141
256) Omega leased a machine for a ten-year non-cancelable term. At the end of the ten-year
term, Omega has five consecutive one-year renewal options. A replacement machine can be
acquired at the end of the term for the leased machine, but due to an expensive installation
process and Omega’s lease term for its store, Omega expects to lease the machine for 12 years.
What is the lease term?
A) 10 years
B) 11 years
C) 12 years
D) 15 years
257) On January 1, Porter Moving and Storage leased a truck for a four-year period, at which
time possession of the truck will revert back to the lessor. Annual lease payments are $30,000
due on December 31 of each year, calculated by the lessor using a 5% discount rate. If Porter’s
revenues exceed a specified amount during the lease term, Porter will pay an additional $12,000
lease payment at the end of the lease. Porter estimates a 60% probability of meeting the target
revenue amount. What amount, if any, should be added to the right-of-use asset and lease
payable under the contingent rent agreement?
A) No additional amount should be added.
B) An additional $6,000 should be added.
C) An additional $7,200 should be added.
D) An additional $12,000 should be added.
142
258) Gamma Leasing acquires equipment and leases it to customers under long-term sales-type
leases. Gamma earns interest under these arrangements at a 6% annual rate. Gamma purchased a
machine and then leased it for $300,000 under an arrangement that specified annual payments to
be received for five years, beginning at the commencement of the lease. The lessee had the
option to purchase the machine at the end of the lease term for $50,000 when it was expected to
have a residual value of $80,000. Calculate the amount of the annual lease payments. (Round
your answer to the nearest whole dollar amount.)
The present value of $1: n = 5, i = 6% is 0.74726.
The present value of an ordinary annuity of $1: n = 5, i = 6% is 4.21236.
The present value of an annuity due of $1: n = 5, i = 6% is 4.46511.
A) $62,349
B) $58,820
C) $67,188
D) $78,385
143
259) On January 1, Smith Industries leased equipment to a customer for a four-year period, at
which time possession of the leased asset will revert back to Smith. The equipment cost Smith
$350,000 and has an expected useful life of six years. Its normal sales price is $350,000. The
residual value after four years is $50,000. Lease payments are due on December 31 of each year,
beginning with the first payment at the end of the first year. The interest rate is 5%. Calculate the
amount of the annual lease payments. (Round your answer to the nearest whole dollar
amount.)
The present value of $1: n = 4, i = 5% is 0.82270.
The present value of an ordinary annuity of $1: n = 4, i = 5% is 3.54595.
The present value of an annuity due of $1: n = 4, i = 5% is 3.72325.
A) $87,104
B) $82,955
C) $98,704
D) $77,337
144
260) On January 1, Ramirez Supply leased a car for a four-year period, at which time possession
of the car will revert back to the lessor. Annual lease payments are $20,000 due on December 31
of each year, calculated by the lessor using a 5% discount rate. Negotiations led to Ramirez
guaranteeing the lessor a $72,000 residual value at the end of the lease term although Ramirez
estimates that the residual value after four years will be $70,000. What is the amount to be added
to the right-of-use asset and lease payable under the residual value guarantee? (Round your
answer to the nearest whole dollar amount.)
The present value of $1: n = 4, i = 5% is 0.82270.
The present value of an ordinary annuity of $1: n = 4, i = 5% is 3.54595.
The present value of an annuity due of $1: n = 4, i = 5% is 3.72325.
A) $823
B) $1,216
C) $1,645
D) $2,061
145
261) Bird leased equipment that had a retail cash selling price of $1,200,000 and a useful life of
five years with no residual value. The lessor paid $1,060,000 to acquire the equipment and used
an implicit rate of 8% when calculating annual lease payments of $278,284 beginning January 1,
at the beginning of the lease. Incremental costs of negotiating and consummating the completed
lease transaction incurred by the lessor were $30,000. What is the effect of the lease on the
lessor’s earnings during the first year (ignore taxes)? (Round your answer to the nearest whole
dollar amount.)
A) $164,839
B) $171,242
C) $178,625
D) $183,737
146
262) On January 1, 2018, Gemini Corporation leased equipment under a finance lease designed
to earn the lessor a 12% rate of return for providing long-term financing. The lease agreement
specified ten annual payments of $225,000 beginning January 1, and each December 31
thereafter through 2026. A 10-year service agreement was scheduled to provide maintenance of
the equipment as required for a fee of $15,000 per year. Insurance premiums of $12,000 annually
are related to the equipment. Both amounts were to be paid by the lessor and the lease payments
reflect both expenditures. At what amount will Gemini record a right-of-use asset? (Round your
answer to the nearest whole dollar amount.)
A) $1,139,085
B) $1,234,009
C) $1,328,932
D) $1,423,856
263) A lessee will reassess variable lease payments that depend on an index or a rate:
A) Only when the lessee remeasures the right-of-use asset and lease liability for other reasons.
B) Only when the lessor also reassesses the variable lease payments.
C) Whenever there is a change in the cash flows resulting from a change in the reference index
or rate.
D) Never.
148
264) Jane Wright Company is preparing an Excel spreadsheet for a 6-year finance lease. The
implicit interest rate in the lease is 4%. The beginning of the lease is December 31, 2018. Lease
payments are made each December 31 starting at December 31, 2018. A portion of the
spreadsheet appears as follows:
A
B
C
D
E
1
Effective rate:
.04
2
Lease payments:
300,000
3
Term to maturity
in years:
6
4
5
Date
Cash Payment
Interest
Expense
Change in
Balance
Outstanding
Balance
6
12/31/18
1,635,546
7
12/31/18
=C7-B7
8
12/31/19
Required:
1. Using the format followed in cell D7, provide the appropriate formula for cell B6.
2. Using the format followed in cell D7, provide the appropriate formula for cell C8.
3. Using the format followed in cell D7, provide the appropriate formula for cell E8.
265) M & O Company is preparing an Excel spreadsheet for a 5-year finance lease. The implicit
interest rate in the lease is 6%. The beginning of the lease is January 1. Lease payments are made
each December 31. A portion of the spreadsheet appears as follows:
A
B
C
D
E
1
Effective rate:
.06
2
Lease payments:
100,000
3
Term to maturity in
years:
5
4
5
Period
Cash Payment
Interest
Expense
Change in
Balance
Outstanding
Balance
6
0
7
1
8
2
What formula should M & O use in cell E8 to calculate the carrying value of the lease payable
after the second lease payment?
A) =E7-D8
B) =E7+D8
C) =E8+D8
D) =PV(C2,C3,0,C1,type)
150
266) M & O Company is preparing an Excel spreadsheet for a 5-year finance lease. The implicit
interest rate in the lease is 6%. The beginning of the lease is January 1. Lease payments are made
each December 31. A portion of the spreadsheet appears as follows:
A
B
C
D
E
1
Effective rate:
.06
2
Lease payments:
100,000
3
Term to maturity in
years:
5
4
5
Period
Cash Payment
Interest
Expense
Change in
Balance
Outstanding
Balance
6
0
7
1
8
2
What formula should M & O use in cell C8?
A) =B8+D7
B) =B8+D8
C) =E7*C1
D) =E8*C1
151
267) Lancaster Services, Inc. leased equipment from Phillips Corporation. Phillips completed
construction of the machine on January 1, 2018. The lease agreement for the $8 million (fair
value and present value of the lease payments) machine specified 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.
Phillip’s implicit interest rate was 10%.
Required:
1. Prepare the journal entry for Lancaster Services at the beginning of the lease on January
1, 2018.
2. Prepare an amortization schedule for the four-year term of the lease. Round your answers
to the nearest whole dollar amounts.
3. Prepare the appropriate journal entries related to the lease on December 31, 2018.
4. Prepare the appropriate journal entries related to the lease on December 31, 2020.
152
153
Use this information to answer the following questions:
On June 30, 2018, Atlas, Inc. leased a warehouse facility from LT Leasing Corporation. The
lease agreement calls for Atlas to make semiannual lease payments of $1,688,721 over a three-
year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018.
Atlas’s incremental borrowing rate is 10%, the same rate LT uses to calculate lease payment
amounts. The fair value of the warehouse is $9 million. LT recently purchased the warehouse for
$9 million.
268) Required:
Amortization is recorded on a straight-line basis at the end of each fiscal year. 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 Atlas uses to record the right-of-use asset and lease liability.
2. What amounts related to the lease would Atlas report in its balance sheet at December 31,
2018? (Ignore taxes.)
3. What amounts related to the lease would Atlas report in its income statement for the year
ended December 31, 2018? (Ignore taxes.)
154
155
269) Required:
Round your answers to the nearest whole dollar amounts.
1. What amounts related to the lease would LT report in its balance sheet at December 31,
2018? (Ignore taxes.)
2. What amounts related to the lease would LT report in its income statement for the year
ended December 31, 2018? (Ignore taxes.)
156
270) On June 30, 2018, Hercule, Inc. leased warehouse equipment from Marble, Inc. The lease
agreement calls for Hercule to make semiannual lease payments of $1,688,721 over a three-year
lease term, payable each June 30 and December 31, with the first payment at June 30, 2018.
Hercule’s incremental borrowing rate is 10%, the same rate Marble used to calculate lease
payment amounts. Marble manufactured the equipment at a cost of $7.5 million.
Required:
Round your answers to the nearest whole dollar amounts.
1. Determine the price at which Marble is “selling” the equipment (present value of the
lease payments) at June 30, 2018 (to the nearest $000).
2. What amounts related to the lease would Marble report in its balance sheet at December
31, 2018? (Ignore taxes.)
3. What amounts related to the lease would Marble report in its income statement for the
year ended December 31, 2018? (Ignore taxes.)
157
158
Use this information to answer the following questions:
Lansing West leased computer hardware from Franklin Leasing on January 1, 2018. Franklin
purchased the equipment from International Machines at a cost of $56,040.
Related Information:
Lease term 2 years (8 quarterly periods)
Quarterly rental payments $7,500 at the beginning of each period
Economic life of asset 2 years
Fair value of asset $56,040
Implicit interest rate 8%
(Also lessee’s incremental borrowing rate)
271) Required:
Prepare appropriate journal entries for Lansing West from the beginning of the lease through
January 1, 2019. Amortization is recorded at the end of each fiscal year (December 31) on a
straight-line basis. Round your answers to the nearest whole dollar amounts.
159
160
272) Required:
Prepare appropriate journal entries for Franklin Leasing from the beginning of the lease through
January 1, 2019. Franklin’s fiscal year ends December 31. Round your answers to the nearest
whole dollar amounts.