TB Problem 15-200 (Static) Amelia Company leased a warehouse from... Amelia Company leased a warehouse from Island Industries on July 1, 2024, in a finance lease. The present value of the lease payments discounted at 10% was $162,217. Ten annual lease payments of $24,000 are due each July 1, beginning July 1, 2024. Island had constructed the building recently for $132,000 and its retail fair value was $162,217. Required: Assuming that control of the warehouse building is transferred to Amelia Company at the beginning of the lease. Prepare the two journal entries to record the lease by Island on July 1, 2024. Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. No 1 2 Date July 01, 2024 July 01, 2024 Lease receivable Cost of goods sold Building Cash Lease receivable Answer is not complete. General Journal 333 ✓ Debit 162,217 ✔ 24,000✔ Credit 30,217 x 132,000 ✓ 24,000

TB Problem 15-200 (Static) Amelia Company leased a warehouse from... Amelia Company leased a warehouse from Island Industries on July 1, 2024, in a finance lease. The present value of the lease payments discounted at 10% was $162,217. Ten annual lease payments of $24,000 are due each July 1, beginning July 1, 2024. Island had constructed the building recently for $132,000 and its retail fair value was $162,217. Required: Assuming that control of the warehouse building is transferred to Amelia Company at the beginning of the lease. Prepare the two journal entries to record the lease by Island on July 1, 2024. Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. No 1 2 Date July 01, 2024 July 01, 2024 Lease receivable Cost of goods sold Building Cash Lease receivable Answer is not complete. General Journal 333 ✓ Debit 162,217 ✔ 24,000✔ Credit 30,217 x 132,000 ✓ 24,000

Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter10: Long-term Liabilities

Section: Chapter Questions

Problem 10.5P

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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?
REPLACEMENT ANALYSIS The Dauten Toy Corporation currently uses an injection molding machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is 2,100, and it can be sold for 2,500 at this time. Thus, the annual depreciation expense is 2,100/6 = 350 per year. If the old machine is not replaced, it can be sold for 500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. This machine falls into the MACRS 5-year class so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year. The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 40%, and its WACC is 15%. Should it replace the old machine?
Problem 10-30 (IFRS)At the beginning of current year, Southstar Company leased a building withthe following information:Annual fixed payment in advance at the beginning of each lease year1, 000, 000Initial direct cost paid350, 000Least incentive received150, 000Lease bonus paid to lessor before commencement of lease100, 000Discounted amount of restoring the building as required by contract200, 000Purchase option that is not reasonably certain to be exercised300, 000Lease term 5 yearsUseful life of building 8 yearsImplicit interest rate 8%Present value of an annuity of 1 in advance at 8% for 5 periods 4.31Present value of 1 at 8% for 5 periods .68 1. What is the initial lease liability?a. 4, 514, 000b. 4, 310, 000c. 4, 614, 000d. 4, 764, 0002. What is the cost of right of use asset?a. 4, 814, 000b. 4, 810, 000c. 4, 710, 000d. 4, 610, 000
33... continue On January 2, 2017 Skysong Company leases a machine with a fair value of $35,000 from Snead, Inc., on the following terms: 1. Noncancelable term of 4 years. 2. Rental of $8,525 per year (at beginning of each year). 3. Estimated residual value after 4 years is $8,200. Skysong Company guarantees the residual value of $4,100 and expects the asset to have a value of $4,100 at the end of the lease. 4. Estimated economic life of the machine is 5 years. 5. Skysong Company’s incremental borrowing rate is 6% a year. Snead’s implicit rate is unknown. (a) Correct answer icon Your answer is correct. What is the nature of this lease to Skysong Company? This lease is a(n) select a type of lease . eTextbook and Media List of Accounts Attempts: 1 of 3 used (b) Your Answer Correct Answer (Used)…
Exercise 15-17 (Algo) Lessee and lessor; operating lease [LO15-4] On January 1, 2024, Nath-Langstrom Services, Incorporated, a computer software training firm, leased several computers under a two-year operating lease agreement from ComputerWorld Leasing, which routinely finances equipment for other firms at an annual interest rate of 4%. The contract calls for four rent payments of $18,000 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by ComputerWorld at a cost of $106,000 and were expected to have a useful life of five years with no residual value. Both firms record amortization and depreciation semiannually. Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1) Prepare appropriate journal entries recorded by Nath-Langstrom Services for the first year of the lease. 2) Prepare appropriate journal entries recorded by ComputerWorld Leasing for the first year of…
Problem 21-09 Ayayai Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $260,015, and its unguaranteed residual value at the end of the lease term is estimated to be $20,500. National will pay annual payments of $37,300 at the beginning of each year. Ayayai incurred costs of $195,000 in manufacturing the equipment and $4,100 in sales commissions in closing the lease. Ayayai has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 10%. Discuss the nature of this lease in relation to the lessor.This is a operating lease finance lease sales-type lease .Compute the amount of each of the following items. (1) Lease receivable $ (2) Sales price $ (3) Cost of sales $…
Problem 10-8 Dexter Company has maintained a policy of acquiring equipment by leasing. On January 1, 2020, Dexter Company entered into a lease agreement for an equipment. The lease stipulates an annual rental payment of P600,000 to be paid every December 31 starting Decemeber 31, 2020. The lease contains neither a transfer of tittle to the lessee nor a purchase option. The equipment has a residual value of P300,000 at the end of the 5 year lease period but us unguaranteed by the lessee. Th economic life of the equipment is 8 years. The implicit interest rate is 12% after considerimg the unguaranteed residual value. The present value of an ordinary annuity of 1 at 12% for 5 period is 3.60. Required: Prepare journal entries on the books of Dexter Company for 2020. Prepare journal entry on December 31,2024 to record the return of the equipment to the lessor as required by the contract. The fair value of the equipment is P200,000.
Problem 10-27 (AICPA Adapted)On December 31, 2020, Ames Company leased equipment for 10 years. Theentity contracted to pay P 400, 000 annual rent on December 31, 2020 andon December 31 of each of the next time years.The lease liability was recorded at P 2, 700, 000 on December 31, 2020before the first payment.The equipment’s useful life is 12 years and the interest rate implicit in thelease is 10%.The entity used the straight line method to depreciate all equipment.1. In recording the December 31, 2021 payment by what amount shouldthe lease liability be reduced?a. 270, 000b. 230, 000c. 225, 000d. 170, 0002. What is the interest expense for 2021?a. 270, 000b. 230, 000c. 200, 000d. 03. What is the lease liability on December 31, 2021?a. 2, 700, 000b. 2, 300, 000c. 2, 130, 000
Problem 3: ABC Co. leased a new machine from XXX Inc. on January 1, 20X1, under a lease with the following information: Lease term 10 years Annual rent payable at the end of each year P 80,000 Useful life of the machine 12 years Implicit interest rate 14% Lessee’s incremental borrowing rate 12% The annual rental payment includes P 6,000 to cover maintenance costs. The maintenance costs transfer services to ABC. The amount charged reflects the stand alone selling price of the maintenance services. Requirements: Provide the entries in 20X1 and 20X2. Determine the current and non-current portions of the lease liability on December 31, 20X1.
Problem 10- 10 Troy Company prepared the following amortization schedule for the lease of a machine from another entity. The machine has an economic life of six years. The lease agreement requires four annual payments of P330,000, including executory costs of P30,000, and the machine will be retured to the lessor at the end of the lease term. Minimum lease Interest Reduction Balance of payment Expense Liability Liablity 1/1/2020 985,150 12/31/2020 300,000 98,515 201,485 783,665 12/31/2021 300,000 78,366 221,634 562,031 12/31/2022…
Problem 11-2 On January 1,2020, Gold Company entered into a 5-year lease of a floor of a building with the following terms: Annual rental for the first two years payable at the end of each year 200,000 Annual rental for the next three years payable at the end of each year 300,000 Initial diect cost paid by lessee 100,000 Leasehold improvement 250,000 Present value of restoration cost required by contract 50,000 Useful life of building 20 years Implicit interest rate 8% Discount rate for the restoration cost…
xercise 15-25 (Algo) Lessor; sales-type lease; residual value effect on financial statements [LO15-2, 15-6] At January 1, 2021, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $32,000 beginning January 1, 2021, the beginning of the lease, and at each December 31 thereafter through 2028. The equipment was acquired recently by Crescent at a cost of $243,000 (its fair value) and was expected to have a useful life of 12 years with no salvage value at the end of its life. (Because the lease term is only 9 years, the asset does have an expected residual value at the end of the lease term of $73,596.) Both (a) the present value of the lease payments and (b) the present value of the residual value (i.e., the residual asset) are included in the lease receivable because the two amounts combine to allow the lessor to recover its net investment. Crescent seeks a 9% return on its lease investments.…