and record this lease? 3. How would Morgan Corp measure the right-of-use asset and lease liability over the lease term?
Wildhorse, Inc. leased equipment from Tower Company under a 4-year lease requiring equal annual payments of $434152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Wildhorse, Inc.’s incremental borrowing rate is 9% and the rate implicit in the lease (which is known by Wildhorse, Inc.) is 7%. Wildhorse, Inc. uses the straight-line method to amortize similar assets. What is the amount of amortization expense recorded by Wildhorse, Inc. in the first year of the asset’s life? PV Annuity Due PV Ordinary Annuity 7%, 4 periods 3.62432 3.38721 9%, 4 periods 3.53129 3.23972 ANSWER CHOICES: 0 because the asset is amortized by Wildhorse Company $383279 $367641 $393377
Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of P86,038, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pisa, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. 1. What is the amount recorded for the leased asset at the lease inception? 2. What is the amount of interest expense recorded by Pisa, Inc. in the first year of the asset’s life?