Billy Limited (lessee) and Bob Limited (lessor) enter into a finance lease agreement on 1 July 2022 with the following terms: ⚫ lease term is 4 years • estimated economic life of the leased asset is 6 years 4 × annual rental payments of $15,000 each payable in arrears ⚫ residual value at the end of the lease term is not guaranteed to be $20,000 ⚫ esitmated fair value of the leased asset at the end of the lease term to be $18,000 ⚫ interest rate implicit in the lease is 8%. Billy Ltd intends to return the asset to Bob Ltd at the end of lease term Required: What is the initial lease liability that Billy Ltd needs to recognise at the lease commencement date? $49 682 $64 383 $62 912 $51 152

Billy Limited (lessee) and Bob Limited (lessor) enter into a finance lease agreement on 1 July 2022 with the following terms: ⚫ lease term is 4 years • estimated economic life of the leased asset is 6 years 4 × annual rental payments of $15,000 each payable in arrears ⚫ residual value at the end of the lease term is not guaranteed to be $20,000 ⚫ esitmated fair value of the leased asset at the end of the lease term to be $18,000 ⚫ interest rate implicit in the lease is 8%. Billy Ltd intends to return the asset to Bob Ltd at the end of lease term Required: What is the initial lease liability that Billy Ltd needs to recognise at the lease commencement date? $49 682 $64 383 $62 912 $51 152

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.
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