Chapter 15 Leases
130. On June 30, 2016, Blue, Inc., leased equipment from Big Leasing Corporation. The lease
agreement qualifies as a direct financing lease and calls for Blue to make semiannual lease
payments of $281,453 over a three-year lease term, payable each June 30 and December 31,
with the first payment at June 30, 2016. Blue’s incremental borrowing rate is 10%, the same
rate Big uses to calculate lease payment amounts. Depreciation is recorded on a straight-line
basis at the end of each fiscal year.
Required:
1. What would be the pretax amounts related to the lease that Big would report in its balance
sheet at December 31, 2016? (Round PV to the nearest $000.)
2. What would be the pretax amounts related to the lease that Big would report in its income
statement for the year ended December 31, 2016?
Answer:
Chapter 15 Leases
AICPA: FN Measurement
131. Southern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2016.
Other information:
Lease term
3 years
Annual payments
$40,000 on January 1 each year
Life of asset
3 years
Implicit interest rate
8%
Incremental 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 2016 and 2017. Assume straight–
line depreciation and a December 31 year-end.
Leased asset
($40,000 x 2.7833)
Lease payable
132. Eastern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2016.
Other information:
Lease term
3 years
Annual payments
$80,000 on January 1 each year
Life of asset
3 years
Implicit interest rate
8%
Incremental 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 2016 and 2017. Assume a
December 31 year-end.
Lease receivable
Cash
Interest expense
[($111,332 – 40,000) x 8%]
Depreciation expense
($111,332 / 3)
Interest payable
Lease payable
Interest expense
[($111,332 – 40,000 – 34,293) x 8%]
Depreciation expense
($111,332 / 3)
133. Diablo Company leased a machine from Juniper Corporation on January 1, 2016. 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:
1. Prepare the journal entry for Diablo Company at the inception of the lease.
2. Prepare the journal entry for the first lease payment.
3. Prepare the journal entry for the second lease payment.
134. Diablo Company leased a machine from Juniper Corporation on January 1, 2016. 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:
1. Determine the amount of each lease payment.
2. Prepare the journal entry for Diablo Company at the inception of the lease.
3. Prepare the journal entry for the first lease payment.
4. Prepare the journal entry for the second lease payment.
Chapter 15 Leases
135. Each of the independent situations below describes a capital 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
2
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
PV, annuity
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 recorded as a liability by the lessee at the inception of
the lease.
Chapter 15 Leases
Use the following to answer questions 136 and 137:
Rumsfeld Corporation leased a machine on December 31, 2016, for a three-year period. The lease
agreement calls for annual payments in the amount of $16,000 on December 31 of each year beginning
on December 31, 2016. Rumsfeld has the option to purchase the machine on December 31, 2019, for
$20,000 when its fair value is expected to be $30,000. The machine’s estimated useful life is expected
to be five years with no residual value. Rumsfeld uses straight-line depreciation for this type of
machinery. The appropriate interest rate for this lease is 12%.
n/i
PV of $1
PV, ordinary
PV, annuity
annuity
due
1 period, 12%
0.89286
0.89286
1.00000
2 periods, 12%
0.79719
1.69005
1.89286
3 periods, 12%
0.71178
2.40183
2.69005
136. Required:
1. Calculate the amount to be recorded as a leased asset and the associated lease liability.
2. Prepare Rumsfeld’s journal entries for this lease for 2016 and 2017.
Answer:
PV of $1, n = 3, i = 12% = .71178
2.69005
PV of payments $16,000 x 2.69005:
PV of BPO $20,000 x.71178:
Leased asset
Lease payable
Lease payable
Depreciation expense
($57,277 / 5)
Chapter 15 Leases
137. Required:
1. Calculate the amount to be recorded as a leased asset and the associated lease liability.
2. Prepare an amortization schedule for this lease.
138. Maker Corp. manufactures imaging equipment. 1 Easy Leasing purchased an MRI machine
from Maker for $1,000,000 and leased it to Imaging Group, Inc., on January 1, 2016.
Lease description:
Quarterly rental payments $65,258: beginning of each period
Lease term 5 years (20 quarters)
No residual value; no BPO
Economic life of MRI machine 5 years
Implicit interest rate and
lessee’s incremental
borrowing rate 12%
Fair value of asset $1,000,000
Present value of an annuity
due of $1: n = 20, i = 3% 15.3238
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to
be incurred.
Required:
1. How should this lease be classified by Imaging Group and by 1 Easy Leasing?
2. Prepare appropriate entries for both Imaging Group and 1 Easy Leasing from the inception
of the lease through the second rental payment on April 1, 2016. Depreciation is recorded
at the end of each fiscal year (December 31).
Chapter 15 Leases
3. Assume Imaging Group leased the machine directly from the manufacturer, Maker Corp.,
which produced the machine at a cost of $700,000. Prepare appropriate entries for Maker
from the inception of the lease through the second rental payment on April 1, 2016.
Chapter 15 Leases
Chapter 15 Leases
139. Scape Corp. manufactures telephony equipment. Scape leased equipment to User, Inc., on
January 1, 2016. Scape produced the equipment at a cost of $5,000,000.
Lease description:
Quarterly rental payments $522,064 at beginning of each period
Lease term 5 years (20 quarters)
No residual value; no BPO
Economic life of equipment 5 years
Implicit interest rate and
lessee’s incremental
borrowing rate 12%
Fair value of asset $8,000,000
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to
be incurred.
Required:
Prepare appropriate entries for both User and Scape from the inception of the lease through the
second rental payment on April 1, 2016. Depreciation is recorded at the end of each fiscal year
(December 31).
Chapter 15 Leases
140. On June 30, 2016, Blue, Inc., leased a machine from Large Leasing Corporation. The lease
agreement calls for Blue to make semiannual lease payments of $281,453 over a three-year
lease term, payable each June 30 and December 31, with the first payment at June 30, 2016.
Blue’s incremental borrowing rate is 10%, the same rate Big uses to calculate lease payment
amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. Large
constructed the machine at a cost of $1,250,000.
Required:
1. Determine the price at which Large is “selling” the machine (present value of the lease
payments) at June 30, 2016 (to the nearest $000).
2. What would be the pretax amounts related to the lease that Large would report in its
balance sheet at December 31, 2016?
3. What would be the pretax amounts related to the lease that Large would report in its
income statement for the year ended December 31, 2016?
Answer:
Chapter 15 Leases
141. Southwestern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2016.
Hi-Tech manufactured the equipment at a cost of $90,000.
Other information:
Lease term
3 years
Annual payments
$40,000 on January 1 each year
Life of asset
3 years
Fair value of asset
$111,332
Implicit interest rate
8%
Incremental rate
8%
There is no expected residual value.
Required:
Prepare appropriate journal entries for Hi-Tech Leasing for 2016. Assume a December 31
year-end.
Chapter 15 Leases
142. Northwestern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2016.
Hi-Tech manufactured the equipment at a cost of $90,000.
Other information:
Lease term
3 years
Annual payments
$40,000 on January 1 each year
Life of asset
3 years
Implicit interest rate
8%
Incremental 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 Hi-Tech Leasing for 2016 and 2017. Assume a
December 31 year-end.
Lease receivable
Cost of goods sold
($40,000 x 2.7833)
Cash
Interest receivable
[($111,332 – 40,000) x 8%]
Cash
Lease receivable
Interest receivable
[($111,332 – 40,000 – 34,293) x 8%]
Chapter 15 Leases
143. The Bobo Company leased equipment from Bolinger Industries on January 1, 2016. Bolinger
purchased the equipment at a cost of $270,000.
Other information:
Lease term
3 years
Annual payments
$120,000 beginning Jan. 1, 2016
Life of asset
3 years
Implicit interest rate
8%
Lessee’s incremental rate
8%
Present value of an ordinary
annuity of $1, i = 8, n = 3
2.5771
Present value of an annuity
due of $1, i = 8, n = 3
2.7833
Required:
1. Calculate the amount of dealer’s profit that Bolinger would recognize in this sales-type
lease. Round to nearest dollar. Show calculations.
2. Prepare the appropriate entries for Bolinger on January 1, 2016. Round to nearest dollar.
Show calculations.
3. Prepare the appropriate entry for Bolinger on December 31, 2016. Round to nearest dollar.
Answer:
Sales revenue ($120,000 x 2.7833)
Cost of goods sold
Profit
Leased receivable ($120,000 x 2.7833)
Cost of goods sold
Cash
Interest receivable ($333,996 – 120,000) x 8%
144. Merlin Co. leased equipment to Houdini Inc. The equipment cost the lessor $200,000. The
appropriate interest rate for this lease is 15%. The annual lease payments are made at the end
of each year. The lease term is three years. The residual value at the end of the lease term is
expected to be $40,000. Houdini has the option to purchase the equipment at that time for
$20,000. Assume this is a direct financing lease.
n / i
PV of $1
PV,
ordinary
PV,
annuity
annuity
due
1 period, 15%
.86957
.86957
1.00000
2 periods, 15%
.75614
1.62571
1.86957
3 periods, 15%
.65752
2.28323
2.62571
Required:
1. For this lease:
(a.) The lease payment computed by the lessor is $_____________.
(b.) The amount the lessee should capitalize is $____________.
2. How much interest should be recognized at the end of year 1 by the:
(a.) Lessor? $__________
(b.) Lessee? $_____
Answer:
(a.)
Cost of leased asset
Less PV of BPO
($20,000 x .65752)
Amount to be recovered through payments
(b.)
$200,000 Amount capitalized
(a)
$200,000 x 15% = $30,000
(b)
$200,000 x 15% = $30,000
Chapter 15 Leases
145. Here is a lease amortization schedule for Jedi Corporation.
Asset being leased: High-speed R2D2 unit
Initial lease obligation
??
Annual lease payments
30,000
Payable at lease inception
and at beginning of each
subsequent year.
Annual interest rate
??
Payments per year
1
Number of years for lease
10
Useful life of asset
12 years
No expected residual value
at the end of 12 years.
Bargain purchase option
5,000
Exercisable at end of lease.
Lease
Periodic
Effective
Decrease
in
Payment
Payment
Interest
Balance
Balance
??
1
30,000
??
??
181,970
2
30,000
16,377
13,623
168,347
3
30,000
15,151
14,849
153,498
4
30,000
13,815
16,185
137,313
5
30,000
12,358
17,642
119,671
6
30,000
10,770
19,230
100,441
7
30,000
9,040
20,960
79,481
8
30,000
7,153
22,847
56,634
9
30,000
5,097
24,903
31,731
10
??
??
??
??
11
??
413
4,587
??
Total interest over term of lease. ??
Annual straight-line depreciation on the leased asset. ??
Required:
(a) Calculate the effective interest and the decrease in balance for the first lease payment.
(b) Calculate the initial lease obligation above.
(c) Calculate the annual depreciation amount. (Round to the nearest dollar.)
(d) Calculate the annual interest rate.
(e) Calculate the missing amounts for rows for payments 10 and 11.
(f) Calculate the total effective interest over the term of the lease.
e.
4,587
Chapter 15 Leases
146. To raise funds for operations, Trifecta Corporation sold its building on January 1, 2016, to a
transportation company for $1,000,000 and immediately leased the building back. The lease is
for a 10-year period ending December 31, 2022, at which time ownership of the building will
revert to Trifecta. The building has a book value of $800,000 (original cost $2,000,000). The
lease requires Trifecta to make payments of $176,984 to the transportation company each
December 31. The building had a total original useful life of 30 years with no residual value
and is being depreciated on a straight-line basis. The lease has an implicit rate of 12%.
Required:
1. Prepare the appropriate entries for Trifecta on (a) January 1, 2016, to record the sale–
leaseback and (b) December 31, 2016, to record necessary adjustments.
2. Show how Trifecta’s December 31, 2016, balance sheet and income statement would reflect
the sale-leaseback.
Answer:
Chapter 15 Leases
147. To raise operating funds, Combs Corporation sold a piece of equipment on January 1, 2016, to
a finance company for $600,000. Combs immediately leased the equipment back for a 10-year
period. After that time ownership will transfer to Combs. The equipment has a fair value of
$624,000. Its cost and its book value were $480,000. Its useful life is 12 years. The lease
requires Combs to make payments of $80,000 to the finance company each January 1
beginning at the inception date of the lease. Combs depreciates similar assets on a straight-line
basis. The appropriate interest rate is 7%. The present value of an annuity due of $1 for 10
years at 7% is 7.5.
Required:
Prepare the journal entries for Combs on January 1, 2016, to record the sale-leaseback and the
December 31, 2016, adjusting entries.
