181
287) At January 1, 2018, Gem Finder leased mining equipment from Emerald Corporation under
a nine-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 Emerald at a cost of $540,000 (its fair
value) and was expected to have a useful life of 12 years with no salvage value at the end of its
life. (Because the lease term is only 9 years, the asset does have an expected residual value at the
end of the lease term of $33,684.). Both (a) the present value of the lease payments and (b) the
present value of the residual value (i.e., the residual asset) are included in the lease receivable
because the two amounts combine to allow the lessor to recover its net investment. Emerald
seeks a 10% return on its lease investments. By this arrangement, the lease is deemed to be a
finance lease.
Required:
1. What will be the effect of the lease on Emerald’s earnings for the first year (ignore taxes)?
2. What will be the balances in the balance sheet accounts related to the lease at the end of
the first year for Emerald (ignore taxes)?
182
288) On January 1, 2018, Osiris Inc. leased manufacturing equipment from Giza Leasing for a
four-year period ending December 31, 2018, at which time possession of the leased asset will
revert back to Giza. The equipment cost Giza $206,092 and has an expected economic life of
five years. Giza expects the residual value at December 31, 2018, to be $25,000. Negotiations led
to Osiris guaranteeing a $35,000 residual value.
Equal payments under the lease are $50,000 and are due on December 31 of each year with the
first payment being made on December 31, 2018. Osiris is aware that Giza used a 5% interest
rate when calculating lease payments.
Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare the appropriate journal entry for Osiris on January 1, 2018, to record the lease.
2. Prepare all appropriate journal entries for Osiris on December 31, 2018, related to the
lease.
183
184
289) United Health Group leased a life support machine on January 1, 2018, for a three-year
period ending December 31, 2020. The lease agreement specified annual payments of $144,000
beginning with the first payment at the beginning of the lease, and each December 31 through
2019. The company had the option to purchase the machine on December 30, 2020, for $180,000
when its fair value was expected to be $240,000, a sufficient difference that exercise seems
reasonably certain. The machine’s estimated useful life was six years with no salvage value.
United Health was aware that the lessor’s implicit rate of return was 12%.
186
290) Franconia 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 sales-type leases. Franconia earns interest under these arrangements at a 10% annual
rate.
The company leased an electronic typesetting machine it purchased for $123,600 to a local
publisher, MacCleod Inc. on December 31, 2017. The lease contract specified annual payments
of $32,000 beginning January 1, 2018, the beginning of the lease, and each December 31 through
2019 (three-year lease term). The publisher had the option to purchase the machine on December
30, 2020, the end of the lease term, for $48,000 when it was expected to have a residual value of
$64,000, a sufficient difference that exercise seems reasonably certain.
Required:
Round your answers to the nearest whole dollar amounts.
1. Show how Franconia calculated the $32,000 annual lease payments for this sales-type
lease.
2. Prepare the appropriate journal entries for Franconia Leasing from the beginning of the
lease through the end of the lease term.
187
188
291) On January 1, 2018, Patagonia Leasing leased equipment to Pebble Services under a
finance/sales-type lease designed to earn Patagonia a 12% rate of return for providing long-term
financing. The lease agreement specified:
a. Ten annual payments of $110,000 beginning January 1, 2018, the beginning of the lease
and each December 31 thereafter through 2026.
b. The estimated useful life of the leased equipment is 10 years with no residual value. Its
cost to Patagonia was $632,824.
c. The lease qualifies as a finance lease/sales-type lease.
d. A 10-year service agreement with Mechanics International was negotiated to provide
maintenance of the equipment as required. Payments of $10,000 per year are specified,
beginning January 1, 2018. Patagonia was to pay this cost as incurred, but lease payments reflect
this expenditure.
e. A partial amortization schedule, appropriate for both the lessee and lessor, follows:
Decrease in Outstanding
Payments Effective Interest Balance Balance
(12% × Outstanding balance)
632,825
1/1/2018 100,000 100,000 532,825
12/31/2018 100,000 .12 (532,825) = 63,939 36,061 496,764
12/31/2019 100,000 .12 (496,764) = 59,612 40,388 456,376
Required:
Round your answers to the nearest whole dollar amounts.
Prepare the appropriate journal entries for both the lessee and lessor related to the lease on:
1. January 1, 2018.
2. December 31, 2018.
189
190
292) Terms of a lease agreement and related facts were:
a. Costs of legal fees and commissions incurred by the lessor for the lease transaction were
$16,968.
b. The retail cash selling price of the leased asset was $2,000,000. Its useful life was three years
with no residual value.
c. The lease term is three years and the lessor paid $2,000,000 to acquire the asset.
d. Annual lease payments at the beginning of each year were $737,320.
e. Lessor’s implicit rate when calculating annual rental payments was 11%.
Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare the appropriate journal entries for the lessor to record the lease and related payments
at its beginning, January 1, 2018.
2. Calculate the effective rate of interest revenue after adjusting the net investment by initial
direct costs.
3. Record any journal entry(s) necessary at December 31, 2018, the fiscal year-end.
191
192
293) The lease agreement and related facts indicate the following:
a. Leased equipment had a retail cash selling price of $900,000. Its useful life was five
years with no residual value.
b. The lease term is five years and the lessor paid $795,000 to acquire the equipment (thus,
selling profit).
c. Lessor’s implicit rate when calculating annual lease payments was 8%.
d. Annual lease payments beginning January 1, 2018, the beginning of the lease, were
$208,713.
e. The costs of legal fees incurred by the lessor for executing the completed lease
transaction were $22,500.
Required:
Round your answers to the nearest whole dollar amounts.
Prepare the appropriate journal entries for the lessor to record:
1. The lease and the initial payment at its commencement.
2. Any journal entry(s) necessary at December 31, 2018, the fiscal year-end.
193
294) The following relate to an operating lease agreement:
a. The lease term is 3 years, beginning January 1, 2018.
b. The leased asset cost the lessor $4,000,000 and had a useful life of eight years with no
residual value. The lessor uses straight-line depreciation for its depreciable assets.
c. Annual lease payments at the beginning of each year were $685,000.
d. Direct costs incurred by the lessor to consummate the completed lease transaction were
$12,000.
Required:
Prepare the appropriate journal entries for the lessor from the beginning of the lease through the
end of the lease term. Round your answers to the nearest whole dollar amounts.
295) Which of the following might shorten the term of the lease?
A) Initial direct costs.
B) Contingent rentals.
C) A renewal option.
D) A purchase option.
194
296) What makes up a lessor’s net investment?
A) Lease payments plus residual value
B) Present value of lease payments plus present value of residual value
C) Present value of lease payments minus present value of residual value
D) Lease payments plus non-lease payments
195
297) To raise operating funds, Azure Sailing sold a boat on January 1, 2018, to a finance
company for $2,310,000. Azure immediately leased the plane back for a 13-year period, at which
time ownership of the airplane will transfer to Azure. The boat has a fair value of $2,400,000. Its
cost and its book value were $1,800,000. Its useful life is estimated to be 15 years. The lease
requires Azure to make payments of $308,313 to the finance company each January 1. Signal
depreciates assets on a straight-line basis. The lease has an implicit rate of 11%.
Required:
Round your answers to the nearest whole dollar amounts.
Prepare the appropriate journal entries for Azure on:
1. January 1, 2018, to record the transaction.
2. December 31, 2018, to record necessary adjustments.
196
298) To raise operating funds, Coyne Incorporated sold its office building to an insurance
company on January 1, 2018, for $1,600,000 and immediately leased the building back. The
operating lease is for the final 12 years of the building’s estimated 20-year remaining useful life.
The building has a fair value of $1,600,000 and a book value of $1,300,000 (its original cost was
$2 million). The rental payments of $200,000 are payable to the insurance company each
December 31. The lease has an implicit rate of 9%.
Required:
Round your answers to the nearest whole dollar amounts.
Prepare the appropriate journal entries for Coyne Incorporated on:
1. January 1, 2018, to record the sale-leaseback.
2. December 31, 2018, to record necessary adjustments.
197
299) On January 1, 2018, Morris Production leased a machine from Werner 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 Morris. Portions of the Werner Leasing’s
lease amortization schedule appear below:
Jan. 1 Payments Effective Interest Decrease Outstanding
in Balance Balance
374,596
2018 40,000 40,000 334,596
2018 40,000 33,460 6,540 328,056
2019 40,000 32,806 7,194 320,861
2020 40,000 32,086 7,914 312,947
2021 40,000 31,295 8,705 304,242
2022 40,000 30,424 9,576 294,666
2023 40,000 29,467 10,533 284,133
– –– – –
– –– – –
– –– – –
2035 40,000 9,948 30,052 69,422
2036 40,000 6,942 33,058 36,364
2037 40,000 3,636 36,364 0
Required:
1. What is Morris’s lease liability at the beginning of the lease (after the first payment)?
2. What amount would Majestic record as a right-of-use asset?
3. What is the lease term in years?
4. What is the effective annual interest rate?
5. What is the total amount of lease payments?
6. What is the total effective interest expense recorded over the term of the lease?
198
300) On January 1, 2018, McCaffrey Inc. leased office space under a three-year operating lease
agreement. The arrangement specified three annual rent payments of $320,000 each, beginning
December 31, 2018, and at each December 31 through 2020. The lessor, Lowell Leasing,
routinely finances equipment for other firms at an annual interest rate of 5%. McCaffrey also
paid a $400,000 advance payment at the beginning of the lease in addition to the first $320,000
rent payment. With permission of the owner, McCaffrey made structural modifications to the
building before occupying the space at a cost of $720,000. The useful life of the building and the
structural modifications were estimated to be 30 years with no residual value.
Required:
Prepare the appropriate journal entries for McCaffrey Inc. from the beginning of the lease
through the end of 2018. McCaffrey’s fiscal year is the calendar year. Round your answers to the
nearest whole dollar amounts.
