Cost of equipment P1,200,000 Useful life of equipment 5 years Lease term 4 years Annual rent payable at the end of each year Interest rate implicit in the lease r400,000 10% Residual value P80,000
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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.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.Determining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a 10-year cancelable (at the option of either party) agreement to lease a storage building from Wake Company. The following information pertains to this lease agreement: 1. The agreement requires rental payments of 100,000 at the beginning of each year. 2. The cost and fair value of the building on January 1, 2019, is 2 million. The storage building has not been specialized for Caswell. 3. The building has an estimated economic life of 50 years, with no residual value. Caswell depreciates similar buildings according to the straight-line method. 4. The lease does not contain a renewable option clause. At the termination of the lease, the building reverts to the lessor. 5. Caswells incremental borrowing rate is 14% per year. Wake set the annual rental to ensure a 16% rate of return (the loss in service value anticipated for the term of the lease). Caswell knows the implicit interest rate. 6. Executory costs of 7,000 annually, related to taxes on the property, are paid by Caswell directly to the taxing authority on Dec. 31 of each year. Required: 1. Determine what type of lease this is for the lessee. 2. Prepare appropriate journal entries on the lessees books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2019 and 2020.
- Lessee Accounting with Payments Made at Beginning of Year Adden Company signs a lease agreement dated January 1, 2019, that provides for it to lease non-specialized heavy equipment from Scott Rental Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows: 1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of 20,000 to be paid in advance at the beginning of each year. 2. The cost, and also fair value, of the heavy equipment to Scott at the inception of the lease is 68,036.62. The equipment has an estimated life of 4 years and has a zero estimated residual value at the end of this time. 3. Adden agrees to pay all executory costs directly to a third party. 4. The lease contains no renewal or bargain purchase options. 5. Scotts interest rate implicit in the lease is 12%. Adden is aware of this rate, which is equal to its borrowing rate. 6. Adden uses the straight-line method to record depreciation on similar equipment. 7. Executory costs paid at the end of the year by Adden are: Required: 1. Next Level Determine what type of lease this is for Adden. 2. Prepare a table summarizing the lease payments and interest expense for Adden. 3. Prepare journal entries for Adden for the years 2019 and 2020.Determining Type of Lease and Subsequent Accounting On January 1, 2019, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions: The lease is noncancelable and has a term of 8 years. The annual rentals arc 35,000, payable at the beginning of each year. The interest rate implicit in the lease is 14%. Anderson agrees to pay all executory costs directly to a third party and is given an option to buy the equipment for 1 at the end of the lease term, December 31, 2026. The cost of the equipment to the lessee is 150,000, and the fair value is approximately 185,100. Ballieu incurs no material initial direct costs. It is probable that Ballieu will collect the lease payments. Ballieu estimates that the fair value is expected to be significantly greater than 1 at the end of the lease term. Ballieu calculates that the present value on January 1, 2019, of 8 annual payments in advance of 35,000 discounted at 14% is 185,090.68 (the 1 purchase option is ignored as immaterial). Required: 1. Next Level Identify the classification of the lease transaction from Ballices point of view. Give the reasons for your classification. 2. Prepare all the journal entries tor Ballieu for the years 2019 and 2020. 3. Discuss the disclosure requirements for the lease transaction in Ballices notes to the financial statements.Lessee Accounting Issues Sax Company signs a lease agreement dated January 1, 2019, that provides for it to lease computers from Appleton Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows: 1. The lease term is 5 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year. The computers are not specialized for Sax. 2. The computers have an estimated life of 5 years, a fair value of 300,000, and a zero estimated residual value. 3. Sax agrees to pay all executory costs directly to a third party. 4. The lease contains no renewal or bargain purchase options. 5. The annual payment is set by Appleton at 83,222.92 to earn a rate of return of 12% on its net investment. Sax is aware of this rate. Saxs incremental borrowing rate is 10%. 6. Sax uses the straight-line method to record depreciation on similar equipment. Required: 1. Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Sax. 2. Calculate the amount of the asset and liability of Sax at the inception of the lease (round to the nearest dollar). 3. Prepare a table summarizing the lease payments and interest expense. 4. Prepare journal entries for Sax for the years 2019 and 2020.
- n January 1, 20x1, POLTROON Co. leased a piece of equipment to COWARD, Inc. Information on the lease is as follows: Cost of equipment P1,200,000 5 years 4 years Useful life of equipment Lease term Annual rent payable at the end of each year Interest rate implicit in the lease P400,000 10% Residual value P80,000 The equipment will revert back to POLTROON at the end of the lease term. The lease is classified as sales type lease. a. How much is the gross investment in the lease on January 1, 20x1 assuming the residual value is guaranteed? b. How much are the sales and cost of sales if the residual value is unguaranteed?On January 1. 2022, XYZ Lessee leased equipment from Standey Inc. Lessor, signing an Operating Lease with the folowing terms - Both the cost and the fair value of the asset for Stanley Inc. Lessor is $360,000 • Lease specifies 4 annual payments of S60,273 beginning January 1. 2022. and on each January 1 thereater trough 202s. The 4year tarm ends on December 31. 2026 - The asset's expected residual value at the end of the lease term (4 years) is $175,000, unguaranteed by the Lessee The expected useful life of the equipment is 7 years, and there is no expected residual value at the end of its useful ife There is no purchase option, and the equipment reverts back to the Lessor at the end of the 4-year period The implicit rate on the lease is 6%, and XYZ Lessee is aware of that rate. Assume Straight Line Depreciation is used on the Right of Use Asset. Present Value factors are the folowing PV of $1 79209 66506 PV of Annuity Due 3.67301 5.91732 n=7 6% Ar December 31. 2022. end of the first…On 1 July 2023, Station Ltd leased machinery to Depot Ltd. The machinery was purchased by Station Ltd on 1 July 2023 for its fair value of $233,556. The lease agreement contained the following provisions: Lease term 3 years Economic life of machinery 5 years Annual rental payment, in arrears (commencing 30/6/2024) $75,000 Residual value at end of the lease term $45,000 Residual guaranteed by lessee $30,000 Interest rate implicit in lease 7% Depot Ltd incurred $1 200 in costs to negotiate the lease arrangement. Depot Ltd intends to return the machinery to the lessor at the end of the lease term. The reporting period ends 30 June. Required: Prepare a lease payment schedule for Depot Ltd. Prepare the journal entries for 1 July 2023 and 30 June 2024.
- On December 31, 2021, Take it Easy Co. Leased an equipment with a cost of P1,000,000 to DesperadoCo. for4years which is also the useful life of the asset. The lease agreement specificies equal annual paymentofP261,694 beginning on December 31, 2021. At the end of the lease term, the equipment will revert toTakeitEasy Co. A third party related to the lessee guarantees residual value of the equipment amountingtoP150,000.The rate implicit on the lease is 11%. 1. How much is the total interest income to be earned over the lease term?a. P46,775 c. P196,775b. P103,225 d. P1,172,9272. How much is the interst income in 2022?a. P24,597 c. P81,214b. P61,361 d. P110,000On 30 June 2020, Cambridge Ltd leased a vehicle to Awamutu Ltd. Cambridge Ltd had purchased thevehicle on that day for its fair value of $89,721. The lease agreement, which cost Cambridge Ltd $1,457 tohave drawn up, contained the following provisions:Lease Term 4 yearsAnnual payment, payable in advance on 30 June each year $23,900Economic life of vehicle 6 yearsEstimated residual value at end of economic life 52,000Estimated residual value at end of lease term $15,000Residual value guaranteed by lessee $15,000Interest rate implicit in the lease 7%The lease is cancellable, but cancellation will incur a monetary penalty equivalent to 2 years rentalpayments. Included in the annual payment is an amount of $1900 to cover reimbursement for the costsof insurance and maintenance paid by the lessor. The directors of Awamutu Ltd have indicated that theyare interested in acquiring the asset at the end of the lease.a) Prepare the following for the lessor, Cambridge Ltd:1. the lease receipts…Accounting On 30 June 2022, Sock Ltd leased equipment to Shoe Ltd. The equipment was in the records of Sock Ltd on 30 June 2022 at its fair value of $123,000. The lease agreement contained the following provisions: Lease term 3 years Economic life of equipment 4 years Annual rental payment, in arrears (first payment on 29/6/23) $45,000 Residual value at end of the lease term $10,000 Residual value guaranteed by lessee $4,000 Interest rate implicit in lease 8% Present value of $1 in 3 years at 8 % 0.7938 Present value of an annuity of $1 for 2 payments at 8% 1.7833 Present value of an annuity of $1 for 3 payments at 8% 2.5771 The equipment will be depreciated by Shoe Ltd on a straight-line basis. Shoe Ltd intends to return the equipment to Sock Ltd at the end of the lease term. The lease has been classified as a finance lease by Sock Ltd. Initial direct costs for setting up the lease were incurred by both parties: $855 for Shoe…