A agrees to lease a robotic welding unit from Company B on January 1, Year 1. The following conditions apply to the lease: Company • The term of the lease is five years, non-cancellable, and requires payments of $101,350 at the beginning of each year. • The robotic welding unit will have a fair value of $50,000 at the end of the lease; an estimated useful life of five years; and $45,000 guaranteed residual value. There are no renewal options, so the unit will revert to Company B at the termination of the lease. • Company A can borrow at a 5% interest rate. • Company A uses straight-line depreciation on its assets. • Company B set its annual rate of return at 4%, and Company A is aware of this rate. • Present values are as follows: • Present value of lease payments at 4%: $469,240.37 • Present value of lease payments at 5%: $460,737.10 • Present value of residual value at 4%: $38,457.00 • Present value of residual value at 5% : $37,021.50 How much should Company B record as a lease receivable on January 1, Year 1? O $506,261.87 O $507,697.37 O $506,750.00 O $497,758.60

A agrees to lease a robotic welding unit from Company B on January 1, Year 1. The following conditions apply to the lease: Company • The term of the lease is five years, non-cancellable, and requires payments of $101,350 at the beginning of each year. • The robotic welding unit will have a fair value of $50,000 at the end of the lease; an estimated useful life of five years; and $45,000 guaranteed residual value. There are no renewal options, so the unit will revert to Company B at the termination of the lease. • Company A can borrow at a 5% interest rate. • Company A uses straight-line depreciation on its assets. • Company B set its annual rate of return at 4%, and Company A is aware of this rate. • Present values are as follows: • Present value of lease payments at 4%: $469,240.37 • Present value of lease payments at 5%: $460,737.10 • Present value of residual value at 4%: $38,457.00 • Present value of residual value at 5% : $37,021.50 How much should Company B record as a lease receivable on January 1, Year 1? O $506,261.87 O $507,697.37 O $506,750.00 O $497,758.60

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 12P: Comprehensive Landlord Company and Tenant Company enter into a noncancelable, direct financing lease...

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Use the information in RE20-3. Prepare the journal entries that Richie Company (the lessor) would make in the first year of the lease assuming the lease is classified as a sales-type lease. Assume that the lessee is required to make payments on December 31 each year. Also assume that Richie had purchased the equipment at a cost of 200,000.
Comprehensive Landlord Company and Tenant Company enter into a noncancelable, direct financing lease on January 1, 2019, for nonspecialized equipment that cost the Landlord 280,000 (useful life is 6 years with no residual value). The fair value of the equipment is 300,000. The interest rate implicit in the lease is 14%. The 6-year lease requires 6 equal annual amounts payable each January 1, beginning with January 1, 2019. Tenant pays all executory costs directly to a third party on December 1 of each year. The equipment reverts to the lessor at the termination of the lease. Assume that there are no initial direct costs. Landlord expects to collect all rental payments. Required: 1. Next Level (a) Show how landlord should compute the annual rental amounts, (b) Discuss how the Tenant Company should compute the present value of the lease payments. What additional information would be required to make this computation? 2. Next Level Prepare a table summarizing the lease and interest receipts that would be suitable for Landlord. Under what conditions would this table be suitable for Tenant? 3. Assuming that the table prepared in Requirement 2 is suitable for both the lessee and the lessor, prepare the journal entries for both firms for the years 2019 and 2020. Use the straight-line depreciation method for the leased equipment. The executory costs paid by the lessee are in 2019: insurance, 700 and property taxes, 800; in 2020: insurance, 600 and property taxes, 750. 4. Next Level Show the items and amounts that would be reported on the comparative 2019 and 2020 income statements and ending balance sheets for both the lessor and the lessee, using the change in present value approach.
Owens Company leased equipment for 4 years at 50,000 a year with an option to renew the lease for 6 years at 2,000 per month or to purchase the equipment for 25,000 (a price considerably less than the expected fair value) after the initial lease term of 4 years. Why would this lease qualify as a finance lease?
Use the information in RE20-3. Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. However, assume that Garvey is now required to make the 65,949.37 payments on January 1 each year and that the fair value at the lease inception is now 275,000 (65,949:37 4:169865).
Sales-Type Lease with Unguaranteed Residual Value Lessor Company and Lessee Company enter into a 5-year, noncancelable, sales-type lease on January 1, 2019, for equipment that cost Lessor 375,000 (useful life is 5 years). The fair value of the equipment is 400,000. Lessor expects a 12% return on the cost of the asset over the 5-year period of the lease. The equipment will have an estimated unguaranteed residual value of 20,000 at the end of the fifth year of the lease. The lease provisions require 5 equal annual amounts, payable each January 1, beginning with January 1, 2019. Lessee pays all executory costs directly to a third party. The equipment reverts to the lessor at the termination of the lease. Assume there are no initial direct costs, and the lessor expects to be able to collect all lease payments. Required: 1. Show how Lessor should compute the annual rental amounts. 2. Prepare a table summarizing the lease and interest receipts that would be suitable for Lessor. 3. Prepare a table showing the accretion of the unguaranteed residual asset. 4. Prepare the journal entries for Lessor for the years 2019, 2020, and 2021.
Company A has agreed to lease two snow plows from Company B. The lease has the following information: • The lease is for three years, requiring annual payments at the beginning of the year of $24,978 (annuity-due basis) • The snow plows have a fair value at the beginning of the lease of $80,000; an estimated economic life of five years; and a guaranteed residual value of $8,900 • Present value of the slow plows is $72,088 • There are no renewal options. At the end of the lease, the snow plows will be returned to Company A Which test does the lease pass in order to be classified as a finance lease? Transfer of ownership O Present value Purchase option Lease term
Federated Fabrications leased a tooling machine on January 1, 2024, for a three-year period ending December 31, 2026. • The lease agreement specified annual payments of $44,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2025. • The company had the option to purchase the machine on December 30, 2026, for $53,000 when its fair value was expected to be $68,000, a sufficient difference that exercise seems reasonably certain. • The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor's implicit rate of return was 9%. Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Calculate the amount Federated should record as a right-of-use asset and lease liability for this finance lease. 2. Prepare an amortization schedule that describes the pattern of interest expense for Federated over the lease term. 3. Prepare the…
Cheyenne Corporation leased equipment to Sage Hill, Inc. on January 1, 2025. The lease agreement called for annual rental payments of $1,103 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $7,500, a book value of $5,530, and Cheyenne expects a residual value of $5,030 at the end of the lease term. Cheyenne set the lease payments with the intent of earning a 5% return, though Sage Hill is unaware of the rate implicit in the lease and has an incremental borrowing rate of 7%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature. Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) (a) What is the amount of the rental payments used in the lease agreement? (Round answer to 0 decimal places, e.g. 5,275.) Rental payments
Federated Fabrications leased a tooling machine on January 1, 2024, for a three-year period ending December 31, 2026. The lease agreement specified annual payments of $31,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2025. The company had the option to purchase the machine on December 30, 2026, for $40,000 when its fair value was expected to be $55,000, a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor's implicit rate of return was 11%. Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Calculate the amount Federated should record as a right-of-use asset and lease liability for this finance lease. 2. Prepare an amortization schedule that describes the pattern of interest expense for Federated over the lease term. 3. Prepare the…
Federated Fabrications leased a tooling machine on January 1, 2024, for a three-year period ending December 31, 2026. The lease agreement specified annual payments of $34,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2025. The company had the option to purchase the machine on December 30, 2026, for $43,000 when its fair value was expected to be $58,000, a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor's implicit rate of return was 12 %. Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Calculate the amount Federated should record as a right-of-use asset and lease liability for this finance lease. 2. Prepare an amortization schedule that describes the pattern of interest expense for Federated over the lease term. 3. Complete this…
Federated Fabrications leased a tooling machine on January 1, 2024, for a three-year period ending December 31, 2026. . The lease agreement specified annual payments of $34,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2025. . The company had the option to purchase the machine on December 30, 2026, for $43,000 when its fair value was expected to be $58,000, a sufficient difference that exercise seems reasonably certain. . The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor's implicit rate of return was 12%. Note: Use tables, Excel, or a financial calculator. (EV of $1. PV of $1. FVA of $1. PVA of $1. FVAD of $1 and PVAD of $1) Required: 1. Calculate the amount Federated should record as a right-of-use asset and lease llability for this finance lease. 2. Prepare an amortization schedule that describes the pattern of interest expense for Federated over the lease term. 3. Prepare…
Federated Fabrications leased a tooling machine on January 1, 2024, for a three-year period ending December 31, 2026. The lease agreement specified annual payments of $38,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2025. The company had the option to purchase the machine on December 30, 2026, for $47,000 when its fair value was expected to be $62,000, a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor’s implicit rate of return was 20%. Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: Calculate the amount Federated should record as a right-of-use asset and lease liability for this finance lease. Prepare an amortization schedule that describes the pattern of interest expense for Federated over the lease term. Prepare the…