Concept explainers
Variable lease payments
• LO15–2, LO15–6
On January 1, 2018, Wetick Optometrists leased diagnostic equipment from Southern Corp., which had purchased the equipment at a cost of $1,437,237. The lease agreement specifies six annual payments of $300,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2022. The six-year lease term ending December 31, 2023 (a year after the final payment), is equal to the estimated useful life of the equipment. The contract specifies that lease payments for each year will increase on the basis of the increase in the Consumer Price Index for the year just ended. Thus, the first payment will be $300,000, and the second and subsequent payments might be different. The CPI at the beginning of the lease is 120. Southern routinely acquires diagnostic equipment for lease to other firms. The interest rate in these financing arrangements is 10%.
Required:
1. Prepare the appropriate
2. Assuming the CPI is 124 at that time, prepare the appropriate journal entries related to the lease for Wetick at December 31, 2018,.
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INTERMEDIATE ACCOUNTING(LL)-W/CONNECT
- IFRS 16 Leases - Shark Ltd. rents a property downtown in order to use it as its new „flaghip-store“. • The commencement date of the lease contract is January 1 st, 2020. • The contract period is 10 years (until December 31st 2029; no extension or termination options). • The lease payments agreed under the rental agreement amount to € 100,000 per year and are due on January 1 st for each year of the lease term (up-front annual lease payments). • The implicit interest rate assumed in the lease is unknown to Shark Ltd. • Shark Ltd.‘s incremental borrowing rate is 4.75 %. • In addition, Shark Ltd. has to pay an up-front compensation payment (€ 15,000) to the previous lessee of the store in order to move in at the desired date. Required: • Determine the relevant lease payments • Calculate the right-of-use asset and the lease liability at initial recognition • Present the subsequent measurement of both the right-of-use asset and the lease liabilityarrow_forwardQuestion 5 The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee. Inception date: May 1, 2025 Annual lease payment due at the beginning of each year, beginning with May 1, 2025: $30,000 Bargain-purchase option price at end of lease term = $10,000 Lessor's implicit rate = 7% The lease term ends in FIVE years on April 30, 2030. What is the present value of the asset being leased? Recommendation: draw a timeline of the cash flows from the lessee to the lessor. Your Answer: Answerarrow_forwardProblem 11-5 On January 1,2020, Madelle Company entered into a lease for floor space with the following information. Floor space 5,000 square meters Annual rental payable at the end of each year 200,000 Lease term 5 years Implicit in the elase 10% Present value of an ordinary annuity of 1 for 10% at 5 periods 3.7908 On Jnaury 1, 2022, Madelle Company and the lessor agreed to amend the original terms of the lease with the following information. Floor space 3,750 square meters Annual rental payable at the end of each year 150,000 Implicit in the elase…arrow_forward
- Problem 15-3 (Algo) Lease amortization schedule [LO15-2] On January 1, 2024, Majestic Mantles leased a lathe from Equipment Leasing under a finance lease. Lease payments are made annually. Title does not transfer to the lessee and there is no purchase option or guarantee of a residual value by Majestic Portions of the Equipment Leasing's lease amortization schedule appear below: January 1 2024 2025 2026 2027 2028 2029 2030 2041 2042 2043 Payments $ 26,500 $ 26,500 $ 26,500 $ 26,500 $ 26,500 $ 26,500 $ 26,500 $ 26,500 $ 26,500 $ 26,500 Effective Interest $ 22,167 $ 21,734 $ 21,257 $ 20,733 $ 20,156 $ 19,522 1. Lease liability 2. Right-of-use asset 3. Lease term 4. Effective annual interest rate 5. Total of lease payments 6. Total effective interest expense Decrease in Balance $ 26,500 $ 4,333 $ 4,766 $ 5,243 $ 5,767 $ 6,344 $ 6,978 $ 6,590 $ 19,910 $ 4,599 $ 21,901 $ 2,409 $ 24,091 Outstanding Balance $ 248,178 $ 221,679 $ 217,337 $ 212,571 $ 207,328 $ 201,561 $ 195,217 $ 188,238…arrow_forwardProblem 3 On January 1, 2020, Berto Company leased a machinery with an estimated useful life of 8 years. The contract is a six-year noncancelable lease with a 10% implicit interest rate. PV of an annuity due of 1 at 10% for six periods 4.7908 PV of 1 at 10% for six periods 0.5645 The lease contains neither a transfer of title to the lessee nor a purchase option. The lease requires annual payments of P500,000 beginning January 1, 2020. The entity had a residual value guarantee of P400,000 when the machinery is returned to the lessor upon the lease expiration. Required: 1. Prepare a table of amortization of the lease liability and interest expense. 2. Prepare journal entries for 2020 and 2021. 3. Prepare journal entry on January 1, 2026 to record the return of the machinery to the lessor. Assume the fair value of the asset is P450,000. 4. Prepare journal entry on January 1, 2026 to record the return of the machinery to the lessor. Assume the fair value of the asset is P300,000.arrow_forwardExercise 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…arrow_forward
- PROBLEM 8: Lease agreement with VARIABLE PAYMENTS Li Zi Company entered into a lease of building on January 1, 2020. The lease contract provided the following information: Lease term 10 years Estimated useful life of leased asset 12 years Annual rental payable at end of each year for the first 5 years 400,000 Annual rental payable at end of each year for the next first 5 years 550,000 Interest rate implicit in the lease 10% No purchase option nor transfer of title REQUIRED: Prepare table of amortization and journal entries for the entire lease term.arrow_forwardExercise 15-17 (Algo) Lessee and lessor; operating lease [LO15-4] On January 1, 2021, Nath-Langstrom Services, Inc., 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 $14,500 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by ComputerWorld at a cost of $99,000 and were expected to have a useful life of five years with no residual value. Both firms record amortization and depreciation semiannually. (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.) 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 the…arrow_forwardExercise 15-4 (Algo) Sales-type lease; lessor; 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 $604,152 over a four-year lease term (also the asset's useful life), 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 used to calculate lease payment amounts. IC purchased the equipment from Builders, Incorporated at a cost of $4.1 million. Note: Use tables, Excel, or a financial calculator. (EV of $1. PV of $1. EVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) Required: 1. What amount related to the lease would IC report in its balance sheet on December 31, 2024 (ignore taxes)? 2. What amount related to the lease would IC report in its income statement for the year ended December 31, 2024 (ignore taxes)?…arrow_forward
- Accounting for Operating Lease LO C3 On January 1, Rogers (lessee) signs a three-year lease for machinery that is accounted for as a operating lease. The lease requires three $14,837 lease payments (the first at the beginning of the lease and the remaining two at December 31 of Year 1 and Year 2). The present value of the three annual lease payments is $42,200, using a 5.580% interest rate. The lease payment schedule follows. Date (A) Beginning Balance of Lease Liability (B) Debit Interest on Lease Liability 5.580% \times (A) + (C) Debit Lease Liability (D) − (B) = (D) Credit Cash Lease Payment (E) Ending Balance of Lease Liability (A) − (C) January 1, Year 1 $ 42,200 $ 0 $ 14,837 $ 14,837 $ 27,363 December 31, Year 1 27,363 1,527 13,310 14,837 14,053 December 31, Year 2 14,053 784 14,053 14,837 0 $ 2,311 $ 42,200 $ 44,511 Required: Prepare the January 1 journal entry at the start of the lease to record any asset or liability. Prepare the January 1 journal entry to record the first…arrow_forwardExercise 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 $20,000 each, payable semiannually on June 30 and December 31 each year. • The computers were acquired by ComputerWorld at a cost of $110,000 and were expected to have a useful life of eight 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…arrow_forward2 points Exercise 15-5 (Algo) Sales-type lease; lessor; balance sheet and income statement effects [LO15-3] On June 30, 2024, Georgia-Atlantic, Incorporated leased warehouse equipment from Builders, Incorporated The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $512,709 over a 5-year lease term (also the asset's useful life), payable each June 30 and December 31, with the first payment on June 30, 2024. Georgia-Atlantic's incremental borrowing rate is 12.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $3.5 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 price at which Builders is "selling" the equipment (present value of the lease payments) on June 30, 2024. 2. What amount related to the lease would Builders report in its balance sheet on December 31, 2024 (ignore taxes)? 3.…arrow_forward
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