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Exam 15: Leases

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Question 1

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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. $\begin{array}{ll}\text { Related Information: }\\\text { Lease term } & 2 \text { years ( } 8 \text { quarterly periods) } \\\text { Quarterly rental payments } & \$ 7,500 \text { at the beginning of each period } \\\text { Economic life of asset } & 2 \text { years }\\\text { Fair value of asset } & \$ 56,040 \\\text { Implicit interest rate } & 8 \% \\\end{array}$ - 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.

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Question 2

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ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a finance lease. The cost of the asset is $120,000. The lease contains a bargain purchase option that is effective at the end of the fifth year. The expected economic life of the asset is 10 years. The lease term is five years. The asset is expected to have a residual value of $2,000 at the end of 10 years. Using the straight-line method, what would Best record as annual amortization?

A) $23,600.
B) $12,200.
C) $12,000.
D) $11,800.

E) C) and D)
F) None of the above

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Question 3

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A lessee is allowed to elect not to record a right-of-use asset and lease payable at the beginning of the lease term for a lease that has a lease term of 12 months or having a value of $5,000 or less when using:

On June 30, 2018, Atlas, Inc. leased a warehouse facility from LT Leasing Corporation. The lease agreement calls for Atlas to make semiannual lease payments of $1,688,721 over a three-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Atlas's incremental borrowing rate is 10%, the same rate LT uses to calculate lease payment amounts. The fair value of the warehouse is $9 million. LT recently purchased the warehouse for $9 million -Required: Amortization is recorded on a straight-line basis at the end of each fiscal year. Round your answers to the nearest whole dollar amounts. 1. Determine the present value of the lease payments at June 30, 2018 (to the nearest $000) that Atlas uses to record the right-of-use asset and lease liability. 2. What amounts related to the lease would Atlas report in its balance sheet at December 31, 2018? (Ignore taxes.) 3. What amounts related to the lease would Atlas report in its income statement for the year ended December 31, 2018? (Ignore taxes.)

Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years. -What is the total interest paid over the term of the lease?

On January 1, 2018, Robertson Construction leased several items of equipment under a two-year operating lease agreement from Jamison 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 equipment was acquired by Jamison Leasing at a cost of $360,000 and was expected to have a useful life of five years with no residual value. Both firms record amortization and depreciation semi-annually. -Required: Prepare the appropriate journal entries for the lessor (Jamison Leasing) from the beginning of the lease through the end of 2018. Round your answers to the nearest whole dollar amounts.

ABC Books is the lessor in a lease agreement. From the perspective of the lessor, the lease may be classified as:

Deal Leasing leased equipment to Hand Company on January 1, 2018. The lease payments were calculated to provide the lessor a 10% return. Ten annual lease payments of $60,000 are due at the beginning of each year beginning January 1, 2018. The present value of an annuity due of $1 at 10% for ten periods is 6.75902. -Required: Consider this to be a finance lease. Round your answers to the nearest whole dollar amounts. 1. Prepare the journal entries to record the lease by Hand (lessee) at January 1, 2018. 2. Prepare the journal entries to record the lease by Hand (lessee) at December 31, 2018, the end of the first reporting period.

In an operating lease, the amortization of the right-of-use asset in the third year is:

S Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. The immediate impact of recording a finance lease on these ratios is a(n) :

Finance leases are agreements that are formulated outwardly as leases, but are installment purchases in substance.

Hy Marx Co. recorded a right-of-use asset of $600,000 in a 10-year operating lease. Lease payments are made annually at January 1 of each year beginning January 1, 2018. The interest rate charged by the lessor was 10%. Required: Prepare the appropriate journal entries on January 1, 2018, and December 31, 2018. Round your answers to the nearest whole dollar amounts.

On January 1, 2018, Central Industries leased a high-performance conveyer to Dynamic Company for a four-year period ending December 31, 2018, at which time possession of the leased asset will revert back to Central. The equipment cost Central $1,912,000 and has an expected useful life of five years. Central expects the residual value at December 31, 2022, will be $600,000. Negotiations led to the lessee guaranteeing a $680,000 residual value. Equal payments under the finance/sales-type lease are $400,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Dynamic is aware that Central used a 5% interest rate when calculating lease payments. Required: 1. Prepare the appropriate journal entries for both Dynamic and Central on January 1, 2018, to record the lease. 2. Prepare all appropriate journal entries for both Dynamic and Central on December 31, 2018, related to the lease.

Damon is the lessee in connection with a finance lease. Damon will not record:

If the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term, then it must be considered to be an operating lease.

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.

Southern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2018. Other information: $\begin{array}{ll}\text { Lease term } & 3 \text { years } \\\text { Annual payments } & \$ 40,000 \text { on January } 1 \text { each year }\\\text { Life of asset } & 3 \text { years } \\\text { Implicit interest rate } & 8 \% \\\text { PV, annuity due, } 3 \text { periods, } 8 \% & 2.7833 \\\text { PV, ordinary annuity, } 3 \text { periods, } 8 \% & 2.5771\end{array}$ There is no expected residual value. Required: Prepare appropriate journal entries for Southern Edison for 2018 and 2019. Assume straight-line amortization and a December 31 year-end. Round your answers to the nearest whole dollar amounts.

Eastern Edison Company leased equipment from Low-Tech Leasing on January 1, 2018. Low-Tech recently purchased the equipment at a cost of $222,664. Other information: $\begin{array} { l l } \text { Lease term } & 3 \text { years } \\\text { Annual payments } & \$ 80,000 \text { on January } 1 \text { each year } \\\text { Life of asset } & 3 \text { years } \\\text { Fair value of asset } & \$ 222,664 \\\text { Implicit interest rate } & 8 \% \\\text { Incremental rate } & 8 \%\end{array}$ There is no expected residual value. Required: Prepare appropriate journal entries for Low-Tech Leasing for 2018. Assume a December 31 year-end. Round your answers to the nearest whole dollar amounts.

Southwestern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2018. Hi-Tech manufactured the equipment at a cost of $90,000. Other information: There is no expected residual value. Required: Prepare appropriate journal entries for Hi-Tech Leasing for 2018. Assume a December 31 year-end. Round your answers to the nearest whole dollar amounts.

In accounting for a finance lease/sales-type lease, explain how the lessee's and lessor's income statements are affected.