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Exam 15: Leases

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Question 31

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Blue Co. recorded a right-of-use asset of $100,000 in a 10-year operating lease. Payments of $16,275 are made annually at the end of each year. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset after two years will be:

A) $80,000.
B) $86,823.
C) $100,000.
D) $121,000.

E) A) and B)
F) B) and D)

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Question 32

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On January 1, 2018, Duncan-Lang Services, Inc. a computer software training firm, leased several computers under a two-year operating lease agreement from Neble 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 computers were acquired by Neble at a cost of $360,000 and were expected to have a useful life of five years with no residual value. Appropriate adjusting entries are recorded at the end of each quarter. Required: Prepare the appropriate journal entries for both (a) the lessee and (b) the lessor from the beginning of the lease through the end of 2018. Round your answers to the nearest whole dollar amounts.

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(a) (Lessee)
January 1, 2018
Right-of-us...

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Question 33

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Nickle leased equipment to Back Company on July 1, 2018. Lease payments of $18,000 are due each year beginning July 1, 2018. The present value of the lease payments discounted at 10% was $120,000. The asset's useful life is 12 years. Required: 1. Prepare the journal entries to record the lease by Nickle (lessor) at July 1, 2018, and at December 31, 2018, the end of its fiscal year. Assume that Nickle acquired this equipment for $120,000 on July 1, 2018 for the purpose of this lease and that control of the equipment was transferred to the lessee at the beginning of the lease. 2. Prepare the journal entries to record the lease by Nickle (lessor) at July 1, 2018, and at December 31, 2018, the end of its fiscal year. Assume that Nickle acquired this equipment for $180,000 on July 1, 2018 for the purpose of this lease and that that control of the equipment was not transferred to the lessee.

I.D. Clair Co. recorded a right-of-use asset of $100,000 in a 10-year operating lease. Payments of $14,795 are made annually at January 1 of each year beginning January 1, 2018. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset at December 31, 2018, will be:

You and a colleague are reviewing a prospective lease transaction for your employer, Ma and Pa Kettle's (MPK). Having heard of the new lease accounting standard update, your CFO has assigned you the task of assessing the impact of the lease transactions on the company's financial statements. The terms are these: At the beginning of its fiscal year, MPK would lease restaurant space from Wilson Corporation under a 10-year lease agreement. The contract calls for annual lease payments of $25,000 each at the end of each year. The building was acquired last week by Wilson at a cost of $300,000 and is expected to have a useful life of 25 years with no residual value for calculating straight-line depreciation. Wilson seeks a 10% return on its lease investments. Required: What will be the effect of the lease on MPK's earnings for the first year, and on the balance sheet at the end of the year (ignore taxes)? Journal entries are not required but might be helpful in your assessment. Round your answers to the nearest whole dollar amounts.

The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease and (c) would not have been incurred had the lease agreement not occurred are referred to as initial direct costs. Initial direct costs are deferred and expensed over the lease term, generally on a straight-line basis in:

On January 1, 2018, McCaffrey Inc. leased office space under a three-year operating lease agreement. The arrangement specified three annual rent payments of $320,000 each, beginning December 31, 2018, and at each December 31 through 2020. The lessor, Lowell Leasing, routinely finances equipment for other firms at an annual interest rate of 5%. McCaffrey also paid a $400,000 advance payment at the beginning of the lease in addition to the first $320,000 rent payment. With permission of the owner, McCaffrey made structural modifications to the building before occupying the space at a cost of $720,000. The useful life of the building and the structural modifications were estimated to be 30 years with no residual value. Required: Prepare the appropriate journal entries for McCaffrey Inc. from the beginning of the lease through the end of 2018. McCaffrey's fiscal year is the calendar year. Round your answers to the nearest whole dollar amounts.

Cady Salons leased equipment from Smith Co. on January 1, 2018, in an operating lease. The present value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000 are due at each January 1 beginning January 1, 2018. The amortization of the right-of-use asset for the reporting year ending December 31, 2018, would be:

On January 1, 2018, Packard Corporation leased equipment to Hewlitt Company. The lease term is eight years. The first payment of $450,000 was made on January 1, 2018. Remaining payments are made on December 31 each year, beginning with December 31, 2018. The equipment cost Packard Corporation $2,400,000. The present value of the lease payments is $2,640,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, what will be the balance reported as a liability by Hewlitt in the December 31, 2019, balance sheet?

On January 1, Ramirez Supply leased a car for a four-year period, at which time possession of the car will revert back to the lessor. Annual lease payments are $20,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate. Negotiations led to Ramirez guaranteeing the lessor a $72,000 residual value at the end of the lease term although Ramirez estimates that the residual value after four years will be $70,000. What is the amount to be added to the right-of-use asset and lease payable under the residual value guarantee? (Round your answer to the nearest whole dollar amount.) The present value of $1: n = 4, i = 5% is 0.82270. The present value of an ordinary annuity of $1: n = 4, i = 5% is 3.54595. The present value of an annuity due of $1: n = 4, i = 5% is 3.72325.

Abhijit Co. leased equipment from Barua Corp. on July 1, 2018, for an 8-year period expiring June 30, 2026. Equal annual payments on July 1 of each year are $120,000. The first payment was made on July 1, 2018. The rate of interest contemplated by Abhijit and Barua is 10%. The cash selling price of the equipment is $704,000, and the cost of the equipment on Barua's accounting records is $560,000. The lease is appropriately recorded as a sales-type lease. What is the amount of selling profit on the sale and interest revenue that Barua will record for the year ended December 31, 2018?

A lessee will reassess variable lease payments that depend on an index or a rate:

Mann Co. is the lessee in a six-year lease that the lessor classifies as a sales-type lease. The lease payments begin December 31, 2018. The agreement specifies that Woo Corp. make equal annual lease payments on December 31 of each year. In its 2019 income statement:

If the residual value of a leased asset turns out to be more than the amount guaranteed by the lessee, the:

Compare the way a purchase option that is reasonably certain to be exercised and a lessee-guaranteed residual value are treated by the lessee and lessor when determining lease payments.

On January 1, 2018, Gravel Inc. leased construction equipment from Rocky Mountain Leasing. Rocky Mountain Leasing purchased the equipment from Bishop Inc. at a cost of $1,916,316. Gravel's borrowing rate for similar transactions is 10%. The lease agreement specified four annual payments of $400,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2020. The useful life of the equipment is estimated to be six years. The present value of those four payments at a discount rate of 10% is $1,394,740. On January 1, 2020 (after two years and three payments), Gravel and Rocky Mountain agreed to extend the lease term by two years. The market rate of interest at that time was 9%. Required: Round your answers to the nearest whole dollar amounts. 1. Prepare the appropriate journal entries for Gravel Inc. on January 1, 2020, to adjust its lease liability for the lease modification. 2. Prepare all appropriate journal entries for Rocky Mountain Leasing on January 1, 2020, to record the lease modification. 3. Prepare all appropriate journal entries for Gravel Inc. on December 31, 2020, related to the lease. 4. Prepare all appropriate journal entries for Rocky Mountain Leasing on December 31, 2020, related to the lease.

Kate Co. leased a warehouse from Big Dave Industries on July 1, 2018, in a finance lease. The present value of the lease payments discounted at 10% was $160,000. Ten annual lease payments of $24,000 are due each July 1, beginning July 1, 2018. Big Dave had constructed the equipment recently for $132,000 and its retail fair value was $160,000. Required: Assuming that control of the warehouse is transferred to KateCo at the beginning of the lease. Prepare the two journal entries to record the lease by Big Dave at July 1, 2018.

Trussel Creations leased kitchen equipment under a five-year lease with an option to renew for three years at the end of five years and an option to renew for an additional three years at the end of eight years. The first three-year renewal option can be exercised for one-half the original and usual rate. What is the length of the lease term that Trussel Creations should assume in recording the transactions related to the lease?

On January 1, 2018, Antonio's Pizzeria leased retail space from Berenstein Properties. The 8-year finance lease requires monthly variable lease payments equal to 3% of Antonio's Pizzeria's sales revenue, with a monthly sales minimum of $1,200,000. Payments at the beginning of each month are based on previous month sales. During the previous 5-year period, Antonio's Pizzeria has generated monthly sales of over $650,000. Berenstein's interest rate, known by Antonio's Pizzeria, was 5%. Required: Round your answers to the nearest whole dollar amounts. 1. Prepare the journal entries for Antonio's Pizzeria at the beginning of the lease. 2. Prepare the journal entries for Antonio's Pizzeria at February 1, 2018. January sales were $1,980,000. Amortization is recorded monthly.

Ivan Oder Co. recorded a right-of-use asset of $300,000 in a 10-year operating lease. Lease payments of $44,385 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.