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306) Terms of a lease agreement and related facts are:
a. Leased asset has a retail cash selling price of $200,000. Its useful life is six years.
b. Annual lease payments at the beginning of each year are $41,746, beginning January 1.
The lease term is six years.
c. Lessor’s interest rate when calculating annual lease payments was 9%.
d. Direct costs by the lessor of legal and commissions to execute the completed lease are
$4,124.
Required:
Round your answers to the nearest whole dollar amounts.
Prepare the appropriate journal entries for the lessor to record the lease, the initial lease payment
at its commencement, and at the December 31 fiscal year-end under each of the following two
independent assumptions:
1. The lessor recently paid $200,000 to acquire the asset.
2. The lessor recently paid $170,000 to acquire the asset.
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307) Terms of a lease agreement and related facts were:
a. The lease asset had a retail cash selling price of $200,000. Its useful life was six years
with no residual value (straight-line depreciation).
b. Annual lease payments at the beginning of each year were $41,746, beginning January 1.
c. Lessor’s implicit rate when calculating annual rental payments was 10%.
d. Incremental costs of negotiating costs of negotiating and consummating the completed
lease transaction incurred by the lessor were $4,124.
Required:
Round your answers to the nearest whole dollar amounts.
Prepare the appropriate journal entries for the lessor to record the lease, the initial payment at its
beginning, and at the December 31 fiscal year-end under each of the following three independent
assumptions:
1. The lease term is three years and the lessor paid $200,000 to acquire the asset (operating
lease).
2. The lease term is six years and the lessor paid $200,000 to acquire the asset. Also assume
that adjusting the lease receivable (net investment) by initial direct costs reduces the effective
rate of interest to 9%.
3. The lease term is six years and the lessor paid $170,000 to acquire the asset.
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308) Brady Leasing leases mechanical equipment to industrial consumers under sales-type leases
that earn Brady a 10% rate of return for providing long-term financing. A lease agreement with
Patel Construction specified 20 annual payments beginning December 31, 2018, the beginning of
the lease. The estimated useful life of the leased equipment is 20 years with no residual value. Its
cost to Brady was $2,809,500. The lease qualifies as a finance lease to Patel. Maintenance of the
equipment was contracted for through a 20-year service agreement with Southwestern Service
Company requiring 20 annual payments of $9,000 beginning December 31, 2018. Hazard
insurance with Jefferson Insurance on the equipment required $9,000 of annual insurance
premiums. Both companies use straight-line depreciation or amortization.
Required:
Round your answers to the nearest whole dollar amounts.
Prepare the appropriate journal entries for both the lessee and lessor to record the second lease
payment and depreciation on December 31, 2019, under each of three independent assumptions:
1. The lessee pays maintenance costs as incurred. The lessor pays insurance premiums as
incurred. The lease agreement requires annual payments of $300,000.
2. The contract specifies that the lessor pays maintenance costs as incurred. The lessee’s
lease payments were increased to $309,000 to include an amount sufficient to reimburse these
costs.
3. The lessee’s lease payments of $309,000 included $9,000 for hazard insurance on the
equipment rather than maintenance.
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309) On January 1, 2018, Park Industrial leased equipment from Rochester Leasing for a four-
year period ending December 31, 2018, at which time possession of the leased asset will revert
back to Rochester. The equipment cost Rochester $412,184 and has an expected economic life of
five years. Rochester expects the residual value at December 31, 2018, will be $50,000.
Negotiations led to the lessee guaranteeing a $70,000 residual value.
Equal payments under the lease are $100,000 and are due on December 31 of each year with the
first payment being made on December 31, 2018. Park is aware that Rochester used a 5% interest
rate when calculating lease payments.
Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare the appropriate journal entries for both Park and Rochester on January 1, 2018, to
record the lease.
2. Prepare all appropriate journal entries for both Park and Rochester on December 31,
2018, related to the lease.
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310) On January 1, 2018, Gravel Inc. leased construction equipment from Rocky Mountain
Leasing. Rocky Mountain Leasing purchased the equipment from Bishop Inc. at a cost of
$1,916,316. Gravel’s borrowing rate for similar transactions is 10%.
The lease agreement specified four annual payments of $400,000 beginning January 1, 2018, the
beginning of the lease, and at each December 31 thereafter through 2020. The useful life of the
equipment is estimated to be six years. The present value of those four payments at a discount
rate of 10% is $1,394,740.
On January 1, 2020 (after two years and three payments), Gravel and Rocky Mountain agreed to
extend the lease term by two years. The market rate of interest at that time was 9%.
Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare the appropriate journal entries for Gravel Inc. on January 1, 2020, to adjust its
lease liability for the lease modification.
2. Prepare all appropriate journal entries for Rocky Mountain Leasing on January 1, 2020,
to record the lease modification.
3. Prepare all appropriate journal entries for Gravel Inc. on December 31, 2020, related to
the lease.
4. Prepare all appropriate journal entries for Rocky Mountain Leasing on December 31,
2020, related to the lease.
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