of six year
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On January 1, 2020, Edgar Company entered into a six-year lease with a lessor. Annual lease
payments of P1,200,000 including annual executory cost of P200,000 are payable at the end
of each year. Edgar Company knows that the lessor expects a 10% return on the lease. Edgar
Company has a 12% incremental borrowing rate. The equipment is expected to have an
estimated useful life of six years. In addition, a third party has guaranteed to pay the lessor a
residual value of P400,000 at the end of the lease.
In the December 31, 2020
lease obligation?
Step by step
Solved in 2 steps
- 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?On August 1, 2019, Kern Company leased a machine to Day Company for a 6-year period requiring payments of 10,000 at the beginning of each year. The machine cost 40,000 and has a useful life of 8 years with no residual value. Kerns implicit interest rate is 10%, and present value factors are as follows: Present value for an annuity due of 1 at 10% for 6 periods4.791 Present value for an annuity due of 1 at 10% for 8 periods5.868 Kern appropriately recorded the lease as a sales-type lease. At the inception of the lease, the Lease Receivable account balance should be: a. 60,000 b. 58,680 c. 48,000 d. 47,910Using the information provided, what transaction represents the best application of the present value of an annuity due of $1? A. Falcon Products leases an office building for 8 years with annual lease payments of $100,000 to be made at the beginning of each year. B. Compass, Inc., signs a note of $32,000, which requires the company to pay back the principal plus interest in four years. C. Bahwat Company plans to deposit a lump sum of $100.000 for the construction of a solar farm In 4 years. D. NYC Industries leases a car for 4 yearly annual lease payments of $12,000, where payments are made at the end of each year.
- On January 1, 2019, Mopps Corp. agrees to provide Conklin Company 3 years of cleaning and janitorial services. The contract sets the price at 12,000 per year, which is the normal standalone price that Mopps charges. On December 31, 2020, Mopps and Conklin agree to modify the contract. Mopps reduces the fee for the third year to 10,000, and Conklin agrees to a 4-year extension that will extend services through December 31, 2024, at a price of 15,000 per year. At the time that the contract is modified, Mopps is charging other customers 13,500 for the cleaning and janitorial service. Required: Should Mopps and Conklin treat the modification as a separate contract? If so how should Mopps account for the contract modification on December 31, 2020? Support your opinion by discussing the application to this case of the factors that need to be considered for determining the accounting for contract modifications.On March 1, 2019, Elkhart enters into a new contract to build a specialized warehouse for 7 million. The promise to transfer the warehouse is determined to be a performance obligation. The contract states that if the warehouse is usable by November 30, 2019, Elkhart will receive a bonus of 600,000. For every week after November 30 that the warehouse is not usable, the bonus will decrease by 150,000. Elkhart provides the following completion schedule: Required: 1. Assume that Elkhart uses the expected value approach. What amount should Elkhart use for the transaction price? 2. Assume that Elkhart uses the most likely amount approach. What amount should Elkhart use for the transaction price? 3. Next Level What is the purpose of assessing whether a constraint on the variable consideration exists?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).
- On 1 July 2020, Pininfarina, an Italian automotive design service, acquired equipment under a four-year finance lease agreement from ABB Robotics. The equipment had a present value of $1,077,450. The equipment had an estimated useful life of six years. The implicit rate of interest on the equipment was 8% per annum. The lease involved four payments, three annual payments on 30 June each year of $304,000 and an additional final payment at the end of the lease of $400,000 on 30 June 2024. Pininfarina will return the equipment at the end of the lease to ABB Robotics. Required: a) Complete a lease schedule for the four years up to and including 30 June 2024On 1 January 2022, Enola plc entered a six-year lease contract with Maverick plc for a brand-new electric delivery vehicle. The contract requires a payment of £8,000 every year in advance. The interest rate implicit in the lease is 7% and Enola plc uses actuarial method to allocate interest for finance leases. The economic life of the vehicle is estimated to be 90 months and the residual value of the vehicle at the end of six years will be £1,000. The newly appointed accountant did not take any account related to this leasing (including the payment made at the beginning of the year). Requirement： The Financial Director of Enola plc would like a report on how the six-year lease should be accounted for. Prepare a note containing the full calculation and explanation of your proposed treatment with reference to International Financial Reporting Standards.On 1 January 2022, Enola plc entered a six-year lease contract with Maverick plc for a brand-new electric delivery vehicle. The contract requires a payment of £8,000 every year in advance. The interest rate implicit in the lease is 7% and Enola plc uses actuarial method to allocate interest for finance leases. The economic life of the vehicle is estimated to be 90 months and the residual value of the vehicle at the end of six years will be £1,000. The newly appointed accountant did not take any account related to this leasing (including the payment made at the beginning of the year). Requirements: The Financial Director of Enola plc would like a report on how the six-year lease should be accounted for. Prepare a note containing the full calculation and explanation of your proposed treatment with reference to International Financial Reporting Standards.
- Telephone Limited signed a contract with Machinery Leasing Company at 1st January 2020 to lease a machine. The agreement consists in 10 equal annual payments of $300,000 at the beginning of each year with an interest rate of 15%. The yearly rental payment includes $30,000 of executory costs related to insurance on the machine. The executory costs of $30,000 are paid to the lessor each year. There is an option to purchase the machine at the end of the lease term for $50,000. The machine has an estimated useful life of 14 years and a guaranteed residual value of $20,000. Both companies adopt straight-line depreciation method for all items of PPE. Consider a PVIF (n=10, i=15%) of 0.2472 and PVIFA (n=10, i=15%) of 5.0188. The balance day for Telephone Limited and Machinery Leasing Company is 31 of December. Required(Round all numbers to the nearest dollar) a) Discuss the nature of this lease to Telephone Limited. b) Discuss the nature of this lease to Machinery Leasing Company. c)…On January 1, 2019, Lotte Company enters into a 10-year lease of machinery with annual lease payments of P800,000 payable at the beginning of each year. The contract specifies that the lease payments will increase every two years on the basis of the increase in consumer price index for the preceding 24 months. The consumer price index at the commencement date is 140. The rate implicit in the lease is not readily determinable. Lessee’s incremental borrowing rate is 8% per annum, which reflects the fixed rate at which lessee could borrow an amount similar to the value of the right-of-use asset, in the same currency, for a ten-year term and with similar collateral. At the beginning of third year (January 1, 2021) of the lease, the consumer price index is 160. How much is the balance of the lease liability as of December 31, 2021? P5,674,397 P3,698,303 P4,226,634 P5,140,920On January 1, 2020 , Athena Company entered into a ten-year noncancelable lease requiring year-end payments of P 1,000,000. Athena's incremental borrowing rate is 12%, while the lessor's implicit interest rate, known to Athena, is 10%. Present Value factors for an ordinary annuity for ten periods are 6.145 at 10% and 5.650 at 12%. On the same date, Athena Co. paid initial direct cost of P 200,000 in negotiating and securing the lease arrangement. Ownership of the property remains with the lessor at expiration of the lease. There is no bargain purchase option. The leased property has an estimated economic life of 12 years. What amount should be capitalized initially as cost of the leased property?
