162
273) Lansing East leased high-tech electronic equipment from Davis Computing on January 1,
2018. Davis Computing manufactured the equipment at a cost of $42,500.
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%
Required:
Round your answers to the nearest whole dollar amounts.
1. Show how Davis Computing determined the $7,500 quarterly rental payments.
2. Prepare appropriate journal entries for Davis Computing to record the lease at its
beginning, January 1, 2018, and the second lease payment on April 1, 2018.
163
274) Lansing South leased hardware from Darter Computing on January 1, 2018. Darter
Computing manufactured the hardware at a cost of $400,000 and lists a cash selling price of
$500,354. Appropriate adjusting entries are made quarterly.
Related Information:
Lease term 5 years (20 quarterly periods)
Quarterly lease payments $30,000 at Jan 1, 2018 and at Mar 31,
June 30, Sept 30 and Dec 31 thereafter
Economic life of asset 5 years
Interest rate charged by the lessor 8%
Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare appropriate journal entries for Lansing South to record the lease at its beginning,
January 1, 2018, and on March 31, 2018.
2. Prepare appropriate journal entries for Darter Computing to record the lease at its
beginning, January 1, 2018, and on March 31, 2018.
164
165
275) At January 1, 2018, Butterfly, Inc. leased mining equipment from Diamond 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 Crescent at a cost of $540,000 (its fair
value) and was expected to have a useful life of 12 years with no salvage value 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.) Diamond seeks a 10% return on
its lease investments. By this arrangement, the lease is deemed to be a finance lease.
Required:
Round your answers to the nearest whole dollar amounts.
1. What will be the effect of the lease on Butterfly’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 Butterfly (ignore taxes)?
166
Use this information to answer the following questions:
At January 1, 2018, Ruby, Inc. leased mining equipment from Sapphire 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 Sapphire at a cost of $540,000 (its fair value) and was
expected to have a useful life of 13 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.) Sapphire seeks a 10% return on its lease investments. By this arrangement, the
lease is deemed to be an operating lease.
276) Required:
Round your answers to the nearest whole dollar amounts.
1. What will be the effect of the lease on Ruby’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 Ruby (ignore taxes)?
167
168
277) Required:
Round your answers to the nearest whole dollar amounts.
1. What will be the effect of the lease on Sapphire’s (lessor’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 Sapphire (ignore taxes)?
169
278) Fisher Company leased equipment from Orkney Industries. The lease agreement qualifies
as a finance lease and requires annual lease payments of $26,269 over a six-year lease term (also
the asset’s useful life), with the first payment at January 1, the beginning of the lease. The
interest rate is 5%. The asset being leased cost Mann $115,000 to produce.
Required:
Round your answers to the nearest whole dollar amounts.
1. Determine the price at which the lessor is “selling” the asset (present value of the lease
payments).
2. What would be the amounts related to the lease that the lessor would report in its income
statement for the year ended December 31? (Ignore taxes.)
279) Rheims Power leased high-tech electronic equipment from Lyons Leasing on January 1,
2018. Lyons purchased the equipment from Nguyen Machines at a cost of $56,040.
Related Information:
Lease term 2 years (8 quarterly periods)
Quarterly lease payments $7,500 at Jan 1, 2015 and at Mar 31,
June 30, Sept 30 and Dec 31 thereafter
Economic life of asset 5 years
Interest rate charged by the lessor 8%
Required: Prepare appropriate journal entries for Rheims Power from the commencement of the
lease through December 31, 2018. December 31 is the fiscal year end for each company.
Appropriate adjusting entries are recorded at the end of each quarter. Round your answers to the
nearest whole dollar amounts.
171
280) On January 1, 2018, Duncan-Lang Services, Inc. a computer software training firm, leased
several computers under a two-year operating lease agreement from Neble 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 computers were acquired by Neble at a cost of $360,000 and were expected to have a
useful life of five years with no residual value. Appropriate adjusting entries are recorded at the
end of each quarter.
Required: Prepare the appropriate journal entries for both (a) the lessee and (b) the lessor from
the beginning of the lease through the end of 2018. Round your answers to the nearest whole
dollar amounts.
172
173
281) Courage Enterprises leased equipment from Sixth Street Leasing on January 1, 2018.
Courage purchased the equipment at a cost of $2,000,000. Courage elected the short-term lease
option. Appropriate adjusting entries are made annually.
Related Information:
Lease term 1 year (4 quarterly periods)
Quarterly lease payments $80,000 at Jan 1, 2018 and at Mar 31,
June 30 and Sept 30
Economic life of asset 5 years
Interest rate charged by the lessor 8%
Required:
Prepare appropriate journal entries for Courage from the beginning of the lease through
December 31, 2018.
174
282) Needham Industries leased manufacturing equipment from Burlington Leasing on January
1, 2018. Needham has the option to renew the lease at the end of two years for an additional
three years. Needham is subject to a $135,000 penalty after two years if it fails to renew the
lease. Burlington Leasing purchased the equipment from Springfield Machines at a cost of
$250,177.
Related Information:
Lease term 3 years (12 quarterly periods)
Lease renewal option for an additional 2 years
Quarterly lease payments $45,000 at Jan 1, 2018 and at Mar 31,
June 30, Sept 30 and Dec 31 thereafter.
Economic life of asset 5 years
Interest rate charged by the lessor 8%
Required:
Prepare appropriate journal entries for Needham Industries from the beginning of the lease
through March 31, 2018. Appropriate adjusting entries are made quarterly. Round your answers
to the nearest whole dollar amounts.
176
283) On January 1, 2018, Granite State Hospital leased medical equipment from Forest Corp.
which had purchased the equipment at a cost of $2,874,474. The lease agreement specifies six
annual payments of $600,000 beginning January 1, 2018, the beginning of the lease, and at each
December 31 thereafter through 2022. The six-year lease term ending December 31, 2023 (a year
after the final payment), is equal to the estimated useful life of the equipment. The contract
specifies that lease payments for each year will increase on the basis of the increase in the
Consumer Price Index for the year just ended. Thus, the first payment will be $600,000, and the
second and subsequent payments might be different. The CPI at the beginning of the lease is 120.
Forest routinely acquires medical equipment for lease to other firms. The interest rate in these
financing arrangements is 10%.
Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare the appropriate journal entries for Granite State and Forest to record the lease at
its beginning.
2. Assuming the CPI is 124 at that time, prepare the appropriate journal entries for Granite
State at December 31, 2018, related to the lease.
177
284) On January 1, 2018, NaviFast leased telecommunications equipment from Rapid Voice,
Inc. Rapid Voice’s cash selling price for the equipment is $435,526. The lease agreement
specifies six annual payments of $100,000 beginning December 31, 2018, and at each December
31 thereafter through 2023. The six-year lease is equal to the estimated useful life of the
equipment. The contract specifies that lease payments for each year will increase by the higher of
(a) the increase in the Consumer Price Index for the preceding year and (b) 3 percent. The CPI at
the beginning of the lease is 120. Rapid Voice routinely leases equipment to other firms. The
interest rate in these lease arrangements is 10%.
Required: Prepare the appropriate journal entries for NaviFast to record the lease at its
beginning. Round your answers to the nearest whole dollar amounts.
179
285) On January 1, 2018, Antonio’s Pizzeria leased retail space from Berenstein Properties. The
8-year finance lease requires monthly variable lease payments equal to 3% of Antonio’s
Pizzeria’s sales revenue, with a monthly sales minimum of $1,200,000. Payments at the
beginning of each month are based on previous month sales. During the previous 5-year period,
Antonio’s Pizzeria has generated monthly sales of over $650,000. Berenstein’s interest rate,
known by Antonio’s Pizzeria, was 5%.
Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare the journal entries for Antonio’s Pizzeria at the beginning of the lease.
2. Prepare the journal entries for Antonio’s Pizzeria at February 1, 2018. January sales were
$1,980,000. Amortization is recorded monthly.
180
286) On January 1, 2018, Dave’s Transport leased a car from Alfonso Motors for a six-year
period with an option to extend the lease for three years. Dave’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. The agreement is considered an operating lease.
Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare Dave’s journal entry to record for the right-of-use asset and lease liability at
January 1, 2018.
2. Prepare the journal entries to record interest and amortization at December 31, 2018.