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301) On January 1, 2018, Tennessee Valley Corporation (TVC) leased equipment from Great
Lakes Leasing under a finance lease. Lease payments are made annually. Title does not transfer
to the lessee and there is no purchase option or guarantee of a residual value by TVC. Portions of
the Great Lakes Leasing’s lease amortization schedule appear below:
Outstanding
Jan. 1 Payments Effective Interest Decrease in Balance Balance
2018 385,002
2018 40,000 40,000 345,002
2019 40,000 34,500 5,500 339,502
2020 40,000 33,950 6,050 333,452
2021 40,000 33,345 6,655 326,798
2022 40,000 32,680 7,320 319,477
2023 40,000 31,948 8,052 311,425
– – – – –
– – – – –
– – – – –
2035 40,000 14,728 25,272 122,012
2036 40,000 12,201 27,799 94,213
2037 40,000 9,421 30,579 63,635
2038 70,000 6,365 63,635 0
Required:
1. What is TVC’s lease payable at the beginning of the lease (after the first payment)?
2. What is the lease term in years?
3. What is the asset’s residual value expected at the end of the lease term?
4. What is the effective annual interest rate?
5. What is the total amount of lease payments for Great Lakes?
6. What is the total amount of lease payments for TVC?
7. What is Great Lakes’ total effective interest revenue recorded over the term of the lease?
8. What amount would TVC record as a right-of-use asset at the beginning of the lease?
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302) On January 1, 2018, Marlon’s Transport leased a car from Fiat Motors for a six-year period
with an option to extend the lease for three years. Marlon’s had no significant economic incentive
as of the beginning of the lease to exercise the 3-year extension option. Annual lease payments
are $5,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate.
Assume that at the beginning of the third year, January 1, 2020, Marlon’s had made significant
improvements to the car whose cost could be recovered only if it exercises the extension option,
creating an expectation that extension of the lease was “reasonably certain.” The relevant interest
rate at that time was 6%.
Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare the journal entry, if any, at the end of the second year for the lessee to account for
the reassessment.
2. Prepare the journal entry, if any, at the end of the second year for the lessor to account for
the reassessment.
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303) National Leasing leases equipment to a variety of businesses. The company’s primary
service is providing alternate financing by acquiring equipment and leasing it to customers under
long-term leases. National earns interest under these arrangements at a 10% annual rate.
The company leased production equipment it purchased on December 31, 2017 for $270,000 to a
local company, Madison Inc. The six-year operating lease term commenced January 1, 2018, and
the lease contract specified annual payments of $24,000 beginning December 31, 2018 and each
December 31 through 2023. The machine’s estimated useful life is 15 years with no estimated
residual value.
Madison had the option to terminate the lease after four years. At the beginning of the lease,
there was no reason to believe the lease would be terminated.
Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare the appropriate journal entries for National Leasing from the beginning of the
lease through the end of 2018.
2. At the beginning of 2019, there was a significant indication that Madison’s economic
incentive to terminate the lease had changed causing both companies to believe termination of
the lease at the end of four years (three years remaining) is “reasonably certain”. Prepare any
appropriate entries for National Leasing at January 1, 2019, to reflect the change in the lease
term.
3. Prepare the appropriate journal entries pertaining to the lease for National Leasing at
December 31, 2019.
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304) On January 1, 2018, Central Industries leased a high-performance conveyer to Dynamic
Company for a four-year period ending December 31, 2018, at which time possession of the
leased asset will revert back to Central. The equipment cost Central $1,912,000 and has an
expected useful life of five years. Central expects the residual value at December 31, 2022, will
be $600,000. Negotiations led to the lessee guaranteeing a $680,000 residual value.
Equal payments under the finance/sales-type lease are $400,000 and are due on December 31 of
each year with the first payment being made on December 31, 2018. Dynamic is aware that
Central used a 5% interest rate when calculating lease payments.
Required:
1. Prepare the appropriate journal entries for both Dynamic and Central on January 1, 2018,
to record the lease.
2. Prepare all appropriate journal entries for both Dynamic and Central on December 31,
2018, related to the lease.
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305) Charles River Hospital leased medical equipment from Plymouth Industries on January 1,
2018. Plymouth Industries manufactured the equipment at a cost of $600,000. The equipment has
a fair value of $750,654. Appropriate adjusting entries are made quarterly.
Related Information:
Lease term 5 years (20 quarterly periods)
Quarterly lease payments $43,641 at Jan. 1, 2018, and at Mar. 31,
June 30, Sept. 30, and Dec. 31 thereafter.
Economic life of asset 6 years
Residual value at end of lease term $33,684
Interest rate charged by the lessor 8%
Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare appropriate journal entries for Charles River Hospital to record the arrangement
at its commencement, January 1, 2018, and on March 31, 2018.
2. Prepare appropriate journal entries for Plymouth Industries to record the arrangement at
its commencement, January 1, 2018, and on March 31, 2018.
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