Concept explainers
Lessor’s initial direct costs; operating and sales-type leases
• LO15–2, LO15–3, LO15–4, LO15–7
Terms of a lease agreement and related facts were:
a. The lease asset had a retail cash selling price of $100,000. Its useful life was six years with no residual value (straight-line
b. Annual lease payments at the beginning of each year were $20,873, beginning January 1.
c. Lessor’s implicit rate when calculating annual rental payments was 10%.
d. Costs of $2,062 for legal fees for the lease execution were the responsibility of the lessor.
Required:
Prepare the appropriate entries for the lessor to record the lease, the initial payment at its beginning, and at the December 31 fiscal year-end under each of the following three independent assumptions:
1. The lease term is three years and the lessor paid $100,000 to acquire the asset (operating lease).
2. The lease term is six years and the lessor paid $100,000 to acquire the asset. Also assume that adjusting the lease receivable (net investment) by initial direct costs reduces the effective rate of interest to 9%.
3. The lease term is six years and the lessor paid $85,000 to acquire the asset.
Want to see the full answer?
Check out a sample textbook solutionChapter 15 Solutions
Intermediate Accounting, 10 Ed
- 16... Partially correct answer icon Your answer is partially correct. Grouper Corporation leases equipment from Falls Company on January 1, 2020. The lease agreement does not transfer ownership, contain a bargain purchase option, and is not a specialized asset. It covers 3 years of the equipment’s 8-year useful life, and the present value of the lease payments is less than 90% of the fair value of the asset leased.Prepare Grouper’s journal entries on January 1, 2020, and December 31, 2020. Assume the annual lease payment is $30,000 at the beginning of each year, and Grouper’s incremental borrowing rate is 8%, which is the same as the lessor’s implicit rate. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,265. Record journal entries in the order presented in the problem.)Click here to…arrow_forwardQuestion 5 LeBron James (LBJ) Corporation agrees on January 1, 2020, to lease equipment from Oriole, Inc. for 3 years. The lease calls for annual lease payments of $16,000 at the beginning of each year. The lease does not transfer ownership, nor does it contain a bargain purchase option, and is not a specialized asset. In addition, the useful life of the equipment is 10 years, and the present value of the lease payments is less than 90% of the fair value of the equipment.Prepare LBJ’s journal entries on January 1, 2020 (commencement of the operating lease), and on December 31, 2020. Assume the implicit rate used by the lessor is unknown, and LBJ’s incremental borrowing rate is 7%. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the…arrow_forward31.. continue Marin, Inc. leases a piece of equipment to Bucks Company on January 1, 2020. The contract stipulates a lease term of 5 years, with equal annual rental payments of $7,367 at the end of each year. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. The asset has a fair value of $40,000, a book value of $38,000, and a useful life of 8 years. At the end of the lease term, Marin expects the residual value of the asset to be $12,000, and this amount is guaranteed by a third party. Marin wants to earn a 6% return on the lease and collectibility of the lease payments is probable. Assume that the lease receivable is $40,000, deferred gross profit is $2,000, and the rate of return to amortize the net lease receivable to zero is 7.64%.Prepare Marin’ journal entry at the end of the first year of the lease to record the receipt of the first lease payment. (Credit account titles are automatically…arrow_forward
- CH 21 POST-CLASS - SU21 Question 1 Ivanhoe Corporation enters into a 5-year lease of equipment on December 31, 2019, which requires 5 annual payments of $37,800 each, beginning December 31, 2019. In addition, Ivanhoe guarantees the lessor a residual value of $20,500 at the end of the lease. However, Ivanhoe believes it is probable that the expected residual value at the end of the lease term will be $10,250. The equipment has a useful life of 5 years.Prepare Ivanhoes' December 31, 2019, journal entries assuming the implicit rate of the lease is 10% and this is known to Ivanhoe. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places e.g. 5,275.)Click here to view factor tables. Date Account Titles and Explanation Debit Credit December 31, 2019 (To…arrow_forwardExercise 15-33 (Algo) Nonlease payments; lessor and lessee [LO15-2, 15-7] On January 1, 2024, NRC Credit Corporation leased equipment to Brand Services under a finance/sales-type lease designed to earn NRC a 11% rate of return for providing long-term financing. The lease agreement specified the following: Ten annual payments of $61,000 beginning January 1, 2024, the beginning of the lease and each December 31 thereafter through 2032. The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to NRC was $346,464. The lease qualifies as a finance lease/sales-type lease. A 10-year service agreement with Quality Maintenance Company was negotiated to provide maintenance of the equipment as required. Payments of $8,000 per year are specified, beginning January 1, 2024. NRC was to pay this cost as incurred, but lease payments reflect this expenditure. A partial amortization schedule, appropriate for both the lessee and lessor, follows: Note: Use…arrow_forward30. Your answer is partially correct. Sage Hill, Inc. leases a piece of equipment to Bucks Company on January 1, 2020. The contract stipulates a lease term of 5 years, with equal annual rental payments of $4,523 at the end of each year. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. The asset has a fair value of $47,000, a book value of $42,000 and a useful life of 8 years. At the end of the lease term, Sage Hill expects the residual value of the asset to be $12,000, and this amount is guaranteed by a third party.Assuming Sage Hill wants to earn a 4% return on the lease and collectibility of the lease payments is probable, record its journal entry at the commencement of the lease on January 1, 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table…arrow_forward
- Kk.194. Jeff owns a new company that is considering either leasing or buying a $100,000 piece of equipment. The lease-buy analysis indicates that buying is better than leasing in Jeff's situation. What factors other than those considered in the lease-buy analysis might lead Jeff to lease rather than buy, in contradiction to the analysis results?arrow_forwardMN.17. On 1 July 2020 Jane Ltd (lessor) leased equipment to Austin Ltd (Lessee). The equipment had a fair value of $369,824. This was also the present value of the lease payments .The lease agreement contained the following details: Lease term 5 years Economic life 6 years Annual rental payment in arrears commencing 30June 2021 $90,000 Residual Value at end of lease term $80,000 Residual Value guaranteed by lessee 80,ooo Interest rate implicit in lease 12% Lease is cancellable with permission of lessor, Jane Ltd .Lease is classified as a finance Lease by the Lessor . Required: (a)Prepare the Lease payment schedule for Austin Ltd, Lessee, for the first two years, for the year ended 30 June 2021 and for the year ended 30 June 2022.arrow_forwardt34 Initial direct costs incurred by the lessor in an operating lease should beA. expensed in the year of incurrence by including them in the cost of goods sold or by treating them as a sellingexpense.B. deferred and recognized as reduction in the interest rate implicit in the lease.C. capitalized as part of asset cost and depreciated over the lease term.D. deferred and carried on the statement of financial position until the end of the lease term.arrow_forward
- 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.…arrow_forward4...continue Sunland Leasing Company agrees to lease equipment to Coronado Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $489,000, and the fair value of the asset on January 1, 2020, is $699,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Coronado estimates that the expected residual value at the end of the lease term will be 60,000. Coronado amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Sunland desires a 9% rate of return on its investments. Coronado’s incremental borrowing rate is 10%, and the lessor’s implicit rate is…arrow_forward4...continue Sunland Leasing Company agrees to lease equipment to Coronado Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $489,000, and the fair value of the asset on January 1, 2020, is $699,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Coronado estimates that the expected residual value at the end of the lease term will be 60,000. Coronado amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Sunland desires a 9% rate of return on its investments. Coronado’s incremental borrowing rate is 10%, and the lessor’s implicit rate is…arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education