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Concept explainers
a.
The classification of lease for both lessee and lessor.
Given information:
Asset is not specialized in nature.
Cost of asset is $180,000.
Lease term is 5 years.
Lease doesn’t contain transfer of ownership.
Economic life of asset is 5 years.
Fair value of the asset is $196,898.
Implicit interest rate is 8%
Annual lease payments are $44,880 due on Jul/1 each year
Accounts are closed on 31/Dec each year.
b.
To prepare: The
Given information:
Asset is not specialized in nature.
Cost of asset is $180,000.
Lease term is 5 years.
Lease doesn’t contain transfer of ownership.
Economic life of asset is 5 years.
Fair value of the asset is $196,898.
Implicit interest rate is 8%
Annual lease payments are $44,880 due on Jul/1 each year.
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Chapter 18 Solutions
Intermediate Accounting, Student Value Edition (2nd Edition)
- Determining Type of Lease and Subsequent Accounting On January 1, 2019, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions: The lease is noncancelable and has a term of 8 years. The annual rentals arc 35,000, payable at the beginning of each year. The interest rate implicit in the lease is 14%. Anderson agrees to pay all executory costs directly to a third party and is given an option to buy the equipment for 1 at the end of the lease term, December 31, 2026. The cost of the equipment to the lessee is 150,000, and the fair value is approximately 185,100. Ballieu incurs no material initial direct costs. It is probable that Ballieu will collect the lease payments. Ballieu estimates that the fair value is expected to be significantly greater than 1 at the end of the lease term. Ballieu calculates that the present value on January 1, 2019, of 8 annual payments in advance of 35,000 discounted at 14% is 185,090.68 (the 1 purchase option is ignored as immaterial). Required: 1. Next Level Identify the classification of the lease transaction from Ballices point of view. Give the reasons for your classification. 2. Prepare all the journal entries tor Ballieu for the years 2019 and 2020. 3. Discuss the disclosure requirements for the lease transaction in Ballices notes to the financial statements.arrow_forwardLessee and Lessor Accounting Issues The following information is available for a noncancelable lease of equipment entered into on March 1, 2019. The lease is classified as a sales-type lease by the lessor (Anson Company) and as a finance lease by the lessee (Bullard Company). Assume that the lease payments are nude at the beginning of each month, interest and straight-line depreciation are recognized at the end of each month, and the residual value of the leased asset is zero at the end of a 3-year life. Required: 1. Record the lease (including the initial receipt of 2,000) and the receipt of the second and third installments of 2,000 in Ansons accounts. Carry computations to the nearest dollar. 2. Record the lease (including the initial payment of 2,000), the payment of the second and third installments of 2,000, and monthly depreciation in Bullards accounts. The lessee records the lease obligation at net present value. Carry computations to the nearest dollar.arrow_forwardLessee Accounting with Payments Made at Beginning of Year Adden Company signs a lease agreement dated January 1, 2019, that provides for it to lease non-specialized heavy equipment from Scott Rental Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows: 1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of 20,000 to be paid in advance at the beginning of each year. 2. The cost, and also fair value, of the heavy equipment to Scott at the inception of the lease is 68,036.62. The equipment has an estimated life of 4 years and has a zero estimated residual value at the end of this time. 3. Adden agrees to pay all executory costs directly to a third party. 4. The lease contains no renewal or bargain purchase options. 5. Scotts interest rate implicit in the lease is 12%. Adden is aware of this rate, which is equal to its borrowing rate. 6. Adden uses the straight-line method to record depreciation on similar equipment. 7. Executory costs paid at the end of the year by Adden are: Required: 1. Next Level Determine what type of lease this is for Adden. 2. Prepare a table summarizing the lease payments and interest expense for Adden. 3. Prepare journal entries for Adden for the years 2019 and 2020.arrow_forward
- Use the information in RE20-3. Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. However, assume that Garvey is now required to make the 65,949.37 payments on January 1 each year and that the fair value at the lease inception is now 275,000 (65,949:37 4:169865).arrow_forwardUse the information in RE20-1. Prepare the journal entry that Keller Corporation would make during the first year of the lease assuming that the lease is classified as an operating lease.arrow_forwardUse the information in RE20-3. Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. Assume that Garvey is required to make payments on December 31 each year.arrow_forward
- Chance Enterprises leased equipment from Third Bank Leasing on January 1, 2024. Chance elected the short-term lease option. Appropriate adjusting entries are made annually. Related Information: Lease term Monthly lease payments Economic life of asset Interest rate charged by the lessor View transaction list Required: Prepare appropriate entries for Chance from the beginning of the lease through April 1, 2024. Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Journal entry worksheet < 1 2 3 4 5 1 years (12 monthly periods) on January 1, 2024, through December 1, 2024. years $56,000 5 8% Record the beginning of the lease for Chance. Aarrow_forwardLeasing AG agrees to lease equipment to Fat Choi Furniture on January 1, 2020. The following information relates to the lease agreement.(Assume the accounting period ends on December 31.)a) Calculate the amount of the annual rental payment required. b) Compute the value of the lease liability to Fat Choi Furniture. c) Prepare an 8-year lease amortization schedule for the lessee, Fat Choi Furniture.arrow_forwardOn January 1, 2021, the lessee company signed an operating lease to lease a building from the lessor. Lease payments are $57,000 per year and are made at the beginning of the year. Assume the following is the partial Lease Amortization Schedule (with only two rows and three columns shown) prepared by the lessee company: Date Annual Payment Interest on Liability 1/1/2022 57,000 44,000 1/1/2023 57,000 38,000 In the journal entry made on December 31, 2022, the lessee company should debit/credit Right-of-Use Asset by $___________. (Just enter the amount. Do not put a plus or minus sign in front of the amount.)arrow_forward
- How would I record the necessary journal entries using this information? - It is an operating lease. - On November 1, 2019 (the beginning of the fiscal year), CAP acquired a of its equipment through a lease agreement with Lessor Corp. The lease contract has the following terms and conditions: - CAP agrees to lease equipment from Lessor Corp. with a fair market value of $900,000 - The term of the lease is for seven years, with annual rental payments of $145,000 due at the beginning of each year. CAP knows the implicit interest rate on the lease agreement is 5%. CAP knows that it could borrow at an incremental rate of 6%. - There is no residual value. - CAP will cover the executory costs associated with the lease. The executor costs will be approximately $10,000 per annum and are included as part of the $145,000 rental payment. - The lease offers a bargain purchase option to purchase the equipment for $50,000 at the end of the seventh year. At the end of year seven, the fair market…arrow_forwardThe following facts pertain to a non-cancelable lease agreement between Sandhill Leasing Company and Carla Vista Company, a lessee. Commencement date Annual lease payment due at the beginning of each year, beginning with January 1, 2025 Residual value of equipment at end of lease term, guaranteed by the lessee Expected residual value of equipment at end of lease term Lease term Economic life of leased equipment Fair value of asset at January 1, 2025 Lessor's implicit rate Lessee's incremental borrowing rate Click here to view factor tables. (a) Date 1/1/25 1/1/25 1/1/26 The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line amortization for all leased equipment. 1/1/27 1/1/28 1/1/29 Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to O decimal places e.g. 5,275.) 1/1/30 12/31/30 $ $ Annual Lease Payment…arrow_forwardThe following facts pertain to a non-cancelable lease agreement between Cullumber Leasing Company and Crane Company, a lessee. Commencement date Annual lease payment due at the beginning of each year, beginning with January 1, 2025 Residual value of equipment at end of lease term, guaranteed by the lessee Expected residual value of equipment at end of lease term Lease term Economic life of leased equipment Fair value of asset at January 1, 2025 Lessor's implicit rate Lessee's incremental borrowing rate Date 1/1/25 1/1/25 1/1/26 1/1/27 1/1/28 1/1/29 1/1/30 12/31/30 Lease payment (A) $97,312 $97,312 $97,312 $97,312 $97,312 $97,312 $5,000 January 1, 2025 $97,312 $24,806 $20,456 $15,845 $10,957 $5,775 $283 $55,000 $50,000 6 6 The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line amortization for all leased equipment. Table shows the amortization schedule for lessee for the lease term: $546,000 years years 6 % Interest expense (B = Prev D* 6%)…arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
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