Joyce purchased the building in which their corporate office is housed on 1/1/21 for $4,700,000. They put down $1,500,000 cash and had to borrow the remaining amount at 6% over a 20-year term. At the time of the purchase, they had the option to lease the building. The 20-year lease would begin on 1/1/21, and called for an immediate payment of $100,000 and then payments of $450,000 beginning on 12/31/21 for the first 10 years and payments of $300,000 beginning on 12/31/31 for the remaining 10 years of the lease. La Fleur had the option to purchase the building for $1 at the end of the lease. Did the CFO make the right decision by purchasing the building? Why or why not? Show your work.

Joyce purchased the building in which their corporate office is housed on 1/1/21 for $4,700,000. They put down $1,500,000 cash and had to borrow the remaining amount at 6% over a 20-year term. At the time of the purchase, they had the option to lease the building. The 20-year lease would begin on 1/1/21, and called for an immediate payment of $100,000 and then payments of $450,000 beginning on 12/31/21 for the first 10 years and payments of $300,000 beginning on 12/31/31 for the remaining 10 years of the lease. La Fleur had the option to purchase the building for $1 at the end of the lease. Did the CFO make the right decision by purchasing the building? Why or why not? Show your work.

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter4: Income Exclusions

Section: Chapter Questions

Problem 76IIP

See similar textbooks

Similar questions

Angelo Company decided to enter the leasing business. The entity acquired a specialized packaging machine for P2,300,000. On January 1, 2020, Angelo Company leased the machine for a period of six years, after which title to the machine is transferred to the lessee. The six annual payment are due each January 1 and the first payment was made on January 1, 2020. The residual value of the machine is P200,000. The lease terms are arranged so that a return of 12% is earned by Angelo Company. What is the annual lease payment payable in advance required to yield the desired return?
Pam D. Corp. decided to enter the leasing business. Dumbrique acquired a specialized packaging machine for P2,300,000. On January 1, 2020, the entity leased the machine for a period of six years, after which title to the machine is transferred to the lessee. The six annual lease payments are due each January 1 and the first payment was made on January 1, 2020. The residual value of the machine is P200,000. The lease term are arranged so that a return of 12% is earned by the lessor. The PV of 1 at 12% for six periods is 0.51, the PV of an annuity in advance of 1 at 12% for six periods is 4.60 and the PV of an ordinary annuity of 1 at 12% for six periods is 4.11 39. What is the annual lease payment payable in advance required to yield the desired return?40. What is the total financial revenue?
ABC Company decided to enter the leasing business. The entity acquired a specialized packaging machine for P 2,300,000. On January 1,2020, the entity leased the machine for a period of six years, after which title to the machine is transferred to the lessee. The six annual lease payments are due each January 1 and the first payment was made on January 1,2020. The residual value of the machine is P 200,000. The lease terms are arranged so that a return of 12% is earned by the lessor. The present value of 1 at 12% for six periods is 0.51, the present value of an annuity in advance of 1 at 12% for six periods is 4.60 and the PV of an ordinary annuity of 1 at 12% for six periods is 4.11. What is the annual lease payment payable in advance required to yield the desired return?
ABC Company decided to enter the leasing business. The entity acquired a specialized packaging machine for P 2,300,000. On January 1,2020, the entity leased the machine for a period of six years, after which title to the machine is transferred to the lessee. The six annual lease payments are due each January 1 and the first payment was made on January 1,2020. The residual value of the machine is P 200,000. The lease terms are arranged so that a return of 12% is earned by the lessor. The present value of 1 at 12% for six periods is 0.51, the present value of an annuity in advance of 1 at 12% for six periods is 4.60 and the PV of an ordinary annuity of 1 at 12% for six periods is 4.11. What is the annual lease payment payable in advance required to yield the desired return? A.P 500,000 B.P 477,826 C.P 559,610 D.P 460,000
ABC Company decided to enter the leasing business. The entity acquired a specialized packaging machine for P 2,300,000. On January 1,2020, the entity leased the machine for a period of six years, after which title to the machine is transferred to the lessee. The six annual lease payments are due each January 1 and the first payment was made on January 1,2020. The residual value of the machine is P 200,000. The lease terms are arranged so that a return of 12% is earned by the lessor. The present value of 1 at 12% for six periods is 0.51, the present value of an annuity in advance of 1 at 12% for six periods is 4.60 and the PV of an ordinary annuity of 1 at 12% for six periods is 4.11. What is the annual lease payment payable in advance required to yield the desired return? P 500,000 P 477,826 P 559,610 P 460,000
On January 1, 2020, Morris Company sells land to Lopez Corporation for $10,000,000, and immediately leases the land back. The following information relates to this transaction: 1. The term of the noncancelable lease is 20 years and the title transfers to Morris Company at the end of the lease term. 2. The land has a cost basis of $8,400,000 to Morris. 3. The lease agreement calls for equal rental payments of $943,074 at the beginning of each year. 4. The land has a fair value of $10,000,000 on January 1, 2020. The incremental borrowing rate of Morris Company is 10%. Morris is aware that Lopez Corporation set the annual rentals to ensure a rate of return of 8%. 5. 6. Morris Company pays all executory costs which total $255,000 in 2020. 7. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Instructions Prepare the journal entries for the entire year 2020 on the books of Morris Company…
Jackie Company leased a parcel of land to Junnie Company for a lease term of 25 years starting January 1, 2018. Junnie immediately started to construct a building on the leased land which was finished and made available for use starting July 1, 2020. The ownership of the building will be transferred to Jackie Company after the end of the lease term. The monthly rentals on the land is P25,000. The total cost of the building is P2,700,000 and had a useful life of 40 years. 19.Assuming the use of the spread-out method, how much is the total taxable income of Jackie from the lease to be reported in 2020? 20.Assuming the use of the outright method, how much is the total taxable income of Jackie from the lease to be reported in 2020?
To raise operating funds, C Incorporated sold its office building to an insurance company on January 1, 2021, for $1,800,000 and immediately leased the building back. The operating lease is for the final 12 years of the building's estimated 20-year remaining useful life. The building has a fair value of $1,800,000 and a book value of $1,100,000 (its original cost was $3 million). The rental payments of $220,000 are payable to the insurance company each December 31. The lease has an implicit rate of 10%. Required: Round your answers to the nearest whole dollar amounts. Prepare the appropriate journal entries for C Incorporated on: 1. January 1, 2021, to record the sale-leaseback. 2. December 31, 2021, to record necessary adjustments.
At the beginning of current year, JadeCompany purchased a new machine forP4,800,000 and leased it to East the same day.The machine has an estimated 12-year life andwill be depreciated P400,000 per year. The leaseis for a three-year period at an annual rental ofP850,000.Additionally, East paid P300,000 to Jade as alease bonus to obtain the three-year lease. Jadeincurred insurance expense of P80,000 for theleased machine during the current year.What is the operating profit of the lessor on theleased asset for the current year?
Oliver entered into a 40-year lease contract with Berna. Per agreement, Oliver will construct a building on Berna’s lot and operate the same for 40 years. Ownership of the building will transfer to Berna upon the termination of the lease. The lease will not commence until the building is completed. Oliver completed the building at a total cost of P40,000,000 on January 1, 2022. The building is expected to be used over 50 years In the immediately preceding problem, assume that the building was completed on July 1, 2022, what is the income using the outright method? P40,000,000 P32,000,000 P8,000,000 P4,000,000 ADD EXPLANATION THANKS
Acco, Inc. leased a building from Beta Corp for a term of fifteen years. By the end of the third year in the term of the lease, Acco had completed construction of an addition to the building with its own funds, which it used as additional needed office space. The addition cost Acco $250,000. At the end of the lease, Acco is $150,000 in arrears with its lease payments. Considering Acco has improved the value of the leased property by $500,000, Beta agrees to forgo the unpaid rent. Discuss the tax consequences of these facts to Acco (computation of depreciation amounts not required).
Karen-Ann Fashions, Inc. entered into a 5-year lease with Phelps Rentals to occupy an office building. The terms of the lease are presented below. The economic life of the building is 30 years. The building had a fair value of $8,000,000 and Karen-Ann has an option to purchase the building at the end of the lease term for $4,600,000, which is expected to be considerably below fair value at lease termination. The annual lease payments are $840000 and are due on January 1 with the first one due at lease commencement on January 1, 2022. The implicit rate in the lease is 5% and is known by Karen-Ann. There is no guaranteed residual value specified. The lessor did not offer any incentives to sign the lease. Karen-Ann did not incur any initial indirect costs. The lease commencement date is January 1. All payments are due on January 1. The present value (PV) of the payments due under the lease is: