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Composition of Lease Payments. Variable Payments. Assume that Anderson Associates, Inc. leases conference and training facilities from. The Learning Company Anderson will conduct training seminars for the clients at the teased space. The lease requires annual payments of $400,000 plus a percentage of sales volume that cannot be less than 1% of total sales revenue. Assume total sales revenue is not known at the time of lease commencement. What are the payments to be used to classify the tease?
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- Which of the following statements regarding the new accounting rules, which take effect in 2019, for leases is false? If the lease term is one year or longer, a liability must be recognized. If the lease term is less than one year, an asset must be recognized. The new lease accounting rules will result in more assets and liabilities being recognized on the balance sheet. Leasing will likely remain popular under the new lease accounting rules because leases do not require a large initial outlay of cash.arrow_forwardAutomobile leases are built around three factors: negotiated sales price, residual value, and interest rate. The residual value is what the dealership expects the car’s value will be when the vehicle is returned at the end of the lease period. The monthly cost of the lease is the capital recovery amount determined by using these three factors. Solve, (a) Determine the monthly lease payment for a car that has an agreed-upon sales price of $34,995, an APR of 9% compounded monthly, and an estimated residual value of $20,000 at the end of a 36-month lease.∗ An up-front paymentof $3,000 is due when the lease agreement (contract) is signed. (b) If the estimated residual value is raised to $25,000 by the dealership to get yourbusiness, how much will the monthly payment be?arrow_forwardTo consider the financial statement effects of leasing versus purchasing an asset, review the following case of Hack Wellington Company Hack Wellington Company needs equipment that will cost the company $560. Hack Wellington Company is considering to either purchase the equipment by borrowing $560 from a local bank or leasing the equipment. Assume that the lease will be structured as an operating lease. Some data from Hack Wellington Company's current balance sheet prior to the lease or purchase of the equipment are: Balance Sheet Data (Dollars) Current assets $2,940 Debt $1,680 Net fixed assets 1,260 Equity 2,520 Total assets $4,200 Total claims $4,200 1. The company's current debt ratio is 2. If the company purchases the equipment by taking a loan, the total debt in the balance sheet will and the debt ratio will change to 3. If the company leases the equipment, the company's debt ratio will because the lease is not capitalized. under a lease agreement as compared to the finandial…arrow_forward
- Please answer both Part 1 and Part 2 questions for Case Study. Thank you. (additional reference from professor: please check the most updated ASC 842 leases) Case 13-8 Sale and Leaseback Part I Lessee Obtains Control Prior to Lease Commencement Phoenix Company wishes to lease a new vehicle for five years. The vehicle manufacturer is not willing to enter into lease arrangements, so Phoenix Company identifies a bank that is willing to purchase the vehicle and enter into a lease under an agreement that Phoenix Company expects to classify as an operating lease. Phoenix Company purchases the vehicle from the manufacturer, takes possession, and obtains legal title. Shortly thereafter, Phoenix Company sells the vehicle to the bank. The sale agreement requires the bank to reimburse Phoenix Company for all costs incurred to acquire the vehicle from the manufacturer and provides the bank with legal title to the vehicle. Concurrent with the sale, Phoenix Company and the bank enter into a…arrow_forwardUse the information for Escapee Company from BE21.20. Assume the same facts, except Escapee guarantees a residual value of $9,000 at the end of the lease term, which equals the expected residual value of the machinery. (a) Does this change your answer from BE21.20? (b) What if the expected residual value at the end of the lease term is $5,000 and Escapee guarantees a residual of $9,000?arrow_forwardThe details of the equipment lease agreement that Taj Corp. (lessee) recently entered into with Stanger Leasing (lessor) are: Commencement date: January 1, 2019. Term of lease: 12 months. Payments: $1,000 per month first due at the commencement date. Other: Title does not transfer and the lease does not include any renewal or purchase options. Interest rate implicit in the lease: Lessee not able to readily determine. Incremental borrowing rate: 9% per annum (0.75% per month). Estimated useful life of equipment: 8 years. Depreciation method: Straight-line. Year end: December 31. Assume that Taj Corp. does elect to expense leases of a short-term nature as a practical expedient. Prepare the journal entry for January 1, 2019. Indicate a debit as positive and a credit as negative. Type 0 for any blanks that do not apply.arrow_forward
- Company A leases computer servers to Company B for five years. At the end of the five years, Company B will assume ownership of the servers. Company B will then send the servers to one of their international locations. Which finance lease classification test does the scenario represent? O Alternative use O Transfer of ownership O Lease term O Purchase optionarrow_forwardA lessor with a sales-type lease involving an unguaranteed residual value at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts? The sales price less the present value of the residual value. The lease payments plus the unguaranteed residual value. The cost of the asset to the lessor, less the present value of any unguaranteed residual value. The present value of the lease payments plus the present value of the unguaranteed residual value.arrow_forwardTOPIC: LEASESCompute for the following (show solution):a. How much total profit should Technocraft recognize for the year ended December 31, 2020?b. How much interest expense shall Marina Sands recognize for the year ended December 31, 2020?c. What amount shall Marina Sands report for the equipment at December 31, 2021?d. What amount of interest revenue should Technocraft report for the year ended December 31, 2020?e. What amount of financial asset shall Technocraft report at December 31, 2020?arrow_forward
- Saved Help Save & You and a colleague are reviewing a prospective lease transaction for your employer, Ma and Pa Kettle's (MPK). Having heard of the new lease accounting standard update, your CFO has assigned you the task of assessing the impact of the lease transactions on the company's financial statements. The terms are these: At the beginning of its fiscal year, MPK would lease restaurant space from Wilson Corporation under a 10-year lease agreement. The contract calls for annual lease payments of $25,000 each at the end of each year. The building was acquired last week by Wilson at a cost of $300,000 and is expected to have a useful life of 25 years with no residual value for calculating straight-line depreciation. Wilson seeks a 10% return on its lease investments. (EV of $1, PV of $1. EVA of $1. PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: What will be the effect of the lease on MPK's earnings for the first year, and on…arrow_forwardEach of the three independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit rate of return. 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) Lease tere (years) Lesson's rate of return (known by lessee) Lessee's incremental borrowing rate Fair value of lease asset Situation 11 Situation 2 Situation 3 Lease Payments Right-of-use Asset/Lease 10 11% 12% Payable $630,000 Situation 2 20 9% 10% Required: as a a. & b. Determine the amount of the annual lease payments as calculated by the lessor and the amount the lessee would record as right-of-use asset and a lease liability, for each of the above situations. Note: Round your answers to the nearest whole dollar. $1,010,000 5 12% 11% $215,000arrow_forwardUse the following information about a net lease to answer this question. Measurement Base rent Operating expenses Taxes Cost of tenant improvements 7,500 rentable square feet $12 per square foot annually $22,500 per year $15,000 per year $20,000 Parking Cost of old lease buyout Moving costs Tenant-improvement allowance $2,000 per month (fixed over the life of the lease) $20,000 $10,000 $2 per square footarrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning