Concept explainers
Sale-leaseback; operating lease
Appendix 15
To raise operating funds, National Distribution Center sold its office building to an insurance company on January 1, 2018, for $800,000 and immediately leased the building back. The operating lease is for the final 12 years of the building’s estimated 20-year remaining useful life. The building has a fair value of $800,000 and a book value of $650,000 (its original cost was $1 million). The rental payments of $100,000 are payable to the insurance company each December 31. The lease has an implicit rate of 9%.
Required:
Prepare the appropriate entries for National Distribution Center on:
1. January 1, 2018, to record the sale-leaseback
2. December 31, 2018, to record necessary adjustments
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Chapter 15 Solutions
INTERMEDIATE ACCOUNTING RMU 9TH EDITION
- Determining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a 10-year cancelable (at the option of either party) agreement to lease a storage building from Wake Company. The following information pertains to this lease agreement: 1. The agreement requires rental payments of 100,000 at the beginning of each year. 2. The cost and fair value of the building on January 1, 2019, is 2 million. The storage building has not been specialized for Caswell. 3. The building has an estimated economic life of 50 years, with no residual value. Caswell depreciates similar buildings according to the straight-line method. 4. The lease does not contain a renewable option clause. At the termination of the lease, the building reverts to the lessor. 5. Caswells incremental borrowing rate is 14% per year. Wake set the annual rental to ensure a 16% rate of return (the loss in service value anticipated for the term of the lease). Caswell knows the implicit interest rate. 6. Executory costs of 7,000 annually, related to taxes on the property, are paid by Caswell directly to the taxing authority on Dec. 31 of each year. Required: 1. Determine what type of lease this is for the lessee. 2. Prepare appropriate journal entries on the lessees books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2019 and 2020.arrow_forwardLease Income and Expense Reuben Company retires a machine from active use on January 2, 2019, for the express purpose of leasing it. The machine had a carrying value of 900,000 after 12 years of use and is expected to have 10 more years of economic life. The machine is depreciated on a straight-line basis. On March 2, 2019, Reuben leases the machine to Owens Company for 180,000 a year for a 5-year period ending February 28, 2024. Under the provisions of the lease, Reuben incurs total maintenance and other related costs of 20,000 for the year ended December 31, 2019. Owens pays 180,000 to Reuben on March 2, 2019. The lease was properly classified as an operating lease. Required: 1. Compute the income before income taxes derived by Reuben from this lease for the calendar year ended December 31, 2019. 2. Compute the amount of rent expense incurred by Owens from this lease for the calendar year ended December 31, 2019.arrow_forwardLessee Accounting Issues Sax Company signs a lease agreement dated January 1, 2019, that provides for it to lease computers from Appleton Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows: 1. The lease term is 5 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year. The computers are not specialized for Sax. 2. The computers have an estimated life of 5 years, a fair value of 300,000, and a zero estimated residual value. 3. Sax agrees to pay all executory costs directly to a third party. 4. The lease contains no renewal or bargain purchase options. 5. The annual payment is set by Appleton at 83,222.92 to earn a rate of return of 12% on its net investment. Sax is aware of this rate. Saxs incremental borrowing rate is 10%. 6. Sax uses the straight-line method to record depreciation on similar equipment. Required: 1. Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Sax. 2. Calculate the amount of the asset and liability of Sax at the inception of the lease (round to the nearest dollar). 3. Prepare a table summarizing the lease payments and interest expense. 4. Prepare journal entries for Sax for the years 2019 and 2020.arrow_forward
- Current Attempt in Progress Your answer is partially correct. Carol Leasing Company signs an agreement on January 1, 2025, to lease equipment to Wildhorse Company. The following information relates to this agreement. 1. The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years. 2. The fair value of the asset at January 1, 2025, is $87,000. 3. 4. 5. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $11,000, none of which is guaranteed. The agreement requires equal annual rental payments of $26,756.27 to the lessor, beginning on January 1, 2025. The lessee's incremental borrowing rate is 5%. The lessor's implicit rate is 4% and is unknown to the lessee. 6. Wildhorse uses the straight-line depreciation method for all equipment. Click here to view factor tables. Prepare all of the journal entries for the lessee for 2025 to record the lease…arrow_forwardEastern Edison Company leased equipment from Low-Tech Leasing on January 1, 2018. Low-Tech recently purchased the equipment at a cost of $334.936. Other information: 5 years $79,000 on January 1 each year 5 years Lease term Annual payments Life of asset Fair value of asset $334,936 Implicit interest rate 9% Incremental rate 9% There is no expected residual value. Required: Prepare appropriate journal entries for Low-Tech Leasing for 2018. Assume a December 31 year-end. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest whole dollar amounts.) View transaction list Journal entry worksheet 1 2 3 > Record the entry at the inception of the lease. Note: Enter debits before credits. Date General Journal Debit Credit January 01, 2018arrow_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_forward
- Current 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_forwardEast Company leased a new machine from North Company on January 1, 2021 under a lease with the following information:Annual rental payable at the beginning of each lease year P 400,000Lease term 10 yearsUseful life of the machine 12 yearsImplicit interest rate 14%Incremental borrowing rate of the lessee 12%Initial direct costs 100,000East Company has the option to purchase the machine on January 1, 2031 by paying P500,000 which approximates the expected fair value of the machine on the option exercise date. 1. At the commencement of the lease, what amount should be recognized as finance lease liability? 2. What would be the carrying amount of the leased asset in the records of East Company as of December 31, 2023? 3. The balance of the finance lease liability as of December 31, 2024 is:arrow_forwardA. To raise operating funds, Pepero Company sold its equipment on March 31, 2019 for P470,000 and immediately leased the equipment back. The fair value of the asset is P700,000 and the equipment has a carrying value of P650,000. The annual rental payments of P100,000 is significantly lower than the fair rental of P125,000 for this type of equipment. Lease term is 12 years out of total life of 25 years. How much loss should be deferred beyond 2019 as a result of this leaseback transaction? P11,250 P168,750 P180,000 P52,500 B. Norie Company leased an asset on a finance lease. The present value of the lease payments total P686,000 and the fair value of the asset is P750,000. The asset has a useful life of 5 years and the lease term is 4 years. The bargain purchase option for the asset at the end of its useful life is nominal and is substantially lower than the value of the asset at that date. Depreciation for the asset is computed using straight line method. How much is the annual…arrow_forward
- S 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 $24,000 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 $162,000 (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 $52,070. Crescent seeks a 12% 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 for the first year (ignore taxes)? Note: Enter decreases with negative sign. 2.…arrow_forwardAt January 1, 2024, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. ⚫ The lease agreement specifies annual payments of $20,000 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 $171,000 (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 $72,098. • 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 the first year (ignore taxes)? Note: Enter decreases with negative sign. 2. What…arrow_forwardRhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2024, Rhone-Metro leased equipment to Western Soya Company for a noncancelable stated lease term of four years ending December 31, 2028, at which time possession of the leased asset will revert back to Rhone-Metro. ● ● ● The equipment cost $390,000 to manufacture and has an expected useful life of six years. Its normal sales price is $445,205. The expected residual value of $26,000 on December 31, 2028, is not guaranteed. The first payment was made on December 31, 2024. Western Soya's incremental borrowing rate is 10%. Western Soya knows the interest rate implicit in the lease payments is 9%. Both companies use straight-line depreciation or amortization. [Hint: A lease term ends for accounting purposes when an option becomes exercisable if it's expected to be exercised (i.e., a BPO).] 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…arrow_forward
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