Concept explainers
Lessee; finance lease; effect on financial statements
• LO15–2
(Note: Exercises 12, 13, 14, and 25 are variations of the same situation.)
At January 1, 2018, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $25,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2025. The equipment was acquired recently by Crescent at a cost of $180,000 (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 nine years, the asset does have an expected residual value at the end of the lease term of $90,995.) Crescent seeks a 10% return on its lease investments. By this arrangement, the lease is deemed to be a finance lease.
Required:
1. What will be the effect of the lease on Café Med’s earnings for the first year (ignore taxes)?
2. What will be the balances in the
Want to see the full answer?
Check out a sample textbook solutionChapter 15 Solutions
INTERMEDIATE ACCOUNTING(LL)-W/CONNECT
- Exercise 15-12 (Algo) Lessee; finance lease; effect on financial statements [LO15-2] At January 1, 2024, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. • The lease agreement specifies annual payments of $26,000 beginning January 1, 2024, the beginning of the lease, and on each December 31 thereafter through 2031. • The equipment was acquired recently by Crescent at a cost of $189,000 (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 $27,160. • Crescent seeks a 8% return on its lease investments. By this arrangement, the lease is deemed to be a finance lease. 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. What will be the effect of the lease on Café Med's earnings for…arrow_forward= ces At January 1, 2024, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. . The lease agreement specifies annual payments of $25,000 beginning January 1, 2024, the beginning of the lease, and on each December 31 thereafter through 2031. The equipment was acquired recently by Crescent at a cost of $180,000 (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 nine years, the asset does have an expected residual value at the end of the lease term of $50,995. Crescent seeks a 10% return on its lease investments. By this arrangement, the lease is deemed to be a finance lease. 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. What will be the effect of the lease on Café Med's earnings for the first year (ignore taxes)? Note: Enter decreases with negative sign. 2. What…arrow_forward3. On January 1, 2022, Verlander Corp. signs a 5-year noncancelable lease agreement to lease a backhoe from Scherzer Equipment, Inc. The following information pertains to this lease agreement. 1. The agreement requires equal rental payments of $3,310 beginning on January 1, 2022. 2. The fair value of the backhoe on January 1, 2022, is $14,000. 3. The backhoe has an estimated economic life of 6 years, with an unguaranteed residual value of $1,500. Verlander depreciates similar equipment using the straight-line method. 4. The lease is nonrenewable. At the termination of the lease, the backhoe reverts to the lessor. 5. Verlander's incremental borrowing rate is 12% per year. The lessor's implicit rate is 9% and is not known by Verlander. 6. The yearly rental payment includes $450 of executory costs related to insurance on the backhoe. Prepare the journal entries on the lessee's books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease…arrow_forward
- Federated Fabrications leased a tooling machine on January 1, 2024, for a three-year period ending December 31, 2026 • The lease agreement specified annual payments of $47,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2025. The company had the option to purchase the machine on December 30, 2026, for $56,000 when its fair value was expected to be $71,000, a sufficient difference that exercise seems reasonably certain. • The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor's implicit rate of return was 12%. Note: Use tables, Excel, or a financial calculator. (FV of $1. PV of $1. EVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) Required: 1. Calculate the amount Federated should record as a right-of-use asset and lease liability for this finance lease. 2. Prepare an amortization schedule that describes the pattern of interest expense for Federated over the lease term. 3. Prepare the…arrow_forwardExercise 15-13 (Algo) Lessee; operating lease; financial statement effects [LO 15-4] At January 1, 2024, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. • The lease agreement specifies annual payments of $28,000 beginning January 1, 2024, the beginning of the lease, and on each December 31 thereafter through 2031. • The equipment was acquired recently by Crescent at a cost of $207,000 (its fair value) and was expected to have a useful life of 13 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 $69,847. • Crescent seeks a 10% return on its lease investments. By this arrangement, the lease is deemed to be an operating lease. 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. What will be the effect of the lease on Café Med's earnings…arrow_forward19 On September 30, 2024, Truckee Garbage leased equipment from a supplier and agreed to pay $125,000 annually for 15 years beginning September 30, 2025. Generally accepted accounting principles require that a liability be recorded for this lease agreement for the present value of scheduled payments. Accordingly, at inception of the lease, Truckee recorded a $1,214,031 lease liability. Determine the interest rate implicit in the lease agreement. 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)arrow_forward
- 1. Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2021. The manufacturing cost of the computers was $12 million. This noncancelable lease had the following terms: • Lease payments: $2,466,754 semiannually; first payment at January 1, 2021; remaining payments at June 30 and December 31 each year through June 30, 2025. • Lease term: five years (10 semiannual payments). • No residual value; no purchase option. • Economic life of equipment: five years. • Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually. • Fair value of the computers at January 1, 2021: $20 million. What is the outstanding balance of the lease liability in Lone Star's June 30, 2021, balance sheet? (Round your answer to the nearest whole dollar.).arrow_forward1, 2024, Botosan... On January 1, 2024, Botosan Corporation leased equipment under a finance lease designed to earn the lessor a 8% rate of return for providing long-term financing. The lease agreement specified ten annual payments of $273,000 beginning January 1, and each December 31 thereafter through 2029. A 10-year service agreement was scheduled to provide maintenance of the equipment as required for a fee of $31,000 per year. Insurance premiums of $20,000 annually are related to the equipment. The lease agreement specified that both amounts were to be paid by the lessor and the lease payments reflect both expenditures. At what amount will Botosan record a right-of-use asset? Note: Round your answer to the nearest whole dollar amount.arrow_forwardA18-11 Lessee Accounting; Amortization Table; Entries: (LO 18-2, 18-4) Watson Co. entered into a lease arrangement for a truck on 1 April 20X2 that had the following terms. • The lease payments are $13,400 per year, payable each 1 April for four years. The lease may be renewed at the option of the lessor for a further five years for $4,000 per year. • Based on an allocation of the lease payment on relative stand-alone prices, the lease and non-lease components (maintenance) are $12,100 and $1,300 respectively. Expected amounts to be paid under the residual value guarantee are $11,400 if the lessee ends the lease at the end of the first lease term, and $3,800 if they end the lease at the end of the second lease term. • The leased asset has a useful life of ten years and a fair value of $64,000. The Interest rate implicit in the lease is 8%. . (PV of $1, PVA of $1, and PVAD of $1.) (Use appropriate factor(s) from the tables provided.) Required: 1-a. Calculate the right-of-use asset.…arrow_forward
- H 14 & 15) i Multiple Choice Acme Auto Repair entered into an agreement to lease equipment from Cromley Motor Products on July 1, 2022, The lease calls for five equal annual payments of $460,000, beginning July 1, 2023. Similar transactions have carried an 11% interest rate. At what amount would Acme would record the right-of-use asset? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) $0. $1,887,127. Saved Help Save & Exit L ^ ENGarrow_forwardCurrent Attempt in Progress Assume that on December 31, 2024, Kimberly-Clark Corp. signs a 10-year, non-cancelable lease agreement to lease a storage building from Carla Vista Storage Company. The following information pertains to this lease agreement. 1. 2. 3. 4. 5. The agreement requires equal rental payments of $67,999 beginning on December 31, 2024. The fair value of the building on December 31, 2024, is $497,876. (a) The building has an estimated economic life of 12 years, a guaranteed residual value of $11,000, and an expected residual value of $7,100. Kimberly-Clark depreciates similar buildings on the straight-line method. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. Kimberly-Clark's incremental borrowing rate is 8% per year. The lessor's implicit rate is not known by Kimberly-Clark. Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Prepare the journal…arrow_forwardExercise 15-3 (Algo) Finance lease; lessee; balance sheet and income statement effects [LO15-2] On June 30, 2024, Georgia-Atlantic, Incorporated leased warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $604,355 over a five-year lease term, payable each June 30 and December 31, with the first payment on June 30, 2024. Georgia-Atlantic's incremental borrowing rate is 10%, the same rate IC uses to calculate lease payment amounts. Amortization is recorded on a straight-line basis at the end of each fiscal year. The fair value of the equipment is $4.90 million. 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. Determine the present value of the lease payments on June 30, 2024 that Georgia-Atlantic uses to record the right-of-use asset and lease liability. 2. What amount related to the lease would Georgia-Atlantic report in…arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning