80. Exhibit 21-4
On January 1, 2010, General Leasing Company entered into a direct financing lease with a lessee, Lee
Company. The lease agreement calls for five equal annual payments of $60,000 at the beginning of each year
with the first payment due on January 1, 2010. The leased property has an estimated residual value of $10,000,
which Lee does not guarantee. The property remains the property of General at the end of the lease term.
General desires a 12% rate of return. Present value factors for a 12% interest rate are as follows:
Present value of $1 for n = 1
0.892857
Present value of $1 for n = 5
0.567427
Present value of an ordinary annuity for n = 5
3.604776
Present value of an annuity due for n = 5
4.037349
Refer to Exhibit 21-4. What is the amount of the credit to Unearned Interest: Leases to be recorded by General Leasing on January 1, 2010? (Round
the answer to the nearest dollar.)
81. Exhibit 21-4
On January 1, 2010, General Leasing Company entered into a direct financing lease with a lessee, Lee
Company. The lease agreement calls for five equal annual payments of $60,000 at the beginning of each year
with the first payment due on January 1, 2010. The leased property has an estimated residual value of $10,000,
which Lee does not guarantee. The property remains the property of General at the end of the lease term.
General desires a 12% rate of return. Present value factors for a 12% interest rate are as follows:
Present value of $1 for n = 1
0.892857
Present value of $1 for n = 5
0.567427
Present value of an ordinary annuity for n = 5
3.604776
Present value of an annuity due for n = 5
4.037349
Refer to Exhibit 21-4. What is the amount of interest revenue that General should recognize on the lease for the year ended December 31, 2010?
(Round the answer to the nearest dollar.)
82. Exhibit 21-4
On January 1, 2010, General Leasing Company entered into a direct financing lease with a lessee, Lee
Company. The lease agreement calls for five equal annual payments of $60,000 at the beginning of each year
with the first payment due on January 1, 2010. The leased property has an estimated residual value of $10,000,
which Lee does not guarantee. The property remains the property of General at the end of the lease term.
General desires a 12% rate of return. Present value factors for a 12% interest rate are as follows:
Present value of $1 for n = 1
0.892857
Present value of $1 for n = 5
0.567427
Present value of an ordinary annuity for n = 5
3.604776
Present value of an annuity due for n = 5
4.037349
Refer to Exhibit 21-4. Given the structure of the lease, the payments, and the residual value information, what is General’s net investment in the
lease during 2011? (Round the answer to the nearest dollar.)
83. Any initial direct costs incurred by the lessor for a sales-type lease should be
84. Exhibit 21-5
The Chicago, Inc. entered into a five-year lease with the Urbana Company on January 1, 2010. Chicago, the
lessor, will require that five equal annual payments of $25,000 be made at the beginning of each year. The first
payment will be made on January 1, 2010. The lease contains a bargain purchase option price of $12,000, which
the lessee may exercise on December 31, 2014. The lessee pays all executory costs. The cost of the leased
property and its normal selling price are $95,000 and $118,236, respectively. Collectibility of the future lease
payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease.
Present value factors for a 7% interest rate are as follows:
Present value of $1 for n = 1
0.934579
Present value of $1 for n = 5
0.712986
Present value of an ordinary annuity for n = 5
4.100197
Present value of an annuity due for n = 5
4.387211
Refer to Exhibit 21-5. If Chicago requires a 7% annual return, the lease should be classified as a(n)
85. Exhibit 21-5
The Chicago, Inc. entered into a five-year lease with the Urbana Company on January 1, 2010. Chicago, the
lessor, will require that five equal annual payments of $25,000 be made at the beginning of each year. The first
payment will be made on January 1, 2010. The lease contains a bargain purchase option price of $12,000, which
the lessee may exercise on December 31, 2014. The lessee pays all executory costs. The cost of the leased
property and its normal selling price are $95,000 and $118,236, respectively. Collectibility of the future lease
payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease.
Present value factors for a 7% interest rate are as follows:
Present value of $1 for n = 1
0.934579
Present value of $1 for n = 5
0.712986
Present value of an ordinary annuity for n = 5
4.100197
Present value of an annuity due for n = 5
4.387211
Refer to Exhibit 21-5. If Chicago requires a 7% annual return, what is the correct amount that should be credited to Unearned Interest: Leases on
January 1, 2010, by Chicago? (Round the answer to the nearest dollar.)
86. Exhibit 21-5
The Chicago, Inc. entered into a five-year lease with the Urbana Company on January 1, 2010. Chicago, the
lessor, will require that five equal annual payments of $25,000 be made at the beginning of each year. The first
payment will be made on January 1, 2010. The lease contains a bargain purchase option price of $12,000, which
the lessee may exercise on December 31, 2014. The lessee pays all executory costs. The cost of the leased
property and its normal selling price are $95,000 and $118,236, respectively. Collectibility of the future lease
payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease.
Present value factors for a 7% interest rate are as follows:
Present value of $1 for n = 1
0.934579
Present value of $1 for n = 5
0.712986
Present value of an ordinary annuity for n = 5
4.100197
Present value of an annuity due for n = 5
4.387211
Refer to Exhibit 21-5. If Chicago requires a 7% annual return, what is the correct amount of interest revenue to be recognized by Chicago for 2010?
(Round the answer to the nearest dollar.)
87. Exhibit 21-5
The Chicago, Inc. entered into a five-year lease with the Urbana Company on January 1, 2010. Chicago, the
lessor, will require that five equal annual payments of $25,000 be made at the beginning of each year. The first
payment will be made on January 1, 2010. The lease contains a bargain purchase option price of $12,000, which
the lessee may exercise on December 31, 2014. The lessee pays all executory costs. The cost of the leased
property and its normal selling price are $95,000 and $118,236, respectively. Collectibility of the future lease
payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease.
Present value factors for a 7% interest rate are as follows:
Present value of $1 for n = 1
0.934579
Present value of $1 for n = 5
0.712986
Present value of an ordinary annuity for n = 5
4.100197
Present value of an annuity due for n = 5
4.387211
Refer to Exhibit 21-5. If Chicago requires a 7% annual return, how much gross profit will Chicago record at the inception of the lease?
88. Which of the following facts would preclude a lessor from classifying a lease as a sales-type or direct
financing lease?
89. Depreciation expense will be recorded in the accounts of the lessee and lessor for which type of leases?
Lessee
Lessor
I.
operating
direct financing
II.
capital
operating
III.
operating
operating
IV.
capital
sales-type
90. When a lessor receives cash on a sales-type lease, which of the following accounts is decreased?
91. Related to direct financing leases
92. If a lessor has an account, Equipment Leased to Others, and the related account, Accumulated Depreciation:
Equipment Leased to Others, on its year-end balance sheet, the lease relating to the accounts would be classified
as a(n)
93. The account Unearned Interest: Leases should be reported on the lessor’s financial statements as
94. The lessor should report the Lease Receivable for a sales-type lease on its balance sheet as
95. Which of the following is a required disclosure by a lessor of an operating lease?
96. Which of the following is not a required disclosure by a lessor of a sales-type lease?
97. FASB’s rules concerning leases are an attempt to record in the financial statements
98. Lessee leased some land and buildings from Lessor. There was no transfer of ownership and no bargain
purchase option. If the fair value of the land is less than a certain percentage of the total fair value of the leased
property at the inception of the lease, both the lessee and the lessor may consider the land and buildings as a
single unit. What is that percentage?
99. Which of the following criteria would require a lessee to classify a lease of land as a capital lease?
1.
Transfer of ownership
2.
Contains a bargain purchase option
3.
Lease term is 75% of economic life
4.
Present value of lease payments is 90% of fair value
100. Which of the following amortization policies is correct for a capital lease of both land and buildings that
transfers title or contains a bargain purchase option?
101. In a sales-leaseback transaction
102. On January 1, 2010, Columbus Properties sold a building to another company and immediately leased it
back again. The Columbus’ book value for the building was $15,954. The lease was for five years with $5,000
payable at the end of each year. The payments, discounted at 10%, equaled $18,954. Which entry would
Columbus Properties not make in 2010?
103. For a sale-leaseback transaction for which the lease qualifies as a capital lease, the seller-lessee should
account for any gain on the sale of the asset as
104. Which statement is not true? A leveraged lease always
105. Which statement is not true?
106. As a generalized statement regarding lease accounting, which statement best describes U.S. versus
international accounting principles?
107. Which of the following indicators relating to lease capitalization is an example of IFRS criteria being more
principles-based than GAAP with respect to lease accounting?
108. The following are indicators in the terms of a lease that cause it to be treated as a capital lease. The
indicators are:
(1)
Losses due to cancellation of the lease by the lessee are borne by the lessee.
(2)
Gains and losses due to changes in the fair value of the leased asset are captured by the lessee.
These indicators are criteria that trigger lease capitalization under
GAAP
IFRS
I.
Yes
Yes
II.
Yes
No
III.
No
Yes
IV.
No
No
109. Shown below is a list of key terms (a-j) related to leasing, followed by a series of definitions (1-10):
a.
bargain purchase option
f.
lessee’s incremental borrowing rate
b.
executory costs
g.
manufacturer’s/dealer’s profit or loss
c.
guaranteed residual value
h.
minimum lease payments
d.
initial direct costs
i.
unguaranteed residual value
e.
interest rate implicit in the lease
j.
unreimbursable cost
____
1.
Incurred by the lessor to originate a lease that result directly from and are essential to acquiring the lease and would not have
been incurred had the lease transaction not occurred.
____
2.
Portion of estimated residual value not guaranteed by the lessee.
____
3.
Required to be paid by the lessee to the lessor over the life of the lease.
____
4.
Rate that would have been incurred if the property had been purchased by debt.
____
5.
Rate that equates the fair value of the leased property and the present value of the lease payments plus the unguaranteed
residual value.
____
6.
Provision that allows the lessee to purchase the leased property at a price so favorable it is a reasonable certainty that the
sale will occur.
____
7.
The difference between the fair value of the property at the beginning of the lease and its cost or carrying value.
____
8.
Commitments by the lessor to guarantee performance of the leased property in a manner more extensive than the typical
product warranty.
____
9.
Portion of the residual value of the leased property that is guaranteed by the lessee.
____
10.
Ownership-type costs, such as insurance, maintenance, and property taxes.
Required:
Match each term to its definition by placing the appropriate letter in the space provided.
1.
d
6.
a
2.
i
7.
g
3.
h
8.
j
4.
f
9.
c
5.
e
10.
b
110. (This problem requires use of present value tables.)
Boston Company leased equipment from Amherst Company on January 1, 2010. Information about the lease is
as follows:
Lease payments, due at the end of each year
$25,000
Lease term
6 years
Estimated useful life of the equipment
10 years
Boston’s incremental borrowing rate
12%
Interest rate implicit in the lease (known to Boston)
10%
Residual value (not guaranteed by Boston)
$20,000
Fair market value of the equipment.
$130,000
Boston’s depreciation method
Straight-line
No bargain purchase option; no transfer of ownership
Required:
a.
Compute the present value of the minimum lease payments.
b.
Classify the lease from the viewpoint of Boston Company, giving reasons.
c.
Prepare Boston’s journal entry or entries for the lease for 2010.
111. On January 1, 2010, Oxford Company leased equipment from Starkville Company. The lease had a
non-cancellable ten-year term and required annual lease payments of $19,000 to be paid on January 1 of each
year with the first payment due January 1, 2010. The annual payment includes $1,000 for executory costs.
Oxford guarantees a $15,000 residual value at the end of the lease term. The estimated economic life of the
equipment is 12 years. The fair value of the equipment on January 1, 2010 is $140,000. Oxford’s incremental
borrowing rate is 10%, and Starkville’s implicit interest rate is 9%, which is known by Oxford. Present value
factors for interest rates of 9% and 10% are as follows:
9%
10%
Present value of $1 for n = 1
0.917431
0.909091
Present value of $1 for n = 10
0.422411
0.385543
Present value of an ordinary annuity for n = 10
6.417658
6.144567
Present value of an annuity due for n = 10
6.995247
6.759024
$25,000 ´ 4.35526 (PV factor at 10% for six periods) = $108,882
which is less than the 90% required.
c.
Rent Expense
25,000
Cash
Oxford uses straight-line depreciation for its plant assets.
Required:
a.
Compute the present value of the minimum
lease payments. (Show computations and
round all amounts to the nearest dollar.)
b.
Classify the lease from the standpoint of the
lessee, stating the reason for the
classification.
c.
Prepare each of the following journal
entries on the lessee’s books. (Show
computations and round all amounts to the
nearest dollar.)
(1)
Record the lease agreement on January 1, 2010.
(2)
Record the payment on January 1, 2010.
(3)
Record any adjusting entries on December 31, 2010, in connection with the lease agreement.
Annual lease payment
$ 19,000
Annual rent-net
$ 18,000
Present value of minimum rents
Present value of guaranteed residual
value ($15,000 ´ .422411)
6,336
Present value of minimum lease payments
$132,250
(2)
Capital Lease Obligation
18,000
Executory Expense (or Prepaid)
1,000
(3)
Depreciation Expense
[($132,250 – $15,000)/10 years]
11,725
Equipment
11,725
Interest Expense [($132,250 – $18,000)
10,283
Accrued Interest on Capital Lease
112. Knoxville, Inc. leased some equipment from another company on January 1, 2010, for a three-year period.
Payments of $45,000 were due each December 31. The lease qualified as a capital lease. Assets were
depreciated over the life of the lease, using the straight-line method. The appropriate interest rate to use was
9%.
Required:
a.
Prepare all December 31, 2010, journal entries required on Knoxville’s books.
b.
At December 31, 2010, how much of the lease liability should be shown as current? Compute two acceptable answers.
c.
If the first $45,000 payment were due January 1, 2010, what journal entries would be required on Knoxville’s books on January 1,
2010?
d.
Assume again that the $45,000 payments are made on December 31. Assume, in addition, that at the end of three years, the lessee
guaranteed a residual value of $10,000. Compute the amount of the lease obligation that should be recorded on January 1, 2010.
e.
Refer to Part d. Assume that on December 31, 2012, the leased equipment had a fair value of only $6,500. Prepare all December 31,
2012, journal entries for the lessee.
a.
Interest Expense (.09 ´ $113,908)
10,252
Capital Lease Obligation
34,748
Cash
Depreciation Expense: Leased
Equipment
($113,908/3 years)
37,969
b.
(1)
$45,000 ´ .917431 = $41,284
(2)
($113,908 – $34,748) ´ .09 = $7,124
$45,000 – $7,124 = $37,876
($45,000 ´ 2.759111)
124,160
Capital Lease Obligation
Cash
d.
Lease obligation on 1/1/10:
$10,000 ´ .772183
$121,630
113. Spokane Company leased some equipment from another company on January 1, 2010, for a four-year
period. Payments of $18,000 were due each December 31. The lease qualified as a capital lease. Assets were
depreciated straight-line over the life of the lease. The appropriate interest rate to use was 10%.
Required:
(For all answers, round to the nearest dollar.)
a.
Prepare all journal entries for 2010 required on Spokane’s books.
b.
At December 31, 2010, how much of the lease liability should be shown as current? Compute two acceptable answers.
c.
If the $18,000 payments were due on January 1, beginning in the year 2010, prepare all January 1, 2010, entries for Spokane.
d.
Assume again that the $18,000 lease payments are due on December 31. Assume, in addition, that at the end of four years, Spokane (the
lessee) guarantees a residual value of $3,000. At what amount should the lease obligation be recorded on January 1, 2010?
e.
Refer to Part d. Assume that at December 31, 2013, the leased equipment had a fair value of only $1,000. Prepare all December 31,
2013 journal entries for Spokane.
e.
Lease
9%
Reduction of
Balance of
Date
Payment
Interest
Obligation
Obligation
1/1/10
$121,630
$45,000
$10,947
$34,053
87,577
45,000
7,882
37,118
50,459
45,000
4,541
40,459
10,000
Interest Expense
4,541
Capital Lease Obligation
40,459
Cash
45,000
Depreciation Expense: Leased Equipment
[($121,630 – $10,000)/3 years]
37,210
Loss on Disposal of Leased Equipment
3,500
Capital Lease Obligation
10,000
Cash ($10,000 –
$6,500)
3,500
114. On January 1, 2010, the Atlanta Company signed a four-year non-cancellable lease of equipment from the
Athens Company. The annual lease payments of $25,000 are to be paid on January 1 of each year. The first
payment is due on January 1, 2010. The lease contains a bargain purchase option price of $15,000. The
equipment’s fair value is expected to be $30,000 on December 31, 2013. The estimated economic life of the
equipment is six years, and the estimated residual value at the end of six years is $5,000. Atlanta’s incremental
borrowing rate is 10%, and the implicit interest rate used in the lease agreement is 9%, which is known by
Atlanta.
Present value factors for interest rates of 9% and 10% are as follows:
9%
10%
Present value of $1 for n = 1
0.917431
0.909091
Present value of $1 for n = 4
0.708425
0.683013
Present value of an ordinary annuity for n = 4
3.239720
3.169865
Present value of an annuity due for n = 4
3.531295
3.486852
Atlanta Company uses the straight-line method to depreciate its plant assets.
Required:
a.
Compute the present value of the minimum lease payments. (Show all computations and round amounts to the nearest dollar.)
b.
Classify the lease from the standpoint of the lessee, stating the reason for the classification.
c.
Prepare a lease amortization schedule for the four-year term for Atlanta Company. (Round amounts to the nearest dollar.)
d.
What is the depreciation expense for 2010?
e.
Lease
10%
Reduction of
Balance of
Date
Payment
Interest
Obligation
Obligation
1/1/10
$59,107
$18,000
$5,911
$12,089
47,018
18,000
4,702
13,298
33,720
18,000
3,372
14,628
19,092
18,000
1,908
16,092
3,000
Interest Expense
1,908
Capital Lease Obligation
16,092
Cash
18,000
$3,000)/4
Loss on Disposal of Leased Equipment
2,000
Capital Lease Obligation
3,000
Cash
2,000