Concept explainers
Lessee-guaranteed residual value; unguaranteed residual value; nonlease costs; different interest rates for lessor and lessee
• LO15–3, LO15–6, LO15–7
On December 31, 2018, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid $40,000 for the truck. Its retail value is $45,114.
The lease agreement specified annual payments of $11,000 beginning December 31, 2018, the beginning of the lease, and at each December 31 through 2021. Branch Motors’ interest rate for determining payments was 10%. At the end of the four-year lease term (December 31, 2022) the truck was expected to be worth $15,000. The estimated useful life of the truck is five years with no salvage value. Both companies use straight-line amortization or depreciation.
Yard Art guaranteed a residual value of $6,000. Yard Art’s incremental borrowing rate is 9% and is unaware of Branch’s implicit rate.
A $1,000 per year maintenance agreement was arranged for the truck with an outside service firm. As an expedient, Branch Motors agreed to pay this fee. It is, however, reflected in the $11,000 lease payments.
Required:
- 1. How should this lease be classified by Yard Art Landscaping (the lessee)? Why?
- 2. Calculate the amount Yard Art Landscaping would record as a right-of-use asset and a lease liability.
- 3. How should this lease be classified by Branch Motors (the lessor)? Why?
- 4. Show how Branch Motors calculated the $11,000 annual lease payments.
- 5. Calculate the amount Branch Motors would record as sales revenue.
- 6. Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2018.
- 7. Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Yard Art.
- 8. Prepare an amortization schedule that describes the pattern of interest revenue over the lease term for Branch Motors.
- 9. Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2019.
- 10. Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2021 (the final lease payment).
- 11. Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2022 (the end of the lease term), assuming the truck is returned to the lessor and the actual residual value of the truck was $4,000 on that date.
(1)
Lease
Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.
The criteria for defining the lease as finance lease or operating lease
As per the notes issued by Financial Accounting Standard Board (FASB), the following are four criteria to determine is a lease is a capital lease or an operating lease:
1. Transfer of title: The asset is transferred to lessee at the end of the lease period concerned.
2. Purchase option: The purchase option is exercisable when the purchase price is sufficiently lower than expected fair value.
3. Economic life: The economic life of the lease period is 75% or more than the useful life of the asset.
4. Value recovery: Present value of lease payments is greater or equal to 90% of the fair value.
If a particular lease fulfils any one of the above four criteria, then it is considered as finance lease. If a lease does not fulfil any of the above four criteria, it would be considered as operating lease.
Sales-type lease/Finance lease
Sales type/Finance lease is a parallel type of direct financing whereby the owner (lessor) purchases the equipment to lease it and received the interest revenue over the period of lease for equipment, apart from the recognition of profit from sale of equipment.
Lessee guaranteed residual value
The lessee guaranteed residual value of leased asset is an estimation of the commercial value of the asset at the end of lease term. The present value is considered when determining the lease classification criteria (Criteria 4). Lessee guaranteed residual value is added to lease receivable and also added to sales revenue.
the appropriate classification of lease by lessee and state the reason.
Answer to Problem 15.18P
The lease is a finance lease to the lessee.
Explanation of Solution
The classification criteria for lessee are as follows:
S.No | Classification criteria | Does it satisfy? | |
1 | Does the lease agreement specify about ownership transfer? | No | |
2 | Does the lease agreement state about bargain purchase option? | No | |
3 | Does the term of lease constitute major part of the expected economic life of the asset? | Yes | Lease term = 4 years Useful life = 5 years |
4 | Is the present value of lease payments greater than or equal to substantially all of the market/fair value of the asset? | No | Present value (1) = $39,564 Fair value = $45,114 |
5 | Is the asset is of such a specialized nature which is expected to have an alternative use to lessor at the end of the term of lease? | No |
Table (1)
Working note:
The present value of lease payments is calculated as below:
(2)
To Calculate: the amount YA Company (lessee) would record as right-of-use asset and lease liability.
Explanation of Solution
The present value of lease payments that would be recorded as right-of-use asset is calculated as below:
When calculating the amount for recording right-of-use asset, the residual value is not included in the lessee’s periodic payments.
Therefore, the present value of lessee’s periodic payments is $35,313
(3)
the appropriate classification of lease by lessor and state the reason.
Answer to Problem 15.18P
The lease is a sales type lease to the lessee.
Explanation of Solution
The classification criteria for lessor are as follows:
S.No | Classification criteria | Does it satisfy? | |
1 | Does the lease agreement specify about ownership transfer? | No | |
2 | Does the lease agreement state about bargain purchase option? | No | |
3 | Does the term of lease constitute major part of the expected economic life of the asset? | Yes | Lease term = 4 years Useful life = 5 years |
4 | Is the present value of lease payments greater than or equal to substantially all of the market/fair value of the asset? | No | Present value (2) = $38,967 Fair value = $45,114 |
5 | Is the asset is of such a specialized nature which is expected to have an alternative use to lessor at the end of the term of lease? | No |
Table (2)
The present value of lease payments is calculated as below:
(4)
To Show: how the annual lease payments of $11,000 is being calculated.
Explanation of Solution
Amount ($) | |
Lease payments at the beginning of each of the next 4 years (5) | 10,000 |
Add: Maintenance cost | 1,000 |
Lease payments including maintenance costs | 11,000 |
Table (3)
Working notes:
Calculate present value of residual amount:
Calculate the amount to be recovered by periodic lease payments:
Amount ($) | |
Amount to be recovered (Fair value of truck) | 45,114 |
Less: Present value of residual value (3) | 10,245 |
Amount to be recovered by periodic lease payments | 34,869 |
(4)
Calculate lease payments at the beginning of each of the next 4 years:
(5)
To Calculate: the amount the company BM (Lessor) would record as sales revenue.
Explanation of Solution
Calculate the sales revenue for lessor as follows:
Amount ($) | |
Present value of periodic lease payments (4) | 34,869 |
Add: Present value of lessee guaranteed residual value (6) | 4,908 |
Sales revenue | 38,967 |
Table (4)
Working notes:
Calculate the present value of lessee guaranteed residual value
Hence, the sales revenue for lessor is $38,967
(6)
To Prepare: appropriatejournal entries for YA Company (Lessee) and Company BM (Lessor) on December 31, 2018.
Explanation of Solution
Prepare journal entry for YA Company (Lessee) in the month of December 31, 2018
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
|
Right-of-use asset (7) | 35,313 | ||||
Lease Payable | 35,313 | ||||
(To record the lease payable) |
Table (5)
- Right-of-use asset is an asset. There is an increase in asset. Therefore, debit right-of-use asset account by $35,313.
- Lease payable is a liability. There is an increase in liability. Therefore, credit lease liability by $35,313.
Working notes:
The present value of lease payments that would be recorded as right-of-use asset is calculated as below:
Transaction on December 31, 2018: Record the lease payments and prepaid maintenance expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Prepaid maintenance expenses | 1,000 | |||
Lease payable (Difference) | 10,000 | |||
Cash | 11,000 | |||
(To record annual lease payment and maintenance expenses.) |
Table (6)
- Prepaid maintenance expense is an asset and increases. Therefore, debit prepaid maintenance expense by $1,000.
- Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $10,000.
- Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $11,000.
Prepare journal entry for BM Company (Lessor) in the month of December 31, 2018
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
Lease Receivable | 45,114 | ||||
Cost of Goods Sold (7) | 33,853 | ||||
Sales Revenue Table (4) | 38,967 | ||||
Equipment | 40,000 | ||||
(To record lease inception) |
Table (7)
- Lease receivable is an asset. There is an increase in asset. Therefore, debit lease receivable by $45,114.
- Equipment is an asset. There is a decrease in asset. Therefore, credit inventory of equipment by $40,000.
- Cost of goods sold decreases stockholders’ equity. Therefore, debit cost of goods sold by $33,853.
- Sales revenue increases stockholders’ equity. Therefore, credit sales revenue by $38,967.
Working notes:
Calculate the cost of goods sold as follows:
Journalize the lease receivable: December 31, 2018
Date | Accounts Title and Explanation | Post Ref. | Debit ($) |
Credit ($) |
|
Cash | 11,000 | ||||
Lease Receivable | 10,000 | ||||
Maintenance fee payable | 1,000 | ||||
(To record the lease received) |
Table (8)
- Cash is an asset. There is an increase in asset. Therefore, debit Cash Account by $11,000.
- Lease receivable is an asset. There is a decrease in asset. Therefore, credit Lease Receivable Account by $10,000.
- Maintenance fees payable is a liability and is increased. Therefore, credit maintenance fees payable by $1,000.
(7)
To prepare: an amortization schedule that describes the pattern of interest expense over the lease term for YA Company.
Explanation of Solution
Prepare an amortization schedule for the Lessee – YA Company.
Lease Amortization Schedule | ||||
A | B | C | D | E |
Year (Dec 31) | Lease Payment ($) | Effective Interest (9% × Outstanding balance) ($) | Payment Reduction ($) (B – C) |
Outstanding Balance ($) (E – D) |
35,313 | ||||
2018 | 10,000 | 10,000 | 25,313 | |
2019 | 10,000 | 2,278 | 7,722 | 17,591 |
2020 | 10,000 | 1,583 | 8,417 | 9,174 |
2021 | 10,000 | 826 | 9,174 | 0 |
40,000 | 4,687 | 35,313 |
Table (9)
The amortization table is prepared to present the pattern of interest expenses throughout the period. The schedule shows the lease balance and effective interest change over the 4 term period of lease using effective interest rate of 9%. Each lease payment after the first payment includes both the interest and amount that represents the reduction of outstanding balance. At the end of the lease period, the outstanding balance becomes zero.
(8)
To prepare: an amortization schedule that describes the pattern of interest expense over the lease term for BM Company.
Explanation of Solution
Prepare an amortization schedule for the Lessee – BM Company.
Lease Amortization Schedule | ||||
A | B | C | D | E |
Year (Dec 31) | Lease Payment ($) | Effective Interest (10% × Outstanding balance) ($) | Payment Reduction ($) (B – C) |
Outstanding Balance ($) (E – D) |
45,114 | ||||
2018 | 10,000 | 35,114 | ||
2019 | 15,000 | 3,511 | 6,489 | 28,625 |
2020 | 15,000 | 2,863 | 7,137 | 21,448 |
2021 | 15,000 | 2,149 | 7,851 | 13,637 |
2022 | 15,000 | 1,363 | 13,637 | 0 |
55,000 | 9,886 | 45,114 |
Table (10)
The amortization table is prepared to present the pattern of interest expenses throughout the period. The schedule shows the lease balance and interest change over the 4 term period of lease using effective interest rate of 10%. Each lease payment after the first payment includes both the interest and amount that represents the reduction of outstanding balance. At the end of the lease period, the outstanding balance becomes zero.
(9)
To Prepare: the appropriate entries for both YA Company and BM Company on December 31, 2019.
Explanation of Solution
Prepare entries in the books of YA Company.
Transaction on December 31, 2019: Record the maintenance expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Maintenance expense | 1,000 | |||
Prepaid maintenance expenses | 1,000 | |||
(To record maintenance expenses.) |
Table (11)
- Maintenance expense decreases stockholders’ equity. Therefore, debit maintenance interest expense by $1,000.
- Prepaid maintenance expense is an asset and decreases. Therefore, credit prepaid maintenance expense by $1,000.
Transaction on December 31, 2019: Record the lease payment.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
Interest expense (8) | 2,278 | ||||
Lease payable | 7,722 | ||||
Prepaid maintenance expense | 1,000 | ||||
Cash | 11,000 | ||||
(To record lease payment) |
Table (12)
- Interest expense decreases stockholders’ equity. Therefore, debit maintenance interest expense by $2,278.
- Prepaid maintenance expense is an asset and increases. Therefore, credit prepaid maintenance expense by $1,000.
- Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $10,000.
- Cash is an asset. There is a decrease in asset. Therefore, credit Cash Account by $11,000.
Working note:
Calculate the amount of interest expense for December 31, 2019 as follows:
Transaction on December 31, 2019: Record the amortization expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Amortization expense (9) | 8,828 | |||
Right-of-use asset | 8,828 | |||
(To record amortization expense.) |
Table (13)
- Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $8,828.
- Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $8,828.
Working note:
Calculate the amortization expense for December 31, 2019 as follows:
Prepare entries in the books of BM Company.
Journalize the lease receivable and interest revenue: December 31, 2019
Date | Accounts Title and Explanation | Post Ref. | Debit ($) |
Credit ($) |
|
Cash | 11,000 | ||||
Lease Receivable (Difference) | 6,489 | ||||
Maintenance fee payable | 1,000 | ||||
Interest revenue (10) | 3,511 | ||||
(To record the lease received) |
Table (14)
- Cash is an asset. There is an increase in asset. Therefore, debit Cash Account by $11,000.
- Lease receivable is an asset. There is a decrease in asset. Therefore, credit Lease Receivable Account by $10,000.
- Maintenance fees payable is a liability and is increased. Therefore, credit maintenance fees payable by $1,000.
- Interest revenue increases stockholders’ equity. Therefore, credit interest revenue by $3,511.
Working note:
Calculate the amount of interest revenue for December 31, 2019 as follows:
(10)
To Prepare: the appropriate entries for both YA Company and BM Company on December 31, 2021.
Explanation of Solution
Prepare entries in the books of YA Company.
Transaction on December 31, 2021: Record the maintenance expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Maintenance expense | 1,000 | |||
Prepaid maintenance expenses | 1,000 | |||
(To record maintenance expenses.) |
Table (15)
- Maintenance expense decreases stockholders’ equity. Therefore, debit maintenance interest expense by $1,000.
- Prepaid maintenance expense is an asset and decreases. Therefore, credit prepaid maintenance expense by $1,000.
Transaction on December 31, 2021: Record the final lease payment.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
Interest expense | 826 | ||||
Lease payable | 9,174 | ||||
Prepaid maintenance expense | 1,000 | ||||
Cash | 11,000 | ||||
(To record lease payment) |
Table (16)
- Interest expense decreases stockholders’ equity. Therefore, debit maintenance interest expense by $826.
- Prepaid maintenance expense is an asset and increases. Therefore, credit prepaid maintenance expense by $1,000.
- Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $9,174.
- Cash is an asset. There is a decrease in asset. Therefore, credit Cash Account by $11,000.
Transaction on December 31, 2019: Record the amortization expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Amortization expense (9) | 8,828 | |||
Right-of-use asset | 8,828 | |||
(To record amortization expense.) |
Table (17)
- Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $8,828.
- Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $8,828.
Prepare entries in the books of BM Company.
Journalize the lease receivable and interest revenue: December 31, 2021
Date | Accounts Title and Explanation | Post Ref. | Debit ($) |
Credit ($) |
|
Cash | 11,000 | ||||
Lease Receivable (Difference) | 7,851 | ||||
Maintenance fee payable | 1,000 | ||||
Interest revenue | 2,149 | ||||
(To record the lease received) |
Table (18)
- Cash is an asset. There is an increase in asset. Therefore, debit Cash Account by $11,000.
- Lease receivable is an asset. There is a decrease in asset. Therefore, credit Lease Receivable Account by $7,851.
- Maintenance fees payable is a liability and is increased. Therefore, credit maintenance fees payable by $1,000.
- Interest revenue increases stockholders’ equity. Therefore, credit interest revenue by $2,149.
(11)
To Prepare: the appropriate entries for both YA Company and BM Company on December 31, 2022.
Explanation of Solution
Prepare entries in the books of YA Company.
Transaction on December 31, 2022: Record the maintenance expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Maintenance expense | 1,000 | |||
Prepaid maintenance expenses | 1,000 | |||
(To record maintenance expenses.) |
Table (19)
- Maintenance expense decreases stockholders’ equity. Therefore, debit maintenance interest expense by $1,000.
- Prepaid maintenance expense is an asset and decreases. Therefore, credit prepaid maintenance expense by $1,000.
Transaction on December 31, 2022: Record the amortization expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Amortization expense (9) | 8,828 | |||
Right-of-use asset | 8,828 | |||
(To record amortization expense.) |
Table (20)
- Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $8,828.
- Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $8,828.
Transaction on December 31, 2022: Record the loss on residual value guarantee.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Loss on residual value guarantee | 2,000 | |||
Cash ($6,000 – $4,000) | 2,000 | |||
(To record loss on residual value.) |
Table (21)
- Loss on residual value guarantee decreases stockholders’ equity. Therefore, debit amortization expense by $2,000.
- Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $2,000.
Prepare entries in the books of BM Company.
Journalize the lease receivable and interest revenue: December 31, 2022
Date | Accounts Title and Explanation | Post Ref. | Debit ($) |
Credit ($) |
|
Cash ($6,000– $4,000) | 2,000 | ||||
Equipment | 4,000 | ||||
Loss on leased assets ($15,000 – $4,000) | 9,000 | ||||
Lease receivable | 13,637 | ||||
Interest revenue | 1,363 | ||||
(To record the lease received) |
Table (22)
- Cash is an asset. There is an increase in asset. Therefore, debit Cash Account by $2,000.
- Equipment is an asset. There is an increase in asset. Therefore, debit Lease Receivable Account by $4,000.
- Loss on residual value guarantee decreases stockholders’ equity. Therefore, debit amortization expense by $9,000.
- Lease receivable is an asset. There is an increase in asset. Therefore, credit Lease Receivable Account by $13,637.
- Interest revenue increases stockholders’ equity. Therefore, credit interest revenue by $1,363.
Want to see more full solutions like this?
Chapter 15 Solutions
INTERMEDIATE ACCOUNTING (LL) W/CONNECT
- xercise 15-25 (Algo) Lessor; sales-type lease; residual value effect on financial statements [LO15-2, 15-6] At January 1, 2021, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $32,000 beginning January 1, 2021, the beginning of the lease, and at each December 31 thereafter through 2028. The equipment was acquired recently by Crescent at a cost of $243,000 (its fair value) and was expected to have a useful life of 12 years with no salvage value at the end of its life. (Because the lease term is only 9 years, the asset does have an expected residual value at the end of the lease term of $73,596.) Both (a) the present value of the lease payments and (b) the present value of the residual value (i.e., the residual asset) are included in the lease receivable because the two amounts combine to allow the lessor to recover its net investment. Crescent seeks a 9% return on its lease investments.…arrow_forwardS Exercise 15-3 (Algo) Finance lease; lessee; balance sheet and income statement effects [LO15-2] On June 30, 2024, Georgia-Atlantic, Incorporated leased warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $604,152 over a four-year lease term, payable each June 30 and December 31, with the first payment on June 30, 2024. Georgia-Atlantic's incremental borrowing rate is 10%, the same rate IC uses to calculate lease payment amounts. Amortization is recorded on a straight-line basis at the end of each fiscal year. The fair value of the equipment is $4.10 million. 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 present value of the lease payments on June 30, 2024 that Georgia-Atlantic uses to record the right-of-use asset and lease liability. 2. What amount related to the lease would Georgia-Atlantic report in…arrow_forwardExercise 15-17 (Algo) Lessee and lessor; operating lease [LO15-4] On January 1, 2021, Nath-Langstrom Services, Inc., a computer software training firm, leased several computers under a two-year operating lease agreement from ComputerWorld Leasing, which routinely finances equipment for other firms at an annual interest rate of 4%. The contract calls for four rent payments of $14,500 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by ComputerWorld at a cost of $99,000 and were expected to have a useful life of five years with no residual value. Both firms record amortization and depreciation semiannually. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Prepare appropriate journal entries recorded by Nath-Langstrom Services for the first year of the lease. 2. Prepare appropriate journal entries recorded by ComputerWorld Leasing for the first year of the…arrow_forward
- Exercise 15-27 (Algo) Lessee; lessee guaranteed residual value [LO15-2, 15-6] On January 1, 2021, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a four-year period ending December 31, 2024, at which time possession of the leased asset will revert back to Aqua. The equipment costs Aqua $421,168 and has an expected economic life of five years. Aqua and Maywood expect the residual value at December 31, 2024, to be $58,000. Negotiations led to Maywood guaranteeing a $82,000 residual value. Equal payments under the lease are $116,000 and are due on December 31 of each year with the first payment being made on December 31, 2021. Maywood is aware that Aqua used a 5% interest rate when calculating lease payments. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required:1. & 2. Prepare the appropriate entries for Maywood on January 1, 2021, and December 31, 2021, related to the lease. (If no…arrow_forward3. Lessee Capital Lease; Lessor Residual Value - Guaranteed - Instructions: Direct Financing Lease; On January 1, 2010, Velde Company (lessee) entered into a 4 year, noncancellable contract to lease a computer from Exceptional Computer Company (lessor). Annual rentals of $16,228 are to be paid each January 1, Velde will assume responsibility for all normal ownership costs, and at the end of the lease period the computer will be returned back to Exceptional Computer Company. The cost of the computer to Exceptional Computer Company was $60,000 and it had an estimated useful life of four years and a guaranteed residual value of $5,000. Velde has an incremental borrowing rate of 12%, but has knowledge that Exceptional Computer Company used a rate 10% in setting annual rentals. Collection of the rentals is reasonably predictable and there are no important uncertainties regarding future unreimbursable costs to be incurred by the lessor. PVIFAD(10%,4) - 3.48685; PVIF(10%,4) - 0.68301 a. What…arrow_forwardExercise 15-17 (Algo) Lessee and lessor; operating lease [LO15-4] On January 1, 2024, Nath-Langstrom Services, Incorporated, a computer software training firm, leased several computers under a two-year operating lease agreement from ComputerWorld Leasing, which routinely finances equipment for other firms at an annual interest rate of 4%. The contract calls for four rent payments of $18,000 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by ComputerWorld at a cost of $106,000 and were expected to have a useful life of five years with no residual value. Both firms record amortization and depreciation semiannually. 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) Prepare appropriate journal entries recorded by Nath-Langstrom Services for the first year of the lease. 2) Prepare appropriate journal entries recorded by ComputerWorld Leasing for the first year of…arrow_forward
- 16... Partially correct answer icon Your answer is partially correct. Grouper Corporation leases equipment from Falls Company on January 1, 2020. The lease agreement does not transfer ownership, contain a bargain purchase option, and is not a specialized asset. It covers 3 years of the equipment’s 8-year useful life, and the present value of the lease payments is less than 90% of the fair value of the asset leased.Prepare Grouper’s journal entries on January 1, 2020, and December 31, 2020. Assume the annual lease payment is $30,000 at the beginning of each year, and Grouper’s incremental borrowing rate is 8%, which is the same as the lessor’s implicit rate. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,265. Record journal entries in the order presented in the problem.)Click here to…arrow_forwardExercise 15-27 (Algo) Lessee; lessee guaranteed residual value [LO15-2, 15-6] On January 1, 2021, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a four-year period ending December 31, 2024, at which time possession of the leased asset will revert back to Aqua. The equipment cost Aqua $429,029 and has an expected economic life of five years. Aqua and Maywood expect the residual value at December 31, 2024, to be $65,000. Negotiations led to Maywood guaranteeing a $92,500 residual value. Equal payments under the lease are $130,000 and are due on December 31 of each year with the first payment being made on December 31, 2021. Maywood is aware that Aqua used a 6% interest rate when calculating lease payments. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required:1. & 2. Prepare the appropriate entries for Maywood on January 1, 2021 and December 31, 2021, related to the lease. (If no entry…arrow_forwardExercise 15-17 (Algo) Lessee and lessor; operating lease [LO15-4] On January 1, 2024, Nath-Langstrom Services, Incorporated, a computer software training firm, leased several computers under a two- year operating lease agreement from ComputerWorld Leasing, which routinely finances equipment for other firms at an annual interest rate of 4%. . The contract calls for four rent payments of $20,000 each, payable semiannually on June 30 and December 31 each year. • The computers were acquired by ComputerWorld at a cost of $110,000 and were expected to have a useful life of eight years with no residual value. . Both firms record amortization and depreciation semiannually. 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. Prepare appropriate journal entries recorded by Nath-Langstrom Services for the first year of the lease. 2. Prepare appropriate journal entries recorded by ComputerWorld Leasing for the first…arrow_forward
- Exercise 15-27 (Algo) Lessee; lessee guaranteed residual value [LO15-2, 15-6) On January 1, 2024, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a four-year period ending December 31, 2027, at which time possession of the leased asset will revert back to Aque . The equipment cost Aque $420,045 and has an expected economic life of five years . Aque and Maywood expect the residual value at December 31, 2027 to be $57,000. • Negotiations led to Maywood guaranteeing a $80.500 residual value. Equal payments under the lease are $14,000 and are due on December 31 of each year with the first payment being made on December 31, 2024. Maywood is aware that Aqua used a 6% interest rate when calculating lease payments. Note: Use tables, Excel, or a financial calculator Ya$1. Pof31 EVA of $1. PVA of 55. EVAD of 51 and PVAD of 33 Required: 1.5 2. Prepare the appropriate entries for Maywood on January 1, 2024 and December 31, 2024 related to the lease Note: If no entry is required…arrow_forward2 points Exercise 15-5 (Algo) Sales-type lease; lessor; balance sheet and income statement effects [LO15-3] On June 30, 2024, Georgia-Atlantic, Incorporated leased warehouse equipment from Builders, Incorporated The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $512,709 over a 5-year lease term (also the asset's useful life), payable each June 30 and December 31, with the first payment on June 30, 2024. Georgia-Atlantic's incremental borrowing rate is 12.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $3.5 million. 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 Builders is "selling" the equipment (present value of the lease payments) on June 30, 2024. 2. What amount related to the lease would Builders report in its balance sheet on December 31, 2024 (ignore taxes)? 3.…arrow_forwardExercise 15-5 (Algo) Sales-type lease; lessor; balance sheet and income statement effects [LO15-3] On June 30, 2024, Georgia-Atlantic, Incorporated leased warehouse equipment from Builders, Incorporated The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $530,475 over a 4-year lease term (also the asset's useful life), payable each June 30 and December 31, with the first payment on June 30, 2024. Georgia-Atlantic's incremental borrowing rate is 10.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $3.1 million. 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 Builders is "selling" the equipment (present value of the lease payments) on June 30, 2024. 2. What amount related to the lease would Builders report in its balance sheet on December 31, 2024 (ignore taxes)? 3. What line…arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education