Concept explainers
Operating lease
• LO15–4
(Note: Brief Exercises 8 and 9 are two variations of the same basic situation.)
At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a seven-year operating lease agreement. The contract calls for quarterly rent payments of $25,000 each. The office building was acquired by Lakeside at a cost of $2 million and was expected to have a useful life of 25 years with no residual value. What will be the effect of the lease on LTT’s earnings for the first year (ignore taxes)?
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- BE 15-9 Operating lease; financial statement effects LO15-4 At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a seven-year operating lease agreement. The contract calls for quarterly rent payments of $25,000 each. The office building was acquired by Lakeside at a cost of $2 million and was expected to have a useful life of 25 years with no residual value. What will be the effect of the lease on Lakeside's earnings for the first year (ignore taxes)?arrow_forwardProblem 2 ABC Company signed a ten-year noncancelable lease agreement to lease a storage building to a lessee under a sales type lease at the start of this year. At the conclusion of each year, the agreement demanded equal rental payments. The building's fair market value is P7,530,000. The building's carrying amount, on the other hand, is P6,420,000. The structure has a twelve-year projected economic life and no residual value. The title to the building will be transferred to the lessee at the end of the lease. The yearly rental was established by ABC to ensure a 12% return on investment. The lessee is aware of the lessor's implicit rate. The entire yearly lease payment includes P300,000 in executory costs for property taxes. What is the minimum annual lease payment? b. What is the total annual lease payment?arrow_forward25 Technoid Incorporated sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2024. The manufacturing cost of the computers was $19 million. This noncancelable lease had the following terms: • Lease payments: $3,287,947 semiannually; first payment on January 1, 2024; remaining payments on June 30 and December 31 each year through June 30, 2028. • Lease term: 5 years (10 semiannual payments). • No residual value; no purchase option. • Economic life of equipment: 5 years. Implicit interest rate and lessee's incremental borrowing rate: 9% semiannually. • Fair value of the computers on January 1, 2024: $23 million. . What is the outstanding balance of the lease liability in Lone Star's balance sheet on June 30, 2024? Note: Round your answer to the nearest whole dollar. Multiple Choice $17,698,200arrow_forward
- Brief Exercise 15-16 (Algo) Lessor's Initial direct costs; sales-type lease [LO15-3, 15-7] Bryant leased equipment that had a retall cash selling price of $700,000 and a useful life of four years with no residual value. The lessor spent $580,000 to manufacture the equipment and used an implicit rate of 9% when calculating annual lease payments of $198.228 beginning January 1, the beginning of the lease. Lease payments will be made January 1 each year of the lease. Incremental costs of consummating the lease transaction incurred by the lessor were $20,000. What is the effect of the lease on the lessor's earnings during the first year, not including any effect of depreciation no longer required on the asset under lease (Ignore taxes)? Note: Input decreases to Income as negative amounts. Impact on lessor's pretax earningsarrow_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_forward54 Oscar, Inc., leased equipment from Reynolds Company on January 1, 2023. Reynolds manufactured theequipment at a cost of $200,000. The equipment has a fair value of $260,000.Information related to the lease appears below:Lease term 5 yearsFirst lease payment January 1, 2023Subsequent lease payments December 31, 2023, 2024, 2025, 2026Economic life of the equipment 6 yearsEstimated value of equipment at end ofeconomic life $0Purchase option, reasonably expectedto be exercised by Oscar $20,000Implicit and incremental borrowing rate 8% 3. Prepare the entries to record the lease and the first payment for both the lessee and the lessor onJanuary 1, 2023arrow_forward
- Exercise 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_forwardProblem 10-30 (IFRS)At the beginning of current year, Southstar Company leased a building withthe following information:Annual fixed payment in advance at the beginning of each lease year1, 000, 000Initial direct cost paid350, 000Least incentive received150, 000Lease bonus paid to lessor before commencement of lease100, 000Discounted amount of restoring the building as required by contract200, 000Purchase option that is not reasonably certain to be exercised300, 000Lease term 5 yearsUseful life of building 8 yearsImplicit interest rate 8%Present value of an annuity of 1 in advance at 8% for 5 periods 4.31Present value of 1 at 8% for 5 periods .68 1. What is the initial lease liability?a. 4, 514, 000b. 4, 310, 000c. 4, 614, 000d. 4, 764, 0002. What is the cost of right of use asset?a. 4, 814, 000b. 4, 810, 000c. 4, 710, 000d. 4, 610, 000arrow_forwardTB MC Qu. 15-72 (Static) XYZ Company leased equipment... XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a finance lease to West, but not as a result of a bargain purchase option or a title transfer. The present value of the lease payments is $600,000. The expected economic life of the asset is seven years. The lease term is five years. Using the straight-line method, what would West record as annual amortization? Multiple Choice О $120,000 О $85,714 $60,000 $0arrow_forward
- 6 Company A (lessee) has reached a lease agreement with Company B (assor) to kase a new carpet weaving machine beginning January 1, Year 1. The lease agreement contains the following information • The lease is for five years, requiring annual payments of $10,355.67 at the beginning of the year. • The weaving machine has a fair value at the beginning of the lease of $50,000; an estimated economic life of five years; and a guaranteed residual value of $2,500 (Company A expects that the value will be greater). • Present value of the weaving machine is $47,945.18. • There are no renewal options. At the end of the lease, the weaving machine will be returned to Company B. • Company A depreciates similar equipment that it purchases on a straight-line basis. • Company B sels the annual lease rate al 5% and Company A is aware of the rate. • The lease is a finance lease. COMPANY A LEASE AMORTIZATION SCHEDULE ANNUITY-DUE BASIS Annual Lease Payment Date January 1, Year 1 January 1, Year 1 January…arrow_forward25. SLIGHTLY USED MEMORY leased a machine with an estimated useful life of 20 years from another company. The 10-year non-cancellable lease provides that the title to the machine transfers to SLIGHTLY USED MEMORY at the end of the lease term. The leased asset should be depreciated by SLIGHTLY USED MEMORY over * a. 10 years O b. 20 years c. 10 years or 20 years depending if O the lessee classifies it as either operating or finance lease d. 10 years or 20 years depending if O the lessor classifies it as either operating or finance leasearrow_forward10 Company A (lessee) has reached a lease agreement with Company B (lessor) to lease a new boom lifl beginning January 1, Year 1 The lease agreement contains the following information • The lease is for three years requiring annual payments at the beginning of the year of $10,213 (annuity-due basis). • The boom lift has a fair value at the beginning of the lease of $40,000; an estimated economic life of five years; and an unguaranteed residual value of $12,500. • Present value of the residual value is $10,798. • There are no renewal options. At the end of the lease the boom lift will be returned to Company B. • The lease does not pass any of the finance lease tests. What is the journal entry that Company A should make on January 1, Year 1 to record the lease? O Debit Leased Asset for $40,000; Credit Lease Liability for $40,000 O Debit Leased Asset for $29,787; Credit Lease Liability for $29,787 O Debit Leased Asset for $27,500; Credit Lease Liability for $27,500 Debit Leased Asset for…arrow_forward
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