Chapter 20: Accounting for Leases
128. Addison Company signs a lease agreement dated January 1, 2016 for equipment from Luke Rental Company
beginning January 1, 2016. The following information relates to the capital lease:
1) The lease term is 5 years, the lease is noncancelable and requires annual payments of
$25,000 to be paid in the beginning of each year.
2) The cost and fair value of the equipment is $102,561. The equipment has an estimated
life of 5 years and zero residual value.
3) Addison agrees to pay all executory costs.
4) There is no renewal or bargain options
5) Luke’s interest rate is implicit to the lease at 11%. Addison is aware of this rate, which
is equal to its borrowing rate.
6) Addison uses the straight line method to record depreciation.
7) Executory costs paid at the end of year by Addison are:
2016 2017
Insurance $1,250 Insurance $1,150
Taxes, property $ 250 Taxes, property $ 225
Date
Lease Payment
Required
Interest Expense at
10% on Obligation
Balance
Balance of
Obligation
Jan. 1, 2016
$ 102,561
Jan. 1, 2016
$25,000
77,561
Dec. 31, 2016
–
8,532
86,092
Jan. 1, 2017
25,000
61,092
Dec. 31, 2017
–
6,720
67,813
Jan. 1, 2018
25,000
42,813
Dec. 31, 2018
–
4,709
47,522
Jan. 1, 2019
25,000
22,522
Dec. 31, 2019
2,477*
25,000
Jan. 1, 2020
25,000
0
*rounded
Required:
Prepare the journal entries for Addison for the years 2016 and 2017.
Chapter 20: Accounting for Leases
129. On January 1, 2016, the Millwork Company signed a four-year non-cancelable lease of equipment from the Midford
Company. The annual lease payments of $35,000 are to be paid on January 1 of each year. The first payment is due
on January 1, 2016. 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, 2019. The estimated economic life of the equipment is six years, and the
estimated residual value at the end of six years is $5,000. Millwork’s incremental borrowing rate is 12%, and the
implicit interest rate used in the lease agreement is 10%, which is known by Millwork.
Present value factors for interest rates of 10% and 12% are as follows:
10%
12%
Present value of $1 for n = 1
0.90909
0.89286
Present value of $1 for n = 4
0.68301
0.63552
Present value of an ordinary annuity for n = 4
3.16987
3.03735
Present value of an annuity due for n = 4
3.48685
3.40183
Millwork 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 Millwork Company.
(Round amounts to the nearest dollar.)
d.
What is the depreciation expense for 2016?
35,000
1
130. San Juan Corp. leased some equipment to Glendale, Inc. on January 1, 2016. The lease required six annual payments,
with the first payment due on December 31, 2016. The cost, and also fair value, of the equipment was $140,000, and
there was no estimated residual value at the end of the six-year period. The lease was a direct financing lease and
does qualify as a capital lease for San Juan . San Juan ‘s desired rate of return is 11%. Use the following factors for 6
periods:
11%
Present value of an ordinary annuity
4.23054
Present value of annuity due
4.69590
Required:
(For all answers, round to the nearest dollar.)
a.
Compute the amount of equal annual payments.
b.
Prepare San Juan’s 1/1/2016 entry.
c.
Prepare all December 31, 2016 entries on San Juan‘s books.
d.
Assume the same information, except that payments are due on January 1 of each year and
the first payment was due on January 1, 2016. Determine the amount of the equal annual
payments and determine the amount of interest revenue San Juan should recognize for the
year 2016.
1
Challenging
ACCT.WHAL.16.20.5 – LO: 20.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
Challenging
ACCT.WHAL.16.20.3 – LO: 20.3
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
131. Rock Hall Financing leased some equipment to Cherry Hill Company on January 1, 2016. The lease required six
annual payments with the first payment due on December 31, 2016. The cost, and also fair value, of the equipment
was $100,000. The equipment had an estimated residual value of $10,000 at the end of the six-year period. The
residual value was guaranteed by the lessee. The lease was a direct financing lease and qualifies as a capital lease for
Cherry Hill. Rock Hall’s desired rate of return is 8%.
Required:
(For all answers, round to the nearest dollar.)
a.
Compute the amount of the equal annual payments.
b.
Prepare all December 31, 2016 journal entries on Cherry Hill’s books.
c.
Use the same information, but assume that the payments are due on January 1 of each year
with the first payment due January 1, 2016. Determine the amount of the annual payments
and determine the amount of interest revenue Rock Hall would recognize for the year
ended December 31, 2016.
1
Challenging
ACCT.WHAL.16.20.5 – LO: 20.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
This problem requires a time value of money table.
132. Motor City, Inc. leased equipment from Des Moines Company on January 1, 2016. Annual December 31 payments
of $15,000 were required. The present value of these payments, discounted at 9% for nine years, is $89,929
(rounded). The lease is a direct financing lease.
Required:
Prepare all December 31, 2016, entries for Des Moines.
133. Beatrice, Inc. purchased equipment at a cost of $97,220 on January 1, 2016. Beatrice immediately leased the
equipment to Corvalis Company for a seven-year period with rental payments of $17,223 to be paid at the beginning
of each year. The lessor’s implicit interest rate in connection with the lease is 9%. The equipment is expected to have
a guaranteed residual value of $5,000 at the end of the lease term, and an estimated useful life of 11 years. Beatrice
paid $6,000 initial direct costs for the lease. The lessor knows all costs, and collection of lease payments is expected.
6 Periods
7 Periods
Present value of an ordinary annuity at 9%
4.486
5.033
Present value of an annuity due at 9%
4.890
5.486
Present Value of $1, at 9%
0.596
0.547
Required:
a.
Determine the present value of the minimum lease payments.
b.
Classify the lease from the standpoint of the lessor, giving reasons.
c.
Prepare the journal entries of the lessor.
(1)
To record the lease agreement.
(2)
To record all entries regarding the initial direct costs.
d.
Explain the impact and rationale of the journal entry made related to the initial direct costs.
6,000
1
Challenging
ACCT.WHAL.16.20.5 – LO: 20.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
134. The Boulder Company leased office equipment to the Boulder Corporation on January 1, 2016. Information
regarding the lease agreement is as follows:
·
The lease qualifies as a direct financing lease.
·
The term of the lease is eight years, with annual rentals of $7,000 to be paid
at the beginning of each year. There is no bargain purchase option.
·
The estimated unguaranteed residual value of the equipment at the end of the
lease term is $5,000.
·
The Boulder Corporation will pay the executory costs of $5,000.
·
The present value of the minimum lease payments, yielding a return of 11%,
is $39,985.40
·
The factor for the present value of $1 for eight years at 11% is 0.43393.
Required:
Prepare the Boulder Company’s 2016 journal entries regarding the lease.
Lease Receivable [($7,000 × 8) + $5,000]
Equipment [$39,985.40 + ($5,000 × 0.43393)]
Unearned Interest: Leases
Cash
Lease Receivable
Unearned Interest: Leases
[($42,155.05 – $7,000) × 0.11]
Interest Revenue: Leases
135. South Bend Corporation purchased equipment in December 2015 for $150,000. South Bend leased the equipment to
the Kansas Company on January 1, 2016. Lease payments of $43,000 are to be made at the end of each year for six
years. The present value of the minimum lease payments at 14% interest is $167,212.72 at the time of the lease. At
the end of the lease term, ownership of the equipment will be transferred to Kansas. The collectibility of the lease
payments is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable
costs yet to be incurred by the lessor.
Required:
a.
Classify the lease from the South Bend Corporation’s standpoint.
b.
Prepare the 2016 journal entries regarding the lease for the South Bend Corporation.
1
Challenging
ACCT.WHAL.16.20.5 – LO: 20.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
136. (This problem requires use of PV tables with an 11% rate, a financial calculator or the formulas.)
Taquito Company leased equipment to Baja Company on January 1, 2016. The lease was for five years and required
annual payments of $24,500 on January 1 of each year with the first payment due January 1, 2016. The equipment
had a cost to Taquito of $85,000 and no expected residual value at the end of the lease term. The lease was
appropriately accounted for as a sales-type lease by Taquito. Taquito used a 11% rate of return to establish the lease
payments.
Required:
a.
Prepare all 2016 journal entries for Taquito related to the lease.
b.
What amount of interest revenue would Taquito recognize for the year ended December
31, 2017?
1
Challenging
ACCT.WHAL.16.20.5 – LO: 20.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
137. Paolo, Inc. (the lessor) entered into a sales-type lease with another company on January 1, 2016. The lease was for
five years with $40,000 due at the end of each year. The cost of the equipment on Paolo’s books was $140,000. Paolo
uses an interest rate of 8%.
Required:
(Round all answers to the nearest dollar.)
a.
Prepare all journal entries for Paolo for the year 2016.
b.
If Paolo has mistakenly accounted for this lease as an operating lease, by how much would
the company’s 2016 income be overstated or understated because of this error? (Be sure to
indicate under or over.)
1
Challenging
ACCT.WHAL.16.20.5 – LO: 20.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
138. Flagstaff, a lessor, entered into a sales-type lease with another company on January 1, 2016. The lease was for four
years with $40,000 payments due at the end of each year. The cost of the equipment on Flagstaff’s books was
$120,000. Actuarial information for 7%, the implicit rate, follows:
3 Periods
4 Periods
Amount of $1
1.2250
1.3108
Amount of annuity of $1
3.1249
4.4399
Present value of $1
0.8163
0.7629
Present value of annuity of $1
2.6243
3.3872
Required:
a.
Prepare all journal entries for Flagstaff for the year 2016.
b.
Use the same information as above, but assume that there is an unguaranteed
residual value of $8,000. Answer the following questions:
(1)
What would be the charge to Cost of Asset Leased?
(2)
What would be the charge to the initial gross receivable?
(3)
What would be the credit to Sales?
1
Challenging
ACCT.WHAL.16.20.5 – LO: 20.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
139. One Republic Company leased equipment to Maps Company on January 1, 2016. The lease term is for a four-year
period. The annual lease payments must be made on January 1 of each year, with the first payment due on January 1,
2016. Additional information relating to the lease is as follows:
·
The cost of equipment to One Republic was $70,000, and the normal selling
price for this type of equipment is $110,000.
·
One Republic requires a 10% rate of return on its investments, so this is the
interest rate used to calculate the annual lease payments.
·
The lease contains a bargain purchase option. On December 31, 2019, the
lessee may acquire the equipment for $4,000.
·
The equipment has an expected economic life of six years. The residual
value of the equipment at that time is estimated to be $1,000.
·
The collectability of the lease payments is reasonably assured, and there are
no important uncertainties surrounding the amount of unreimbursable costs
yet to be incurred by the lessor.
Required:
a.
Compute the amount of the equal annual lease payments. (Round your answer to
the nearest dollar.)
b.
Classify the lease from One Republic Company’s viewpoint (the lessor), stating
the reason for the classification.
c.
Prepare a lease amortization schedule for the four-year term for One Republic.
(Round amounts to the nearest dollar.)
d.
Prepare all entries for 2016 required by the One Republic Company.
The equal annual lease payments are $30,764, determined as follows:
Selling price
Less: Present value of bargain purchase option
($4,000 × .683013)
Amount to be recovered through lease
payments
$107,268/3.486852 = $30,764 (rounded)
Date
1/1/2016
1/1/2016
12/31/2016
1/1/2017
1/1/2018
12/31/2018
12/31/2019