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153) Each of the 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
interest rate.
Situation
1 Lessee
2 Lessor
Lease term
10 yrs.
20 yrs.
Lessor’s desired
rate of return
10%
12%
Lessee’s incremental
borrowing rate
12%
10%
Fair value of asset
$600,000
$400,000
For convenience, here are some table values:
Periods; int. rate
PV, ordinary
annuity
PV, annuity due
10 periods, 10%
6.1446
6.7590
10 periods, 12%
5.6502
6.3283
20 periods, 10%
8.5136
9.3649
20 periods, 12%
7.4694
8.3658
Required: For each situation determine the amount of the annual lease payment, as calculated
by the lessor. Round your answers to the nearest whole dollar amounts.
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154) Each of the four independent situations below describes a lease requiring annual lease
payments of $30,000.
Situation 1
Situation 2
Situation 3
Situation 4
Lease term (years)
4
4
4
4
Asset’s useful life (years)
6
6
5
6
Asset’s fair value
$132,000
$114,000
$129,000
$115,000
Bargain purchase option?
No
No
Yes
No
Annual lease payments
Beg. of yr.
End of yr.
Beg. of yr.
End of yr.
Lessor’s implicit rate
(known by lessee)
5%
6%
6%
5%
Lessee’s incremental
borrowing rate
5%
5%
5%
5%
Required: For each situation, determine the appropriate lease classification by the lessee and
indicate why. Round your answers to the nearest whole dollar amounts.
reasonably certain to be
exercised?
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155) On January 1, 2018, Burrito Bill’s leased restaurant equipment from Oval Corporation
under a twelve-year lease agreement. The lease agreement specifies annual payments of $75,000
beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter
through 2025. The equipment was acquired recently by Oval at a cost of $540,000 (its fair value)
and was expected to have a useful life of 17 years with no salvage value at the end of its life.
(Because the lease term is only 12 years, the asset does have an expected residual value at the
end of the lease term of $33,684.) Oval seeks a 10% return on its lease investments. By this
arrangement, the lease is deemed to be an operating lease.
Required:
(a) What will be the effect of the lease on Burrito Bill’s earnings for the first year? Show the
separate components as well as the total amount. (ignore taxes)
(b) What journal entries will the lessee record during 2018 relating to this lease?
(c) What will be the balances in the balance sheet accounts related to the lease at the end of
the first year for Burrito Bill’s? (ignore taxes)
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156) On January 1, 2018, Salvatore Company leased several machines from Nola Corporation
under a three-year operating lease agreement. The lease calls for semiannual payments of
$15,000 each, payable on June 30 and December 31 of each year. The machines were acquired
by Nola at a cost of $90,000 and are expected to have a useful life of five years with no expected
residual value.
Required: Prepare the appropriate journal entries for the lessor from the beginning of the lease
through the end of 2018.
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Use this information to answer the following questions:
On January 1, 2018, Robertson Construction leased several items of equipment under a two-year
operating lease agreement from Jamison Leasing, which routinely finances equipment for other
firms at an annual interest rate of 4%. The contract calls for four rent payments of $40,000 each,
payable semiannually on June 30 and December 31 each year. The equipment was acquired by
Jamison Leasing at a cost of $360,000 and was expected to have a useful life of five years with
no residual value. Both firms record amortization and depreciation semi-annually.
157) Required:
Prepare the appropriate journal entries for the lessee from the beginning of the lease through the
end of 2018. Round your answers to the nearest whole dollar amounts.
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158) Required:
Prepare the appropriate journal entries for the lessor (Jamison Leasing) from the beginning of the
lease through the end of 2018. Round your answers to the nearest whole dollar amounts.
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159) Eastern Edison Company leased equipment from Low-Tech Leasing on January 1, 2018.
Low-Tech recently purchased the equipment at a cost of $222,664.
Other information:
Lease term 3 years
Annual payments $80,000 on January 1 each year
Life of asset 3 years
Fair value of asset $222,664
Implicit interest rate 8%
Incremental rate 8%
There is no expected residual value.
Required: Prepare appropriate journal entries for Low-Tech Leasing for 2018. Assume a
December 31 year-end. Round your answers to the nearest whole dollar amounts.
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160) Python Company leased equipment from Hope Leasing on January 1, 2018. Hope recently
purchased the equipment at a cost of $222,664.
Other information:
Lease term 3 years
Annual payments $80,000 on January 1 each year
Life of asset 3 years
Fair value of asset $222,664
Implicit interest rate 8%
Incremental rate 8%
There is no expected residual value.
Required: Prepare appropriate journal entries for Python for 2018. Assume straight-line
depreciation and a December 31 year-end. Round your answers to the nearest whole dollar
amounts.
161) Elf Leasing purchased a machine for $500,000 and leased it to IGA, Inc. on January 1,
2018.
Lease description:
Quarterly rental payments $32,629 at beginning of each period
Lease term 5 years (20 quarters)
No residual value; no BPO
Economic life of machine 5 years
Implicit interest rate and lessee’s incremental
borrowing rate 12%
Fair value of asset $500,000
Required: Prepare appropriate entries for both IGA and Elf Leasing from the beginning of the
lease through the second rental payment on April 1, 2018. Amortization is recorded at the end of
each fiscal year (December 31). Round your answers to the nearest whole dollar amounts.
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Use this information to answer the following questions:
On June 30, 2018, Blue, Inc. leased a machine from Big Leasing Corporation. The lease
agreement qualifies as a capital lease and calls for Blue to make semiannual lease payments of
$281,454 over a three-year lease term, payable each June 30 and December 31, with the first
payment at June 30, 2018. Blue’s incremental borrowing rate is 10%, the same rate Big uses to
calculate lease payment amounts.
162) The lease agreement qualifies as a finance lease. Amortization is recorded on a straight-line
basis at the end of each year.
Required:
Round your answers to the nearest whole dollar amounts.
1. Determine the present value of the lease payments at June 30, 2018, (to the nearest $000) that
Blue uses to record the right-of-use asset and lease liability.
2. What would be the amounts related to the lease that Blue would report in its balance sheet at
December 31, 2018? (Ignore taxes.)
3. What would be the amounts related to the lease that Blue would report in its income statement
for the year ended December 31, 2018? (Ignore taxes.)
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163) The lease agreement qualifies as a sales-type lease without selling profit. Depreciation is
recorded on a straight-line basis at the end of each fiscal year.
Required:
Round your answers to the nearest whole dollar amounts.
1. What would be the amounts related to the lease that Big would report in its balance sheet at
December 31, 2018? (Ignore income taxes).
2. What would be the amounts related to the lease that Big would report in its income statement
for the year ended December 31, 2018? (Ignore income taxes.)
164) Southern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2018.
Other information:
Lease term 3 years
Annual payments $40,000 on January 1 each year
Life of asset 3 years
Implicit interest rate 8%
PV, annuity due, 3 periods, 8% 2.7833
PV, ordinary annuity, 3 periods, 8% 2.5771
There is no expected residual value.
Required: Prepare appropriate journal entries for Southern Edison for 2018 and 2019. Assume
straight-line amortization and a December 31 year-end. Round your answers to the nearest whole
dollar amounts.
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165) Eastern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2018.
Other information:
Lease term 3 years
Annual payments $80,000 on January 1 each year
Life of asset 3 years
Implicit interest rate 8%
PV, annuity due, 3 periods, 8% 2.7833
PV, ordinary annuity, 3 periods, 8% 2.5771
Hi-Tech’s cost of the equipment $222,664
There is no expected residual value.
Required: Prepare appropriate journal entries for Hi-Tech Leasing for 2018 and 2019. Assume a
December 31 year-end. Round your answers to the nearest whole dollar amounts.
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166) Diablo Company leased a machine from Juniper Corporation on January 1, 2018. The
machine has a fair value of $20,000,000. The lease agreement calls for four equal payments at
the end of each year in the amount of $6,309,410. The useful life of the machine was expected to
be four years with no residual value. The appropriate interest rate for this lease is 10%.
Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare the journal entry for Diablo Company at the beginning of the lease.
2. Prepare the journal entry for the first lease payment (ignore amortization).
3. Prepare the journal entry for the second lease payment (ignore amortization).
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167) Peters Company leased a machine from Johnson Corporation on January 1, 2018. The
machine has a fair value of $20,000,000. The lease agreement calls for four equal payments at
the end of each year. The useful life of the machine was expected to be four years with no
residual value. The appropriate interest rate for this lease is 10%.
Other information:
PV of an ordinary annuity @10% for 4 periods: 3.16987
PV of an annuity due @ 10% for 4 periods: 3.48685
Required:
Round your answers to the nearest whole dollar amounts.
1. Determine the amount of each lease payment.
2. Prepare the journal entry for Peters Company at the beginning of the lease.
3. Prepare the journal entry for the first lease payment (ignore amortization).
4. Prepare the journal entry for the second lease payment (ignore amortization).