Intermediate Accounting
3rd Edition
ISBN: 9780136912644
Author: Elizabeth A. Gordon; Jana S. Raedy; Alexander J. Sannella
Publisher: Pearson Education (US)
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Textbook Question
Chapter 18, Problem 18.2P
Classification as Finance or Operating Lease, Lessor, Journal Entries, Discount Rates, Sales-Type Lease, Nonlease Components, Guaranteed Residual Value. On January 1, 2018, the lease commencement date, Curran Manufacturing Corporation (CMC) agreed to lease a piece of nonspeciatized, heavy equipment to Oates Products, Inc CMC paid $900,000 to manufacture the machine and carries it at this amount in its inventory. The fair value (current selling price) of the machine is $929,049 The relevant lease terms follow
- Annual rental payments of $240,000 are due on December 31 of each year. However, the first payment is due at the commencement of the lease. The lease payments do not include any other lease components such as insurance or sales taxes.
- Lease term is 4 years.
- There is no purchase option.
- The lessee guarantees a residual value of $60,000 at the termination of the lease. This amount is equal to the expected residual value and there is no unguaranteed residual asset.
- The economic life of the asset is 7 years.
- The lessor’s 6% implicit rate is known to Oates Products. Inc.
- The lessee’s incremental borrowing rate is 8%.
- Annual maintenance is $10,000 and annual training is $7,700 The lessee pays both at the end of the year to an independent third-party vendor. The lessee classifies these costs as general and administrative expenses.
- CMC indicates that collectability of all lease payments is reasonably assured, and it is probable that the residual value will be fully recovered.
- Oates depreciates (amortizes) similar equipment using the straight-line method.
Required
- a. Determine whether this is an operating or a finance lease for the lessee and an operating, sales-type, or direct financing lease for the lessor.
- b. Prepare the amortization table for the entire lease term.
- c. Prepare the lessee’s journal entries required for each year of the lease term assuming that the equipment is returned with a fair value of $60,000.
- d. Prepare the lessor’s journal entries required for each year of the lease term assuming that the equipment is returned with a fair value of $60,000.
- e. Prepare the December 31, 2021,
journal entry for the lessee assuming that the equipment is returned with a fair value of $45,000. - f. Prepare the December 31, 2021, journal entry for the lessor assuming that the equipment is returned with a fair value of $45,000.
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The information below relates to a leasing arrangement between Simmonds Leasing Company and Telsan Company, a lessee.
Inception date January 1, 2020
Lease term 6 years
Annual lease payment due at the beginning ofeach year, beginning with January 1, 2020 $150,000
Fair value of asset at January 1, 2020 $760,000
Economic life of leased equipment 7 years
Residual value of equipment at end of lease term,guaranteed by the lessee $65,500
Lessor’s implicit rate 10%
Lessee’s incremental borrowing rate 12%
January 1, 2020
The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $65,500. The lessee uses the straight-line depreciation method for all equipment.
Instructions(iii)Record the first year’s depreciation on Telsan Company’s books. (iv) Record interest expense and lease liability for Telsan Company for the year ending December 31, 2020. (v) Discuss the nature of this lease to Simmonds Leasing Company.
c) The information below relates to a leasing arrangement between Frankfield
Leasing Company and Boswell Manufacturing Company, a lessee.
Inception date
Lease term (non cancellable)
January 1, 2020
5 years
Annual lease payment due at the beginning of each
$28,500
year beginning January 1, 2020
Fair value of asset at January 1, 2020
Economic life of leased equipment
$130,000
6 years
Residual value of equipment at end of lease
$25,270
term, unguaranteed by the lessee
Lessor's implicit rate (not known by the lessee)
6%
Lessee's incremental borrowing rate
8%
The asset will revert to the lessor at the end of the lease term. There is an expected
residual value of $25,270 which is unguaranteed by the lessee. The lessee uses the
straight-line depreciation method for all equipment.
(Round all figures to the nearest $1.)
The information below relates to a leasing arrangement between Simmonds Leasing Company and Telsan Company, a lessee.
Inception date January 1, 2020
Lease term 6 years
Annual lease payment due at the beginning ofeach year, beginning with January 1, 2020 $150,000
Fair value of asset at January 1, 2020 $760,000
Economic life of leased equipment 7 years
Residual value of equipment at end of lease term,guaranteed by the lessee $65,500
Lessor’s implicit rate 10%
Lessee’s incremental borrowing rate 12%
January 1, 2020
The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $65,500. The lessee uses the straight-line depreciation method for all equipment.
Instructions(i) What is the lease liability for Telsan Company?
ii) Record the lease on Telsan Company’s books at the date of inception. (iii)Record the first year’s depreciation on Telsan Company’s books. (iv) Record interest expense and lease liability for Telsan Company for…
Chapter 18 Solutions
Intermediate Accounting
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