Concept explainers
Reassessment of lease term
• LO15–2, LO15–4, LO15–6
On January 1, 2018, Rick’s Pawn Shop leased a truck from Corey Motors for a six-year period with an option to extend the lease for three years. Rick’s had no significant economic incentive as of the beginning of the lease to exercise the 3-year extension option. Annual lease payments are $10,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate. Assume that at the beginning of the third year, January 1, 2020, Rick’s had made significant improvements to the truck whose cost could be recovered only if it exercises the extension option, creating an expectation that extension of the lease was “reasonably certain.” The relevant interest rate at that time was 6%.
Required:
- 1. Prepare the
journal entry , if any, at the end of the second year for the lessee to account for the reassessment. - 2. Prepare the journal entry, if any, at the end of the second year for the lessor to account for the reassessment.
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Chapter 15 Solutions
INTERMEDIATE ACCOUNTING RMU 9TH EDITION
- Question 6 This is a multiple answer question. On January 1, 2025, Rampart Inc., entered into a lease agreement with ABC Leasing Company to lease a truck for 3 years. The lease is accounted for as a finance lease and $5,000 in lease payments are due at the beginning of the period starting January 1, 2025, and on December 31 of each year thereafter. There is no residual value. The rate implicit in the lease in 8%. On December 31, 2026, what entry will Rampart make when the lease payment is made? The present value of an annuity due at 8% for 3 years is 2.78326. (Round to whole dollars) (Choose all that apply) Question 6 of 25 ill save this response. A. debit interest expense $370 B. debit lease liability $4,630 C. credit cash $5,000 D. debit lease expense $5,000 E.D debit right of use asset $4,630arrow_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_forwardAccounting 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_forward
- PROBLEM 10: LEASE MODIFICATION WITH EXTENSION of lease term Laze Company entered into a lease agreement for a stall space for its products on January 1, 2020. Some of the agreement in the lease contract are as follows: Annual rental payable at end of each year starting December 31, 2020 P350,000 Lease term 6 years Implicit interest rate in the lease 10% Laze Company proposed an amendment on the original lease contract on January 1, 2023, and was approved by the lessor. The amendment is to extend the lease term for another 2 years with the following additional features: Annual rental payable at end of each year starting December 31, 2023 P350,000 Implicit interest rate in the lease 11% REQUIRED:: Prepare table of amortization and journal entries for the entire lease term.arrow_forwardPROBLEM 9: LEASE MODIFICATION as a Separate Lease Leese Company entered into a lease agreement with Lessor Company with the following terms on January 1, 2020. Floor space 2,000 square meters Annual rental payable at end of each year 200,000 Implicit interest rate in the lease 10% Lease term 6 years On January 1, 2023, Leese Company and Lessor Company agreed to amend the original terms of the lease with following arrangement: Additional floor space 4,000 square meters Annual rental payable at end of each year (current market rent) 450,000 Implicit interest rate in the lease 8% REQUIRED: Prepare table of amortization and journal entries for the entire lease term.arrow_forwardProblem 1 Whistler Inc. signed a 6 year non-cancelable lease at the beginning of the year. The leased equipment has a 9 year economic life. The fair value of the leased equipment is $29,000. Annual lease payments due at the beginning of each year are $5,200. There is no bargain purchase option, and the leased asset reverts to the lessor at the end of the lease term. The implicit rate of interest on the lease (known by the lessee) is 6%. Collection of all lease payments is reasonably assured. Part A. What is the classification of this lease from the perspective of the lessee? Part B. What is the classification of this lease from the perspective of the lessor?arrow_forward
- Question 3 Apparel Leasing Company signs a lease agreement on January 1, 2021, to lease equipment to Oman Company. The term of the non-cancelable lease is 8 years, and payments are required at the end of each year. The following information related to this agreement: 1. The equipment has a cost and fair value of $9,500,000 to Apparel, an estimated useful life of 10 years, and no residual value at the end of that time. Annual lease rental is $1,441,606. 2. Apparel Company desires to earn an 8% return on its investment. Instructions: A) Prepare an amortization schedule for the lessor for 2021 and 2022. B) Prepare the journal entries on the lessor's books on January 1, 2021 and December 31, 2021.arrow_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_forwardProblem 5. Operating Lease- Lessor On January 1, 2 0x1, Lessor entered into operating lease. an Information followS: Annual Rent payable at the end of each year P100,000 Lease bonus paid by lessee to lessor 20,000 Security deposit paid by the lessee to the lessor 15,000 Lease term 5 years Additional Information: Annual rent рayment includes P5,000 to Cover for costs of administrative tasks is to be paid for any excess of sales of Lessee over P1,000,000. Lessee's sales for 20x1 are P1, 100, 000. Additional rent of 10% The security deposit will be returned to Lessee at the end of lease term. The appropriate discount rate is 12% Annual depreciation on the leased asset is P70,000 Other costs related to the earning of lease income are P5,000 Requirements: Compute for the profit earned on the lease transaction in 20x1.arrow_forward
- Problem 10-5 On January 1, 2020, Lessee Company entered into a lease with Lessor Company for a new equipment. The lease stipulates that annual payments of P1,000,000 will be made for five years startingbDecember 31,2020. Lessee Company guaranteed a residual value of P474,060 at the end of the 5 year period. Th equipment will revert to the lessor at the lease expiration. The omplicit interest rate for the lease is 16% after considering the guaranteed residual value. The economic life of the equipment is 10 years. The present value factors at 16% for five periods are: Present value of 1 0.4761 Present value of an ordinary annuity of 1 3.2743 Required: Prepare a schedule of the annual payments showing reduction of liablity every year. Prepare a journal entries on the bools of Leese Company for 2020 and 2021. Prepare a journal entry on December 31,2024, end of lease term, to record the return…arrow_forwardProblem 3 On January 1, 2022, Grab Services, Inc. leased delivery trucks from Henri Industries. The lease agreement for the P3,000,000 (fair value and present value of the lease payments) delivery trucks specified four equal payments at the end of each year. The useful life of the delivery trucks was expected to be 8 years with no residual value. The implicit rate on the lease was 10%. 27. Determine the annual lease payment to be made by Grab Services?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
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning
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