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Exam 15: Leases

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Question 81

Multiple Choice

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Gamma Leasing acquires equipment and leases it to customers under long-term sales-type leases. Gamma earns interest under these arrangements at a 6% annual rate. Gamma purchased a machine and then leased it for $300,000 under an arrangement that specified annual payments to be received for five years, beginning at the commencement of the lease. The lessee had the option to purchase the machine at the end of the lease term for $50,000 when it was expected to have a residual value of $80,000. Calculate the amount of the annual lease payments. (Round your answer to the nearest whole dollar amount.) The present value of $1: n = 5, i = 6% is 0.74726. The present value of an ordinary annuity of $1: n = 5, i = 6% is 4.21236. The present value of an annuity due of $1: n = 5, i = 6% is 4.46511.

A) $62,349
B) $58,820
C) $67,188
D) $78,385

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

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Question 82

Multiple Choice

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Barr Corp. is the lessee in a finance lease. Barr would record:

A) Depreciation expense.
B) A right-of-use asset.
C) Lease expense.
D) Interest revenue.

E) C) and D)
F) B) and C)

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Question 83

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Each of the independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit interest rate. For convenience, here are some table values: $\begin{array} { | c | c | c | } \hline \text { Periods; int. rate } & \begin{array} { c } \text { PV, ordinary } \\\text { annuity }\end{array} & \text { PV, annuity due } \\\hline 10 \text { periods, } 10 \% & 6.1446 & 6.7590 \\\hline 10 \text { periods, } 12 \% & 5.6502 & 6.3283 \\\hline 20 \text { periods, } 10 \% & 8.5136 & 9.3649 \\\hline 20 \text { periods, } 12 \% & 7.4694 & 8.3658 \\\hline\end{array}$ Required: For each situation determine the amount of the annual lease payment, as calculated by the lessor. Round your answers to the nearest whole dollar amounts.

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. Required: Prepare appropriate journal entries for Courage from the beginning of the lease through December 31, 2018.

In a ten-year finance lease agreement, the portion of the periodic lease payment that represents interest in the third year is:

Briefly describe the conceptual basis for asset and liability recognition under the right-of-use approach used by the lessee in a lease transaction.

The lessee normally measures the lease liability to be recorded as the:

By the lessor, a lessee-guaranteed residual value at the beginning of a finance lease should be:

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.

Minnetonka Company leases an asset. Information regarding the lease: • Fair value of the asset: $400,000. • Useful life of the asset: 6 years with no salvage value. • Lease term is 5 years. • Annual lease payments are $60,000 • Implicit interest rate: 11%. • Minnetonka can purchase the asset at the end of the lease period for $50,000. What type of lease is this?

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. -What is the total effective interest paid over the term of the lease?

If the leaseback portion of a sale-leaseback transaction meets the criteria to be a sales-type lease, the buyer-lessor will:

On December 31, 2018, Bedford Corp. sold a machine to Sheila Company and simultaneously leased it back for one year. Pertinent information at this date follows: In Bedford's December 31, 2018 income statement, the gain recognized from the sale of this machine should be:

When a finance lease is first recorded at the beginning of the lease, the lessee typically debits:

Pita Pub leased a specialty machine for a five-year non-cancelable term. At the end of the five-year term, Pita Pub has four consecutive one-year renewal options. A replacement machine can be acquired, but due to an expensive installation process and Pita Pub's lease term for its mall location, Pita Pub expects to lease the machine for seven years. What is the lease term?

Each of the two independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit interest rate. Required: For each situation determine the amount recorded as a liability by the lessee at the beginning of the lease. Round your answers to the nearest whole dollar amounts.

If the leaseback portion of a sale-leaseback transaction meets the criteria to be a finance lease:

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.

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. -What is the effective annual interest rate?

If the leaseback portion of a sale-leaseback transaction is classified as an operating lease: