Concept explainers
Finance lease; calculate lease payments
• LO15–2
American Food Services, Inc. leased a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2018. The lease agreement for the $4 million (fair value and present value of the lease payments) machine specified four equal payments at the end of each year. The useful life of the machine was expected to be four years with no residual value. Barton and Barton’s implicit interest rate was 10%.
Required:
1. Prepare the
2. Prepare an amortization schedule for the four-year term of the lease.
3. Prepare the appropriate entries related to the lease on December 31, 2018.
4. Prepare the appropriate entries related to the lease on December 31, 2020.
(Note: You may wish to compare your solution to this exercise with that of E 14–18 which deals with a parallel situation in which the packaging machine was acquired with an installment note.)
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Chapter 15 Solutions
INTERMEDIATE ACCOUNTING(LL)-W/CONNECT
- Problem 1 At the beginning of 2022, EVS Industries acquired a machine with fair value of P6,074,700 by signing a 4-year lease, which is the expected useful life of the machine passing. The lease is payable in four equal annual payments of P2 million at the end of each year. The implicit rate in the lease is 12% 22. What pretax amounts related to the lease would EVS report in its income statement for the year ended December 31, 2022?arrow_forwardBrief Exercise 15-3 (Algo) Lessee and lessor; calculate interest; finance/sales-type lease [LO15-2] A finance lease agreement calls for quarterly lease payments of $5,302 over a 15-year lease term, with the first payment on July 1, the beginning of the lease. The annual interest rate is 8%. Both the present value of the lease payments and the cost of the asset to the lessor are $188,000. Required: a. Prepare a partial amortization table up to the October 1 payment. b. What would be the amount of interest expense (revenue) the lessee (lessor) would record in conjunction with the second quarterly payment on October 1? Complete this question by entering your answers in the tabs below. Required A Required B Prepare a partial amortization table up to the October 1 payment. Note: Enter all amounts as positive values. Round your answers to the nearest whole dollar. Date July 1 July 1 October 1 Lease Payment Effective Interest Decrease in Outstanding balance balancearrow_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_forward
- Problem 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_forwardProblem 15-27 (Static) Finance lease; lessee; financial statement effects [LO15-2, 15-8] Werner Chemical, Incorporated, leased a protein analyzer on September 30, 2024. The five-year lease agreement calls for Werner to make quarterly lease payments of $391,548, payable each September 30, December 31, March 31, and June 30, with the first payment on September 30, 2024. Werner's incremental borrowing rate is 12%. Amortization is recorded on a straight-line basis at the end of each fiscal year. The useful life of the equipment is five years. 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 September 30, 2024. 2. What pretax amounts related to the lease would Werner report in its balance sheet on December 31, 2024? 3. What pretax amounts related to the lease would Werner report in its income statement for the year ended December 31, 2024? 4. What pretax…arrow_forwardXI. Direct Finance Lease – Lessee (PFRS 16)Problem 13. SMC Inc. leased a machine on January 1,2011 to SM Inc. with the following pertinentinformation:Annual rental payable at the beginning of each year P500,000Lease term 5 yearsUseful life of machine 6 yearsFair value of machine on January 1,2011 2,400,000Incremental borrowing rate of lessee 14%Implicit interest rate of lessor known to lessee 12%Bargain purchase option at the end of lease term 100,000Residual value of the machine 200,000Initial direct cost incurred by lessee 300,000Prepaid bonus paid by lessee 400,000Estimated restoration cost in which lessee has contractual obligation 1,000,000Required: Based on your audit, determine the following: ____________1. Initial amount recognized as right of use asset ____________2. Initial amount recognized as leased liability ____________3. Depreciation Expense in 2011 assuming cost model ____________4. Book value of right of use asset on December 31, 2012 ____________5. Current Lease…arrow_forward
- 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?arrow_forward1. Question 1 Illini leases another piece of equipment from Cubs Corporation under a four-year lease agreement on 1/1/20x1. The lease specifies annual payments on each 1/1 and the first payment of $10,000 is made on 1/1/20x1. The lease also specifies a 3% annual increase in the lease payments. The equipment has a fair value of $100,000 on 1/1/20x1. The expected useful life of the equipment is 10 years with no residual value. The equipment will be returned to Cubs at the end of the lease term. The implicit rate is 10%. Please refer to the instructions and the table in this question. Enter the correct journal entry for part [A]. Project 2.2 Part 2 Journal Entries Date Account Name (Debit) Account Name (Credit) Debit Credit 1/1/20X1 ROU assets [A] Lease obligation [B] 1/1/20X1 Lease obligation [C] Cash [D] 12/31/20X1 Rental expense [E]…arrow_forwardHi, Please help to determine present value of lease payments (lessee) considering the following: Project 2.2 Topic: Leases Part 2 Illini leases another piece of equipment from Cubs Corporation under a four-year lease agreement on 1/1/20x1. The lease specifies annual payments on each 1/1 and the first payment of $10,000 is made on 1/1/20x1. The lease also specifies a 3% annual increase in the lease payments. The equipment has a fair value of $100,000 on 1/1/20x1. The expected useful life of the equipment is 10 years with no residual value. The equipment will be returned to Cubs at the end of the lease term. The implicit rate is 10%. Project 2.2 Part 2 Ledger Date Account Name Debit Credit 1/1/20x1 ROU assets [A] Lease obligation [B]arrow_forward
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