Connect Access Card for Financial Accounting
9th Edition
ISBN: 9781259738678
Author: Robert Libby, Patricia Libby, Frank Hodge Ch
Publisher: McGraw-Hill Education
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Chapter S, Problem 2ME
To determine
Compute the present value of lease payments.
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Suddeth Corporation has entered into a 6 year lease for a building it will use as a warehouse. The annual payment under the lease will be $2,468. The
first payment will be at the end of the current year and all subsequent payments will be made at year-ends. If the discount rate is 5%, the present value of
the lease payments is closest to (Ignore income taxes.):
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.
Multiple Choice
O
O
$14,808
$11,050
$14,103
$12,528
Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,300 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years.
Lease Payment
Cash Payment
Effective Interest
Decrease in Balance
Outstanding Balance
32,350
1
7,000
??
??
25,350
2
7,000
1,775
5,225
20,125
3
7,000
1,409
5,591
14,534
4
7,000
1,017
5,983
8,551
5
7,000
??
??
??
6
2,300
150
2,150
0
What is the outstanding balance after payment 5?
$2,150.
$2,300.
$2,450.
$4,450.
3. the information below relates to a sales type lease in which lease payments are
made semiannually at the beginning of each period
Lease term
Lessor's desired rate of return
Lesse's incremental borrowing rate
Current fair market value of leased asset
5 years
12% per year
10% per year
$600,000
Based on the information above, calculate the amount of the semi-annual payment as
determined by the lessor.
Chapter S Solutions
Connect Access Card for Financial Accounting
Ch. S - Defining a Lessor Which of the following best...Ch. S - Prob. 2MCQCh. S - Prob. 3MCQCh. S - Prob. 4MCQCh. S - Prob. 5MCQCh. S - Prob. 6MCQCh. S - Prob. 1MECh. S - Prob. 2MECh. S - Prob. 3MECh. S - Prob. 4ME
Ch. S - Prob. 1ECh. S - Prob. 2ECh. S - Prob. 3ECh. S - Prob. 4ECh. S - Calculating a Deferred Tax Liability LOS-5 On...Ch. S - Prob. 6ECh. S - Prob. 7ECh. S - Prob. 8ECh. S - Prob. 9ECh. S - Prob. 10ECh. S - Converting Operating Leases to Capital Leases...Ch. S - Converting Operating Leases to Capital Leases...Ch. S - Computing Effective Tax Rates LOS-4 Below is...Ch. S - Prob. 4PCh. S - Prob. 5PCh. S - Prob. 6PCh. S - Analyzing Starbuckss Lease Disclosures The...Ch. S - Analyzing Disneys Income Tax Disclosures The...
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- Owens Company leased equipment for 4 years at 50,000 a year with an option to renew the lease for 6 years at 2,000 per month or to purchase the equipment for 25,000 (a price considerably less than the expected fair value) after the initial lease term of 4 years. Why would this lease qualify as a finance lease?arrow_forwardUsing the information provided, what transaction represents the best application of the present value of an annuity due of $1? A. Falcon Products leases an office building for 8 years with annual lease payments of $100,000 to be made at the beginning of each year. B. Compass, Inc., signs a note of $32,000, which requires the company to pay back the principal plus interest in four years. C. Bahwat Company plans to deposit a lump sum of $100.000 for the construction of a solar farm In 4 years. D. NYC Industries leases a car for 4 yearly annual lease payments of $12,000, where payments are made at the end of each year.arrow_forwardBelardo Manufacturing is considering a lease to acquire new equipment. The useful life of the asset is 10 years. Belardo can lease the equipment from Weber City Bank for $5,000 per year over an 9-year period. The lease does not contain a purchase option. There is no transfer of ownership clause in the contract. Should Belardo account for this lease as an operating or a finance lease? Future Value of $1 table Future Value of an Ordinary Annuity table Future Value of an Annuity Due table Present Value of $1 table Present Value of an Ordinary Annuity table Present Value of an Annuity Due table Begin by identifying any of the Group I criteria that Belardo meets. (Select all that apply. If there is insufficient information to determine if a specific criteria is met, do not check the box for that criteria.) 1. The lease transfers ownership to the lessee at the end of the lease term. 2. The lessee is given an option to purchase the asset that the lessee is reasonably certain to exercise. 3.…arrow_forward
- An owner of the ATRIUM Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corporation for 20,000 rentable square feet of office space. ACME would like a base rent of $11 per square foot (PSF) with step-ups of $1 per year beginning one year from now. Required: a. What is the present value of cash flows to ATRIUM under the above lease terms? (Assume a 10% discount rate.) b. The owner of ATRIUM believes that base rent of $11 PSF in (a) is too low and wants to raise that amount to $15 with the same $1 step-ups. However, now ATRIUM would provide ACME a $53,000 moving allowance and $130,000 in tenant improvements (Tls). What would be the present value of this alternative to ATRIUM? c. ACME informs ATRIUM that it is willing to consider a $14 PSF with the $1 annual stepups. However, under this proposal, ACME would require ATRIUM to buyout the one year remaining on its existing lease in another building. That lease is $6 PSF for 20,000 SF per year. If ATRIUM…arrow_forwardHow do I calculate this on a TI-84 calculator? Air Atlantic (AA) has been offered a 3-year old jet airliner under a 12-year lease arrangement. The lease requires AA to make annual lease payments of $500,000 at the beginning of each of the next 12 years. Determine the present value of the lease payments if the opportunity cost of funds is 14arrow_forwardA lease agreement that qualifies as a finance lease calls for annual lease payments of $10,000 over a five-year lease term (also the asset's useful life), with the first payment on January 1, the beginning of the lease. The interest rate is 4%. The lessor's fiscal year is the calendar year. The lessor manufactured this asset at a cost of $30,000. Required: a. Determine the price at which the lessor is "selling" the asset (present value of the lease payments). b. Create a partial amortization table through the second payment on January 1, Year 2. c. What would be the increase in earnings that the lessor would report in its income statement for the first year ended December 31 (ignore taxes)? Note: Use tables, Excel, or a financial calculator. (FV of $1. PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Complete this question by entering your answers in the tabs below. Required A Required B Determine the price at which the lessor is "selling" the asset (present value of the…arrow_forward
- A lease agreement that qualifies as a finance lease calls for annual lease payments of $26,269 over a six-year lease term (also the asset’s useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 5%. The lessor’s fiscal year is the calendar year. The lessor manufactured this asset at a cost of $125,000. What would be the increase in earnings that the lessor would report in its income statement for the year ended December 31(ignore taxes)?arrow_forwardRefer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $1,500 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years. Lease Cash Effective Decrease in Outstanding Payment Payment Interest Balance Balance 40,860 31,960 24,978 17,577 9,731 ?? 0 1 2 3 4 5 6 8,900 8,900 8,900 8,900 8,900 1,500 Multiple Choice $46,000 ?? 1,918 1,499 1,055 What is the total interest paid over the term of the lease? $2.760 ?? 85 ?? 6,982 7,401 7,845 ?? 1,415arrow_forwardA Type A lease agreement calls for quarterly lease payments of $5,376 over a 10-year lease term, with the first payment on July 1, the beginning of the lease. The annual interest rate is 8%. Both the fair value and the cost of the asset to the lessor are $150,000. What would be the amount of interest expense the lessee would record in conjunction with the second quarterly payment on October 1? What would be the amount of interest revenue the lessor would record in conjunction with the second quarterly payment on October 1?arrow_forward
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