Larkspur Company is negotiating to lease a piece of equipment to Crane, Inc. Crane requests that the leasebe for 9 years. The equipment has a useful life of 10 years. Larkspur wants a guarantee that the residualvalue of the equipment at the end of the lease is at least $4,000. Crane agrees to guarantee a residualvalue of this amount though it expects the residual value of the equipment to be only $2,000 at the end ofthe lease term.If the fair value of the equipment at lease commencement is $75,000, what would be the amount of theannual rental payments Larkspur demands of Crane, assuming each payment will be made at the beginningof each year and Larkspur wishes to earn a rate of return on the lease of 9%? (For calculation purposes, use 5decimal places as displayed in the factor table provided and round final answer to O decimal places, e.g. 5,275.)Click here to view factor tables.Amount of equal annual lease paymentsSA

• Explanation:1. Determine the present value of the residual value guarantee:• 𝑃𝑉=𝐹𝑉/(1+𝑟)𝑛•…

Answered: Larkspur Company is negotiating to…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Carla Vista Corporation agrees on January 1, 2025, to lease equipment from Sandhill, Inc. for 3 years. The lease calls for annual lease payments of $10,500 at the beginning of each year. The lease does not transfer ownership, contain a bargain purchase option, and is not a specialized asset. In addition, the economic life of the equipment is 10 years, and the present value of the lease payments is less than 90% of the fair value of the equipment. Prepare Carla Vista' journal entries on January 1, 2025 (commencement of the operating lease), and on December 31, 2025. Assume the implicit rate used by the lessor is 6%, and this is known to Carla Vista. (List all debit entries before credit entries. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round…
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Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor’s implicit lease rate, known to the lessee, is 10%. The lessor and the lessee use ASC 842 guidelines for lease accounting. Present value interest factors are: 10% 12% PV factor of $1 for 10 periods 0.38554 0.32197 PV factor for ordinary annuity for 10 periods 6.14457 5.65022 Upon acquisition, the leased equipment will be valued on Pepper’s balance sheet at: Multiple Choice A. $144,475. B. $157,469. C. $175,000. D. $250,000.
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Sagar
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Long Live Company entered into a lease agreement for the use of a new machine on January 1, 2020. The lease agreement requires an annual payment of P1,500,000 for five years starting December 31, 2020. Long Live guaranteed a residual value of P711,090 at the end of the contract. The machine will revert to the lessor at the end of five years. The machine has an economic life of 10 years. The implicit rate for this lease is 16% where the present value of 1 for five periods is 0.4761 and the present value of an ordinary annuity of 1 is 3.2743. What is the balance of lease liability on December 31, 2020?
Oriole Corporation enters into a 5-year lease of equipment on December 31, 2024, which requires 5 annual payments of $36,200 each, beginning December 31, 2024. In addition, Oriole guarantees the lessor a residual value of $20,300 at the end of the lease. However, Oriole believes it is probable that the expected residual value at the end of the lease term will be $10,300. The equipment has a useful life of 5 years. Assume that for Lost Ark Company, the lessor, collectibility of lease payments is probable and the carrying amount of the equipment is $120,000. Prepare Lost Ark's 2024 and 2025 journal entries, assuming the implicit rate of the lease is 10% and this is known to Oriole. (Record journal entries in the order presented in the problem. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. List all debit entries before credit entries. For…
Krawczek Company will enter into a lease agreement with Heavy Equipment Co. where Krawczek will make lease payments over the next five years. The lease is cancelable and requires equal annual payments of $20,800 per year beginning on January 1 of the first year. The last payment will be January 1 of year 5, and Krawczek will continue to use the asset until December 31 of that year. Other important information includes the following: The fair value of the equipment is $145,000. The applicable discount rate is an 8 percent annual rate. The economic life of the asset is 10 years. Krawczek does not guarantee the residual value of the asset at the end of the lease, and it does not expect to keep the asset at the end of the term. The asset is a standard piece of equipment. a. Is the lease an operating lease or a financing lease? multiple choice Operating lease Financing lease b. What will be the lease expense shown on the income statement at the end of year 1? c. What will…
Elliott Brothers enters into a lease agreement with Central Leasing for a piece of equipment. The terms of the 5-year lease state that payments of $19,500 will be made annually on January 1, commencing with the date that the lease begins. The lease contains a provision that Elliott Brothers may purchase the equipment at the end of the lease period for $19,000, which is well below the expected fair value at the end of the lease. As such, it is expected that Elliott Brothers will exercise this option. The implicit rate in the lease is 9%. If this lease is treated as a finance lease for Elliott Brothers, at what value will the right-of-use asset be recorded? Group of answer choices $12,349 $95,024 $75,848 $82,675

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