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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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Comprehensive Landlord Company and Tenant Company enter into a noncancelable, direct financing lease on January 1, 2019, for nonspecialized equipment that cost the Landlord $280,000 (useful life is 6 years with no residual value). The fair value of the equipment is $300,000. The interest rate implicit in the lease is 14%. The 6-year lease requires 6 equal annual amounts payable each January 1, beginning with January 1, 2019. Tenant pays all executory costs directly to a third party on December 1 of each year. The equipment reverts to the lessor at the termination of the lease. Assume that there are no initial direct costs. Landlord expects to collect all rental payments.

Required:

  1. 1. Next Level (a) Show how landlord should compute the annual rental amounts, (b) Discuss how the Tenant Company should compute the present value of the lease payments. What additional information would be required to make this computation?
  2. 2. Next Level Prepare a table summarizing the lease and interest receipts that would be suitable for Landlord. Under what conditions would this table be suitable for Tenant?
  3. 3. Assuming that the table prepared in Requirement 2 is suitable for both the lessee and the lessor, prepare the journal entries for both firms for the years 2019 and 2020. Use the straight-line depreciation method for the leased equipment. The executory costs paid by the lessee are in 2019: insurance, $700 and property taxes, $800; in 2020: insurance, $600 and property taxes, $750.
  4. 4. Next Level Show the items and amounts that would be reported on the comparative 2019 and 2020 income statements and ending balance sheets for both the lessor and the lessee, using the change in present value approach.

1 (a)

To determine

Calculate the annual rental amounts.

Explanation

Compute the annual rental amount of Company L, as follows:

Annul Rental Amount = Cost of EquipmentPV factor for 6 receipts in advance at 14%$300,0004

1 (b)

To determine

Explain the way Company T should compute the present value of the lease rights and additional information required to make such calculation.

2.

To determine

Prepare the table summarizing the lease and interest receipts that would be suitable for Company L.

3.

To determine

Prepare journal entries suitable for Company L and Company T for the years 2016 and 2017.

4.

To determine

Prepare income statements and ending balance sheets for both Company L and Company T for the year 2016 and 2017 with appropriate notes.

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