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Lessee and lessor; lessee guaranteed residual value
• LO15–2, LO15–7
On January 1, 2018, Nguyen Electronics leased equipment from Nevels Leasing for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Nevels. The equipment cost Nevels $824,368 and has an expected economic life of five years. Nevels expects the residual value at December 31, 2021, will be $100,000. Negotiations led to the lessee guaranteeing a $140,000 residual value.
Equal payments under the lease are $200,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Nguyen is aware that Nevels used a 5% interest rate when calculating lease payments.
Required:
1. Prepare the appropriate entries for both Nguyen and Nevels on January 1, 2018, to record the lease.
2. Prepare all appropriate entries for both Nguyen and Nevels on December 31, 2018, related to the lease.
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Chapter 15 Solutions
INTERMEDIATE ACCOUNTING(LL)-W/CONNECT
- es aw Exercise 15-27 (Algo) Lessee; lessee guaranteed residual value [LO15-2, 15-6] On January 1, 2024, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a four-year period ending December 31, 2027, at which time possession of the leased asset will revert back to Aqua. . The equipment cost Aqua $421,168 and has an expected economic life of five years. • Aqua and Maywood expect the residual value at December 31, 2027, to be $58,000. • Negotiations led to Maywood guaranteeing a $82,000 residual value. . Equal payments under the lease are $116,000 and are due on December 31 of each year with the first payment being made on December 31, 2024. . Maywood is aware that Aqua used a 5% interest rate when calculating lease payments. 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. & 2. Prepare the appropriate entries for Maywood on January 1, 2024 and December 31, 2024, related to the lease.…arrow_forward7 f Sage Industries and Pronghorn Inc. enter into an agreement that requires Pronghorn Inc. to build three diesel-electric engines to Sage’s specifications. Upon completion of the engines, Sage has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is non-cancelable, becomes effective on January 1, 2020, and requires annual rental payments of $405,443 each January 1, starting January 1, 2020.Sage’s incremental borrowing rate is 8%. The implicit interest rate used by Pronghorn and known to Sage is 7%. The total cost of building the three engines is $2,685,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Sage depreciates similar equipment on a straight-line basis. At the end of the lease, Sage assumes title to the engines. Collectibility of the lease payments is probable.(f) Show the items and amounts that would be reported on the balance sheet (not notes) at December…arrow_forwardProblem 15-30 (Algo) Sale-leaseback [LO Appendix 15] To raise operating funds, North American Courier Corporation sold its building on January 1, 2024, to an insurance company for $508,000 and immediately leased the building back. • The lease is for a 10-year period ending December 31, 2033, at which time ownership of the building will revert to North American Courier. • The building has a carrying amount of $430,000 (original cost $1,060,000). • The lease requires North American to make payments of $89,908 to the insurance company each December 31. · 0 The building had a total original useful life of 30 years with no residual value and is being depreciated on a straight-line basis. The lease has an implicit rate of 12%. 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 the appropriate entries for North American (a) on January 1, 2024, to record the transaction and (b) on December 31, 2024, to…arrow_forward
- 7 f Sage Industries and Pronghorn Inc. enter into an agreement that requires Pronghorn Inc. to build three diesel-electric engines to Sage’s specifications. Upon completion of the engines, Sage has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is non-cancelable, becomes effective on January 1, 2020, and requires annual rental payments of $405,443 each January 1, starting January 1, 2020.Sage’s incremental borrowing rate is 8%. The implicit interest rate used by Pronghorn and known to Sage is 7%. The total cost of building the three engines is $2,685,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Sage depreciates similar equipment on a straight-line basis. At the end of the lease, Sage assumes title to the engines. Collectibility of the lease payments is probable.(f) Show the items and amounts that would be reported on the balance sheet (not notes) at December…arrow_forwardProblem 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_forwardExercise 15-11 (Static) Lessee and lessor; sales-type lease with selling profit [LO15-2, 15-3] Eye Deal Optometry leased vision-testing equipment from Insight Machines on January 1, 2024. Insight Machines manufactured the equipment at a cost of $200,000 and lists a cash selling price of $250,177. Appropriate adjusting entries are made quarterly. 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) Related Information: Lease term Quarterly lease payments Economic life of asset Interest rate charged by the lessor Required 1 Required: 1. Prepare appropriate entries for Eye Deal to record the arrangement at its beginning, January 1, 2024, and on March 31, 2024. 2. Prepare appropriate entries for Insight Machines to record the arrangement at its beginning, January 1, 2024, and on March 31, 2024 Complete this question by entering your answers in the tabs below. Required 2 View transaction list Journal entry worksheet 1 اء…arrow_forward
- 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_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_forwardPROBLEM 6: Leased asset was PURCHASED by the lessee Lazy Company leased an equipment with useful life of 6 years on January 1, 2020 for period of 5 years with fixed annual rental ofP600,000 which is to be paid at the end of each year. The lease contract provides that the lessee has guaranteed a P100,000 residualvalue of the leased asset. The implicit interest rate in the lease is 10%. Assuming that at December 31, 2022, Lazy Companypurchased the equipment for P1,300,000. REQUIRED: Prepare table of amortization and journal entries for the entire lease term.arrow_forward
- PROBLEM 5: Lease Agreement with UNGUARANTEED Residual Value, RESTORATION COST and ANNUAL EXECUTORY COST Lazy Company leased a building with useful life of 10 years on January 1, 2020 for period of 8 years with fixed annual rental ofP800,000 which is to be paid at the end of each year. The residual value of P100,000 is unguaranteed. Initial direct cost incurred andpaid by the lessee amounted to P150,000. Additional payment to the lessor to obtain the long-term arrangement of the leaseamounts to P100,000. Annual property taxes/insurance/maintenance and other executory costs paid P90,000. The lease agreementfurther provides restoration cost of the leased asset at the end of lease term for P250,000 (present value). The implicit interest ratein the lease is 10%. REQUIRED: Prepare table of amortization and journal entries for the entire lease termarrow_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_forwardX On 1 January 2021 Bob Company sells an item of machinery to Jaison Company for its fair value of $300,000. The asset had a carrying amount of $120,000 prior to the sale. The sale represents the satisfaction of a performance obligation, in accordance with IFRS 15 Revenue from Contracts with Customers. Bob Company enters on to a contract with Jaison Company for the right to use the asset for the next five years. Annual payments of $50,000 are due at the end of each year. The interest rate implicit in the lease is 10%. The present value of the annual lease payments is $190,000. The remaining useful life of the machine is much greater than the lease term. Required: 1. Explain how it will be recorded in the books of Bob Company and show the necessary journal entries. 2. Why do companies prefer lease financing instead of direct purchase? Explain any three valid reasons.arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningIndividual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT
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