Construction Accounting And Financial Management (4th Edition)
4th Edition
ISBN: 9780135232873
Author: Steven J. Peterson MBA PE
Publisher: PEARSON
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Chapter 3, Problem 15P
Using the chart of accounts in Figure 2-1, determine the changes to the
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You have been assigned the task of analyzing whether to purchase or lease some transportation equipment for your company. The analysis period is six years, and the base year is year zero (b = 0). Other pertinent information is given in the shown Table also. Solve,, a. The contract terms for the lease specify a cost of $300,000 in the first year and $200,000 annually in years two through six (the contract, i.e., these rates, does not cover the annual expense items). b. The after-tax MARR (not including inflation) is 13.208 % per year (ir). c. The general inflation rate (f ) is 6%. d. The effective income tax rate (t) is 34%. e. Assume the equipment is in the MACRS (GDS)five-year property class. Which alternative is preferred? (Use an after-tax, actual dollar analysis and the FW criterion.)
Zhang Company leased equipment from Mann Industries. The lease agreement qualifies as a finance lease and requires annual lease
payments of $49,677 over a five-year lease term (also the asset's useful life), with the first payment on January 1, the beginning of the
lease. The interest rate is 4%. The asset being leased cost Mann $180,000 to produce.
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. Determine the price at which the lessor is "selling" the asset (present value of the lease payments).
2. What would be the amounts related to the lease that the lessor would report in its income statement for the year ended
December 31 (ignore taxes)?.
Complete this question by entering your answers in the tabs below.
Required 1 Required 2
Determine the price at which the lessor is "selling" the asset (present value of the lease payments).
Note: Round your intermediate and final answers to the nearest whole…
Telor, a private company that follows ASPE, entered into a lease agreement with Global Leasing Corporation to lease a warehouse for six years. Annual lease payments are $21,000, payable at the beginning of each lease year. Telor signed the lease agreement on January 1, 2021, and made the first payment on that date.
At the end of the lease, the machine will revert back to Global Leasing Corporation. The normal useful life of the warehouse is 10 years. At the time of the lease, the warehouse could be purchased for $108,000. Telor does not know the implicit rate of the lease; Telor's incremental borrowing rate is 10%. Telor uses straight-line depreciation for this type of asset.
Required:
Using the three criteria under ASPE, prove whether this is an operating or capital lease.
Prepare a lease amortization schedule for the lease. Round all amounts to the nearest dollar.
Prepare the journal entries for 2021 and 2022 for Telor. Round amounts to the nearest dollar.
Chapter 3 Solutions
Construction Accounting And Financial Management (4th Edition)
Ch. 3 - How do the relationships between the balance...Ch. 3 - Which of the transactions from this chapter result...Ch. 3 - Prob. 3DQCh. 3 - Which of the transactions from this chapter result...Ch. 3 - Prob. 5DQCh. 3 - Prob. 6DQCh. 3 - The following invoices are being entered into the...Ch. 3 - Prob. 9PCh. 3 - Using the chart of accounts in Figure 2-1,...Ch. 3 - Using the chart of accounts in Figure 2-1,...
Ch. 3 - Using the chart of accounts in Figure 2-1,...Ch. 3 - Using the chart of accounts in Figure 2-1,...Ch. 3 - Using the chart of accounts in Figure 2-1,...Ch. 3 - Using the chart of accounts in Figure 2-1,...Ch. 3 - Using the chart of accounts in Figure 2-1,...Ch. 3 - Using the chart of accounts in Figure 2-1,...Ch. 3 - Using the chart of accounts in Figure 2-1,...Ch. 3 - Using the chart of accounts in Figure 2-1,...
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- Zhang Company leased equipment from Mann Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $52,538 over a six-year lease term (also the asset's useful life), with the first payment on January 1, the beginning of the lease. The interest rate is 5%. The asset being leased cost Mann $230,000 to produce. Note: Use tables, Excel, or a financial calculator. (FV of $1. PV of $1. FVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) Required: 1. Determine the price at which the lessor is "selling" the asset (present-value of the lease payments). 2. What would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31 (ignore taxes)? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Determine the price at which the lessor is "selling" the asset (present value of the lease payments). Note: Round your intermediate and final answers to the nearest whole…arrow_forwardA new long-term lease is entered into for extra storage space for the new product line of ink cartridges. The net present value of the future lease payments is $120,400. The lease is for two years at $5,000 per month beginning March 1. Book the journal entry for paid rent expense for the first half of the year in cash.arrow_forwardGordon Inc., a private company that follows ASPE, entered into a lease agreement with Canada Leasing Corporation to lease a warehouse for six years. Annual lease payments are $21,000, payable at the beginning of each lease year. Gordon Inc. signed the lease agreement on January 1, 2021, and made the first payment on that date. At the end of the lease, the machine will revert back to Canada Leasing Corporation. The normal useful life of the warehouse is 10 years. At the time of the lease, the warehouse could be purchased for $108,000. Gordon does not know the implicit rate of the lease; Gordon's incremental borrowing rate is 10%. Gordon uses straight-line depreciation for this type of asset. Required: Using the three criteria under ASPE, prove whether this is an operating or capital lease. Prepare a lease amortization schedule for the lease. Round all amounts to the nearest dollar. Prepare the journal entries for 2021 and 2022 for Gordon Inc. Round amounts to the nearest…arrow_forward
- The following separate scenarios relate to a 5-year lease, pertaining to equipment with a fair value of $25,000. Assume in all scenarios that payments are made at the beginning of the period. 1. Lease payments include a fixed payment of $5,000 per year. 2. Lease payments include a fixed payment of $5,000 per year, plus $250 for insurance and $300 for a maintenance contract. 3. Lease payments will be $5,000 in the first year and will increase by 3% (calculated on the previous year's payment) for each of the following 4 years. 4. Lease payments will be $5,000 in the first year and will increase each of the following years by the increase in the CPI from the preceding year. The current CPI is 120 and is expected to increase to 122 at the end of the next year. 5. Lease payments will be $5,000 in the first year and will increase each of the following years by (a) the increase in the CPI from the preceding year, or (b) 3%, whichever is greater. The current CPI is 120 and is expected to…arrow_forwardA building owner is evaluating the following alternatives for leasing space in an office building for the next five years:Net lease with steps. Rent will be $15 per square foot the first year and will increase by $1.50 per square foot each year until the end of the lease. All operating expenses will be paid by the tenant. Net lease with CPI adjustments. The rent will be $16 per square foot in the first year. After the first year, the rent will be increased by the amount of any increase in the CPI. The CPI is expected to increase by 3 percent per year. Gross lease. Rent will be $30 per square foot each year with the lessor responsible for payment of all operating expenses. Expenses are estimated to be $9 during the first year and increase by $1 per year thereafter.Gross lease with expense stop and CPI adjustment. Rent will be $22 the first year and increase by the full amount of any change in the CPI after the first year with an expense stop at $9 per square foot. The CPI and operating…arrow_forwardCompany A leases equipment from Company B in a finance lease. Lease payments of $3,226 are due quarterly over a 10 year period, with the first payment due July 1, the beginning of the lease. The annual interest rate is 8%. What is the outstanding balance in the Lease Payable account after the second payment? What is the outstanding balance in the Right-of-Use asset account after the second payment?arrow_forward
- Use the following information about a net lease to answer this question. Measurement Base rent Operating expenses Taxes Cost of tenant improvements 7,500 rentable square feet $12 per square foot annually $22,500 per year $15,000 per year $20,000 Parking Cost of old lease buyout Moving costs Tenant-improvement allowance $2,000 per month (fixed over the life of the lease) $20,000 $10,000 $2 per square footarrow_forwardDo the journal entries for the following transactions A lessee enters into a three-year lease and agrees to make the following annual payments at the end of each year: $10,000 in year 1, $15,000 in year 2, and $20,000 in year 3. The initial measurement of the right-of-use (ROU) asset and liability to make lease payments is $38,000 at a discount rate of 8%. At the end of the year, the lessee paid the first installement and recorded the amortisation expense and the interest expense. Amortization expense: $12,667 ($38,000/3) Interest expense: $3,038 ($38,000*.08). Lease liability: ? (You must calculate.)arrow_forwardA 1,000-square-foot office space is leased at $15.00 per square foot during the first year with $2.00 step-up provisions each of the following years. The lease is gross with an expense stop set at $6.65 per square foot, and yearly expenses per square foot are as follows: $6.00, $6.65, and $7.05. The lease provides for two months of free rent at the end of the lease term. If the lease term is three years and the discount rate is 10 percent, what is the effective rent per square foot?arrow_forward
- Tomeguin manufactured 10 excavators and leased them in the current year to its main customer for 5 years, which is the useful life of the excavators. The contract establishes 5 payments of 20,000 and the cost of each of the machines was $50,000. How should Tomeguin classify the lease? A) Operational B) Sale Type C) Financial D) Capitalizedarrow_forwardFieger Company leases equipment for 8 years with an annual rental of $2,000 per year or $16,000 in total. General Leasing (the lessor) agrees to provide Fieger with $300 for the first 2 years of the lease to defray needed repairs to the equipment. Determine the lease payments that Fieger will pay for the first 3 years of the lease agreementarrow_forwardA transport Company leased 4 buses for a period of 5 years from a leasing company. The fair value of each bus is OMR 15,000 at the beginning of the lease period. The Trucks have a life time of 5 years and no residual value. As per the lease agreement, the title of the buses are to be transferred to the transport company by the end of the lease period. The annual lease payment is OMR 15,000 payable at the beginning of each year. An interest rate of 10% and straight line method of depreciation is applicable. a. Determine the type of lease b. Determine the PV of minimum lease payments? c. Prepare amortization table. d. Record journal entries in the books of transport companyarrow_forward
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