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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Various Lease Issues for Lessor and Lessee Benjamin Company has rented new equipment to Murrell Builders that cost Benjamin $48,000, and has a fair value of $50,000. This nonspecialized equipment has a life of 4 years and no residual value at the end of that time. The lease is noncancelable and is signed on January 1, 2019. Murrell assumes all normal risks and executory costs of ownership. The title to the property is transferred to Murrell at the end of the 4 years. The interest rate implicit in the lease is 14% return. The lessee’s incremental borrowing rate is also 14%. It is probable that all rental payments will be collected.

Required:

  1. 1. Assuming the annual rentals are payable at the end of each year, complete the following:
    1. a. lessor computation of periodic rental receipts
    2. b. lessee computation of the present value of the lease payments
    3. c. a table summarizing lease and interest payments that would be suitable for both lessor and lessee
  2. 2.Assuming the annual rentals are payable at the start of each year, compute the same three items listed in Requirement 1.
  3. 3. Prepare the journal entries for the lessor and lessee for Requirement 2 throughout 2019. Use the straight-line depreciation method.
  4. 4. Indicate the asset and liability amounts that the lessor and lessee would report on their balance sheets at December 31, 2019, under Requirement 2, using the change in present value approach.

1 (a)

To determine

Compute the lessor’s (Company B) periodic rental receipts.

Explanation

Compute the lessor’s (Company B) periodic rental receipts:

Peridic Rental Receipts = Cost of AssetPVfactor of 4 receipts at 14%                               �

1 (b)

To determine

Compute the present value of the special property rights under the lease for Company M (Lessee Company).

1 (c)

To determine

Prepare a table summarizing lease and interest payments that would be useful to both M Company and B Company.

2 (a)

To determine

Compute the lessor’s periodic rental receipts.

2 (b)

To determine

Compute the present value of the special property rights under the lease for Company M (Lessee Company).

2 (c)

To determine

Prepare a table summarizing lease and interest payments that would be useful to both M Company and B Company

3

To determine

Prepare the journal entries for the Company B and Company M for the year 2019.

4

To determine

Show the way that Company M and Company B report their asset and liability amount on their balance sheet at December 31, 2019

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