please help answer (#2 only) 8:19ull LTEe bbhosted.cuny.edu – Private3 of 4Present Value of an Ordinary Annuity of 1PVF-OAn,i=1-14-)ni(n) Periods2%2Â¼%3%4%5%6%1.98039.97561.97087.96154 95238 9434021.94156 1.92742 1.91347 1.88609 1.85941 1.8333932.88388 2.85602 2.82861 2.77509 2.72325 2.6730143.80773 3.76197 3.71710 3.62990 3.54595 3.4651154.71346 4.64583 4.57971 4.45182 4.32948 4.2123665.60143 5.50813 5.41719 5.24214 5.07569 4.917326.47199 6.34939 6.23028 6.00205 5.78637 5.5823887.32548 7.17014 7.01969 6.73274 6.46321 6.2097998.16224 7.97087 7.78611 7.43533 7.10782 6.80169108.98259 8.75206 8.53020 8.11090 7.72173 7.36009Present Value of an Annuity Due of1PVF-ADn,i=1+1-4-»-ti(n) Periods2%2Â¼% 3%4%5%6%11.00000 1.00000 1.00000 1.00000 1.00000 1.000001.98039 1.97561 1.97087 1.96154 1.95238 1.9434032.94156 2.92742 2.91347 2.88609 2.85941 2.8333943.88388 3.85602 3.82861 3.77509 3.72325 3.673014.80773 4.76197 4.71710 4.62990 4.54595 4.4651165.71346 5.64583 5.57971 5.45182 5.32948 5.212366.60143 6.50813 6.41719 6.24214 6.07569 5.9173287.47199 7.34939 7.23028 7.00205 6.78637 6.5823898.32548 8.17014 8.01969 7.73274 7.46321 7.20979109.16224 8.97087 8.78611 8.43533 8.10782 7.80169Present Value of 1 (Present Value of a Single Sum)PVFN,i=1(1+i)«=(1+i)-n(n) Periods 2% 2Â¼% 3%4%5%6%1.98039 .97561 .97087 .96154 .95238 .943402.96117.95181 .94260 .92456 .90703 .890003.94232 .92860 .91514 .88900 .86384 .83962.92385 .90595 .88849 .85480 .82270 .79209.90573 .88385 ,86261 ,82193 ,78353 7472688797 ,86230 83748.79031.746Z2 .70496 Problem #1Jay Company, as lessee, enters into a lease agreement on January 1, 2020, to lease equipment.The following data are relevant to the lease agreement.The term of the noncancellable lease is three years, with no renewal option. Payments of$12,000 are due on January 1, of each year.The fair value of the equipment on January 1, 2020 is $35,000. The equipment has anestimated economic life of five years, and an unguarenteed residual value of $4,000.The equipment reverts back to the lessor at the termination of the lease and is expected tohave use to the lessor.The lessee is aware that the lessor used an implicit rate of 6%.(Present Value & Future Value Tables are provided on pages 3 and 4)Instructions:1. Indicate the type of lease Jay has entered into and why (include a list of the CapitalLease Criteria)(Present Value & Future Value Tables are provided on pages 3 and 4)2. Prepare the journal entries on Jay's books related to the lease agreement for thefollowing dates: (round all amounts to the nearest dollar. Include a partial amortizationschedule)a. January 1, 2020b. December 31, 2020c. January 1, 2021

The lists of capital lease criteria are as follows: The present value of lease covers almost the…

Jay Company, as lessee, enters into a lease agreement on January 1, 2020, to lease equipment. The following data are relevant to the lease agreement. The term of the noncancellable lease is three years, with no renewal option. Payments o $12,000 are due on January 1, of each year. The fair value of the equipment on January 1, 2020 is $35,000. The equipment has an estimated economic life of five years, and an unguarenteed residual value of $4,000. The equipment reverts back to the lessor at the termination of the lease and is expected have use to the lessor. The lessee is aware that the lessor used an implicit rate of 6%. (Present Value & Future Value Tables are provided on pages 3 and 4) Instructions: 1. Indicate the type of lease Jay has entered into and why (include a list of the Capital Lease Criteria) (Present Value & Future Value Tables are provided on pages 3 and 4) 2. Prepare the journal entries on Jay's books related to the lease agreement for the following dates: (round all amounts to the nearest dollar. Include a partial amortization schedule) a. January 1, 2020 b. December 31, 2020 c. January 1, 2021

Jay Company, as lessee, enters into a lease agreement on January 1, 2020, to lease equipment. The following data are relevant to the lease agreement. The term of the noncancellable lease is three years, with no renewal option. Payments o $12,000 are due on January 1, of each year. The fair value of the equipment on January 1, 2020 is $35,000. The equipment has an estimated economic life of five years, and an unguarenteed residual value of $4,000. The equipment reverts back to the lessor at the termination of the lease and is expected have use to the lessor. The lessee is aware that the lessor used an implicit rate of 6%. (Present Value & Future Value Tables are provided on pages 3 and 4) Instructions: 1. Indicate the type of lease Jay has entered into and why (include a list of the Capital Lease Criteria) (Present Value & Future Value Tables are provided on pages 3 and 4) 2. Prepare the journal entries on Jay's books related to the lease agreement for the following dates: (round all amounts to the nearest dollar. Include a partial amortization schedule) a. January 1, 2020 b. December 31, 2020 c. January 1, 2021

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 1E: Determining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a...

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Lessee Accounting Issues Sax Company signs a lease agreement dated January 1, 2019, that provides for it to lease computers from Appleton Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows: 1. The lease term is 5 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year. The computers are not specialized for Sax. 2. The computers have an estimated life of 5 years, a fair value of 300,000, and a zero estimated residual value. 3. Sax agrees to pay all executory costs directly to a third party. 4. The lease contains no renewal or bargain purchase options. 5. The annual payment is set by Appleton at 83,222.92 to earn a rate of return of 12% on its net investment. Sax is aware of this rate. Saxs incremental borrowing rate is 10%. 6. Sax uses the straight-line method to record depreciation on similar equipment. Required: 1. Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Sax. 2. Calculate the amount of the asset and liability of Sax at the inception of the lease (round to the nearest dollar). 3. Prepare a table summarizing the lease payments and interest expense. 4. Prepare journal entries for Sax for the years 2019 and 2020.
Determining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a 10-year cancelable (at the option of either party) agreement to lease a storage building from Wake Company. The following information pertains to this lease agreement: 1. The agreement requires rental payments of 100,000 at the beginning of each year. 2. The cost and fair value of the building on January 1, 2019, is 2 million. The storage building has not been specialized for Caswell. 3. The building has an estimated economic life of 50 years, with no residual value. Caswell depreciates similar buildings according to the straight-line method. 4. The lease does not contain a renewable option clause. At the termination of the lease, the building reverts to the lessor. 5. Caswells incremental borrowing rate is 14% per year. Wake set the annual rental to ensure a 16% rate of return (the loss in service value anticipated for the term of the lease). Caswell knows the implicit interest rate. 6. Executory costs of 7,000 annually, related to taxes on the property, are paid by Caswell directly to the taxing authority on Dec. 31 of each year. Required: 1. Determine what type of lease this is for the lessee. 2. Prepare appropriate journal entries on the lessees books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2019 and 2020.
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.
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
Lessor Accounting Issues Ramsey Company leases heavy equipment to Terrell Inc. on March 1, 2019, on the following terms: 1. Twenty-four lease rentals of 2,950 at the beginning of each month are to be paid by Terrell, and the lease is noncancelable. 2. The cost of the heavy equipment to Ramsey was 55,000. 3. Ramsey uses an implicit interest rate of 18% per year and will account for this lease as a sales-type lease. Required: Prepare journal entries for Ramsey (the lessor) to record the lease contract on March 1, 2019, the receipt of the first two lease rentals, and any interest income for March and April 2019. (Round your answers to the nearest dollar.)
Lessee Accounting Issues Timmer Company signs a lease agreement dated January 1, 2019, that provides for it to lease equipment from Landau Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows: The lease is noncancelable and has a term of 5 years. The annual rentals are 83,222.92, payable at the end of each year, and provide Landau with a 12% annual rate of return on its net investment. Timmer agrees to pay all executory costs directly to a third party on December 1 of each year. In 2019, these were insurance, 3,760; property taxes, 5,440. In 2020: insurance, 3,100; property taxes, 5,330. There is no renewal or bargain purchase option. Timmer estimates that the equipment has a fair value of 300,000, an economic life of 5 years, and a zero residual value. Timmers incremental borrowing rate is 16%, it knows the rate implicit in the lease, and it uses the straightline method to record depreciation on similar equipment. Required: 1. Calculate the amount of the asset and liability of Timmer at the inception of the lease. (Round to the nearest dollar.) 2. Prepare a table summarizing the lease payments and interest expense. 3. Prepare journal entries on the books of Timmer for 2019 and 2020. 4. Next Level Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2019. Use the present value of next years payment approach to classify the finance lease obligation between current and noncurrent. 5. Next Level Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2019. Use the change in present value approach to classify the finance lease obligation between current and noncurrent.
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.
Lease Income and Expense Reuben Company retires a machine from active use on January 2, 2019, for the express purpose of leasing it. The machine had a carrying value of 900,000 after 12 years of use and is expected to have 10 more years of economic life. The machine is depreciated on a straight-line basis. On March 2, 2019, Reuben leases the machine to Owens Company for 180,000 a year for a 5-year period ending February 28, 2024. Under the provisions of the lease, Reuben incurs total maintenance and other related costs of 20,000 for the year ended December 31, 2019. Owens pays 180,000 to Reuben on March 2, 2019. The lease was properly classified as an operating lease. Required: 1. Compute the income before income taxes derived by Reuben from this lease for the calendar year ended December 31, 2019. 2. Compute the amount of rent expense incurred by Owens from this lease for the calendar year ended December 31, 2019.
Lessee Accounting with Payments Made at Beginning of Year Adden Company signs a lease agreement dated January 1, 2019, that provides for it to lease non-specialized heavy equipment from Scott Rental Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows: 1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of 20,000 to be paid in advance at the beginning of each year. 2. The cost, and also fair value, of the heavy equipment to Scott at the inception of the lease is 68,036.62. The equipment has an estimated life of 4 years and has a zero estimated residual value at the end of this time. 3. Adden agrees to pay all executory costs directly to a third party. 4. The lease contains no renewal or bargain purchase options. 5. Scotts interest rate implicit in the lease is 12%. Adden is aware of this rate, which is equal to its borrowing rate. 6. Adden uses the straight-line method to record depreciation on similar equipment. 7. Executory costs paid at the end of the year by Adden are: Required: 1. Next Level Determine what type of lease this is for Adden. 2. Prepare a table summarizing the lease payments and interest expense for Adden. 3. Prepare journal entries for Adden for the years 2019 and 2020.
FISH CHIPS INC, PART I LEASE ANALYSIS Martha Millon, financial manager for Fish it Chips Inc., has been asked to perform a lease-versus-buy analysis on a new computer system. The Computer costs 1,200,000, and if it is purchased. Fish Chips could obtain a term loan for the full amount at a 10% cost. The loan would be amortized over the 4-year life of the computer, with payments made at the end of each year The computer is classified as special purpose; hence, it falls into the MACRS 3-year class. The applicable MACRS rates are 33%. 45%. 15%, and 7%. If the computer is purchased, a maintenance contract must be obtained at a cost of 25,000, payable at the beginning of each year. After 4 years, the computer will be sold. Millons best estimate of its residual value at that time is 125,000. Because technology is changing rapidly however, the residual value is uncertain. As an alternative. National Leasing is willing to write a 4-year lease on the computer, including maintenance, for payments of 340,000 at the beginning of each year. Fish 4c Chipss marginal federal-plus-state tax rate is 40%. Help Millon conduct her analysis by answering the following questions. a. 1. Why is leasing sometimes referred to as "off-balance-sheet" financing? 2. What is the difference between a capital lease and an operating lease? 3. What effect does leasing have on a firms capital structure? b. 1. What is Fish Chips's present value cost of owning the computer? (Hint: Set up a table whose bottom line is a time line" that shows the cash flows over the period t = 0 to t = 4. Then find the PV of these cash flows, or the PV cost of owning.) 2. Explain the rationale for the discount rate you used to find the PV. c. 1. What is Fish Chipss present value cost of leasing the computer? (Hint: Again, construct a time line.) 2. What is the net advantage to leasing? Does your analysis indicate that the firm should buy or lease the computer? Explain. d. Now assume that Millon believes that the computers residual value could be as low as 0 or as high as 250,000, but she stands by 125,000 as her expected value. She concludes that the residual value is riskier than the other cash flows in the analysis, and she wants to incorporate this differential risk into her analysis. Describe how this can be accomplished. What effect will it have on the lease decision? e. Millon knows that her firm has been considering moving its headquarters to a new location, and she is concerned that these plans may come to fruition prior to the expiration of the lease. If the move occurs, the company would obtain new computers; hence, Millon would like to include a cancellation clause in the lease contract. What effect would a cancellation clause have on the risk of the lease?
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 The following information is available for a noncancelable lease of equipment entered into on March 1, 2019. The lease is classified as a sales-type lease by the lessor (Anson Company) and as a finance lease by the lessee (Bullard Company). Assume that the lease payments are nude at the beginning of each month, interest and straight-line depreciation are recognized at the end of each month, and the residual value of the leased asset is zero at the end of a 3-year life. Required: 1. Record the lease (including the initial receipt of 2,000) and the receipt of the second and third installments of 2,000 in Ansons accounts. Carry computations to the nearest dollar. 2. Record the lease (including the initial payment of 2,000), the payment of the second and third installments of 2,000, and monthly depreciation in Bullards accounts. The lessee records the lease obligation at net present value. Carry computations to the nearest dollar.