An entity is a manufacturer of machinery. It uses lease agreements to sell its product. On January 1, 2019, the entity leased a machine to another entity under the following terms: • The lease term is 5 years. • The annual rental is P500,000 payable every January 1, 2019. • The machine has a cost to the entity of P1,600,000. • Implicit interest rate in the lease, known to the lessee, is 8%. The machine reverts back to the entity at the end of 5 years with an unguaranteed residual value of P400,000. The present value factors of 1 and annuity due at 8% for 5 periods are 0.68 and 4.21 respectively. What amount of sales revenue should be recognized by the entity?

An entity is a manufacturer of machinery. It uses lease agreements to sell its product. On January 1, 2019, the entity leased a machine to another entity under the following terms: • The lease term is 5 years. • The annual rental is P500,000 payable every January 1, 2019. • The machine has a cost to the entity of P1,600,000. • Implicit interest rate in the lease, known to the lessee, is 8%. The machine reverts back to the entity at the end of 5 years with an unguaranteed residual value of P400,000. The present value factors of 1 and annuity due at 8% for 5 periods are 0.68 and 4.21 respectively. What amount of sales revenue should be recognized by the entity?

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 9RE: Use the information in RE20-3. Prepare the journal entries that Richie Company (the lessor) would...

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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.
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.
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).
An entity is a manufacturer of machinery. It uses lease agreements to sell its product. On January 1, 2019, the entity leased a machine to another entity under the following terms: • The lease term is 5 years. • The annual rental is P500,000 payable every January 1, 2019. • The machine has a cost to the entity of P1,600,000. • Implicit interest rate in the lease, known to the lessee, is 8%. The machine reverts back to the entity at the end of 5 years with unguaranteed residual value of P400,000. The present value factors of 1 and annuity due at 8% for 5 periods are 0.68 and 4.21 respectively. What amount should be recognized as interest income for 2019? 194,160 154,160 172,400 128,000 What amount gross income should be recognized by the entity for 2019? 555,000 827,000 955,000 700,000
An entity is a manufacturer of machinery. It uses lease agreements to sell its product, On January 1, 2019, the entity leased a machine to another entity under the following terms: The lease term is 5 years, The annual rental is P500,000 payable every January 1, 2019. The machine has a cost to the entity of P1,600,000. Implicit interest rate in the lease, known to the lessee, is 8%. The machine reverts back to the entity at the end of 5 years with unguaranteed residual value of P400,000. The present value factors of 1 and annuity due at 8% for 5 periods are 0.68 and 4.21 respectively. What amount should be recognized as interest income for 2019?
An entity is a manufacturer of machinery, It uses lease agreements to sell its product, On January 1, 2019, the entity leased a machine to another entity under the following terms: The lease term is 5 years. The annual rental is P500,000 payable every January 1, 2019. The machine has a cost to the entity of P1,600,000. Implicit interest rate in the lease, known to the lessee, is 8%. The machine reverts back to the entity at the end of 5 years with unguaranteed residual value of P400,000. The present value factors of 1 and annuity due at 8% for 5 periods are 0.68 and 4.21 respectively, What amount gross income should be recognized by the entity for 2019?
11. What amount of gross income should be recognized by the entity for 2020? a. P555,000 b. P827,000 c. P955,000 d. P700,000 12. What amount should be recognized as interest income for 2020? a. P194,160 b. P154,160 c. P172,400 d. P128,000
An entity is a manufacturer of machinery, It uses lease agreements to sell its product, On January 1, 2019, the entity leased a machine to another entity under the following terms: The lease term is 5 years. The annual rental is P500,000 payable every January 1, 2019. The machine has a cost to the entity of P1,600,000. Implicit interest rate in the lease, known to the lessee, is 8%. The machine reverts back to the entity at the end of 5 years with unguaranteed residual value of P400,000. The present value factors of 1 and annuity due at 8% for 5 periods are 0.68 and 4.21 respectively, What amount of sales revenue should be recognized by the entity?
Happy Company uses lease as a means of selling its equipment. On July 1, 2021, the company leased a piece of equipment to Great Company. The cost of the equipment to Happy Company was P684,000. The fair market value (which was the sales price) was P792,200 at the time of the inception of the lease. Annual lease payments are P135,000 and are payable in advance for 8 years. The equipment has an expected economic life of 10 years. At the end of the lease term, the title to the equipment will pass to Great Company. Implicit interest rate is 10%. What is the manufacturer’s profit recognized by Happy Company in 2021?
Rich Company uses lease as a means of selling its equipment. On July 1,2019, the company leased an equipment to Poor Company. The cost of the equipment to Rich Company was P 684,000. The fair market value ( which was the sales price) was P 792,236.54 at the time of the inception of the lease. Annual lease payments are P 135,000 and are payable in advance for 8 years. The equipment has an expected economic life of 10 years. At the end of the lease term , title to the equipment will pass to Poor Company. Implicit interest rate is 10%. What is the rich Company's total financial revenue pertaining to the lease?
ABC Company uses lease as a means of selling its equipment. On July 1,2019, the company leased an equipment to DEF Company. The cost of the equipment to ABC Company was P 684,000. The fair market value ( which was the sales price) was P 792,236.54 at the time of the inception of the lease. Annual lease payments are P 135,000 and are payable in advance for 8 years. The equipment has an expected economic life of 10 years. At the end of the lease term , title to the equipment will pass to DEF Company. Implicit interest rate is 10%. required: (D)What is the manufacturer's profit recognized by ABC Company? (E)Assume that at the end of the lease term, the title to the equipment will not pass to the lessee. The lessee however, guarantees a residual value of P 50,000 at the end of the lease term. How much is the cost of goods sold recognized by ABC Company pertaining to the lease? (F)What is the ABC Company's total financial revenue pertaining to the lease?
Assume that on January 1, 2019, JK Restaurants sells a computer system to High Finance Company for P510, 000 and immediately leases the computer system back. The relevant information is as follows: The computer was carried at JK’s books at a value of P450, 000. The term of the noncancelable lease is 10 years. Title will transfer to JK. The lease agreement requires equal rental payments of P83, 000.11 at the end of each year. The incremental borrowing rate for Elmer is at 12%. Elmer is aware that High Finance Co., set the annual rental to ensure a rate of return of 10% The computer has a fair value of P680, 000 on January 1, 2019, and an estimated economic life of 10 years. Elmer pays executory costs of P9, 000 a year. Instructions: Prepare the journal entries for both the lessee and the lessor for 2019 to reflect the sale-leaseback agreement. No uncertainties exist, and collectability is reasonably certain.