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 18.3P
Classification as Finance, Sales-Type, or Operating Lease, Lessee, Lessor,
Florida Energy Restoration, Ltd. (FER) enters into a lease agreement on January 1, 2018. To lease standard power generators from R&R Electric, Inc. The terms of the lease follow
- The term of the lease is 7 years with no renewal option. The seven annual lease payments of $300,000 will be made on January 1 of each year.
- The fair value of the equipment at January 1, 2018, is $1,700,479. The equipment has an economic life of 10 years with no salvage value expected at that time. The cost of the equipment to the lessor, R&R, is $1,500,000.
- FER depreciates similar equipment that it owns on a straight-line basis over the economic life of the property.
- FER’s incremental borrowing rate is 10%, and the lessor's 9% implicit rate on the lease is known to FER.
- There are no nonlease components related to this lease.
- Neither party to the lease pays initial direct costs
- The lessor indicates that the collection of the lease payments are reasonably certain.
- There is no guaranteed residual value in the lease contract, however, the lessor, R&R, expects the asset to be worth $100,000 at the end of the lease term.
Required
- a. Provide justification for classifying this as a finance lease for the lessee.
- b. Prepare a partial amortization table for 2018 through 2020 for the lessee using the effective interest rate method of amortization.
- c. Prepare all of FER’s journal entries for 2018 and 2019.
- d. Prepare the journal entries required for 2018 and 2019 for FER if this were an operating lease.
- e. What type of lease is this for the lessor? Justify your answer.
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On January 1, 2020, Horatio Inc. leased a tractor trailer from Hamlet Ltd. Under the terms of the contract, annual lease payments are due at the beginning of each year. At the end of the lease term the leased asset reverts back to Hamlet. Horatio has a December 31 year end. Other terms of the lease are as follows:
Annual lease payment amount
$ 31,805
Amount of residual value guarantee made by Horatio
$ 10,289
Implicit rate in lease (known by Horatio)
6%
Lease term (in years)
5
Estimated useful life of tractor trailer (in years)
7
Fair value of tractor trailer
$ 149,700
Horatio's incremental borrowing rate
10%
Assume that Horatio Inc. follows IFRS, and depreciates all automotive equipment using the straight-line method.
Required:
a)
Calculate the present value of the minimum lease payments from the perspective of
Horatio.
b)
What kind of lease is this to Horatio?…
On January 1, 2021, Flackmon Company entered into a lease for a truck with a payment of S16,000
per year for 4 years. The expected life of the truck is 5 years, and the first payment will be made
immediately. Flackmon could obtain a loan for a similar amount at a rate of 8% per year.
Required:
A. Record the lease liability and the first payment on January 1, 2021.
B. Record the amortization on the leased asset for 2021.
C. Record interest for 2021 on the lease.
D. Record the lease payment on January 1, 2022.
Your answers to this open-ended assignment should be placed
in the space below this line.
A
Date
Account Name
Debit
Credit
Jan. 1, 2021
1-Jan-21
B
Date
Account Name
Debit
Credit
Dec. 31, 2021
C
Date
Account Name
Debit
Credit
Dec. 31, 2021
D
Date
Account Name
Debit
Credit
Jan. 1, 2022
On January 1, 2020, Ivanhoe Company leased equipment to Flynn Corporation. The following information pertains to this lease.
1.
The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $1,000, while the expected residual value at the end of the lease is $7,000.
2.
Equal rental payments are due on January 1 of each year, beginning in 2020.
3.
The fair value of the equipment on January 1, 2020, is $160,000, and its cost is $120,000.
4.
The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis.
5.
Ivanhoe set the annual rental to ensure a 6% rate of return. Flynn’s incremental borrowing rate is 8%, and the implicit rate of the lessor is unknown.
6.
Collectibility of lease payments by the lessor is probable.
Both the lessor and the lessee’s accounting periods end on December 31.Click here to view factor tables.(For calculation purposes,…
Chapter 18 Solutions
Intermediate Accounting
Ch. 18 - Does the lessee become the owner of the equipment...Ch. 18 - Prob. 18.2QCh. 18 - Prob. 18.3QCh. 18 - What are typical terms and provisions in a lease...Ch. 18 - How does a lease offer business and financial...Ch. 18 - Prob. 18.6QCh. 18 - How is the right-of-use asset measured?Ch. 18 - What components are included in a lease contract?Ch. 18 - How does a lessee separate lease and nonlease...Ch. 18 - How does a lessor separate lease and nonlease...
Ch. 18 - Does a lessee have an option not to separate lease...Ch. 18 - What are the criteria for a lessee to report a...Ch. 18 - Prob. 18.13QCh. 18 - Can the lessor account for a lease either as an...Ch. 18 - What is the difference in the lessees lease...Ch. 18 - How does a guaranteed residual value affect the...Ch. 18 - Prob. 18.17QCh. 18 - What discount rate does the lessee use to...Ch. 18 - Does the choice of discount rate (i.e., the lessee...Ch. 18 - Prob. 18.20QCh. 18 - Prob. 18.21QCh. 18 - Prob. 18.22QCh. 18 - How does a lessee measure the lease liability?Ch. 18 - What is the lessees short-term lease policy...Ch. 18 - Prob. 18.25QCh. 18 - What are the lessee s accounting and reporting...Ch. 18 - Prob. 18.27QCh. 18 - Prob. 18.28QCh. 18 - Prob. 18.29QCh. 18 - How does the lessor measure the net investment in...Ch. 18 - Prob. 18.31QCh. 18 - Prob. 18.32QCh. 18 - Prob. 18.33QCh. 18 - Baxter Brothers, Inc. enters into a four-year...Ch. 18 - Zhou Systems signed a 5-year lease at the...Ch. 18 - Insight Corporation leases equipment for 5 years...Ch. 18 - Lowe Leasing Company recently leased machinery to...Ch. 18 - Prob. 18.5MCCh. 18 - Prob. 18.6MCCh. 18 - Prob. 18.7MCCh. 18 - Bischoff Enterprises leases office space from...Ch. 18 - Identifying Lease and Nonlease Components. Deane...Ch. 18 - Prob. 18.2BECh. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as a Finance or Operating Lease,...Ch. 18 - Prob. 18.7BECh. 18 - Prob. 18.8BECh. 18 - Prob. 18.9BECh. 18 - Classification of Lease, Lessor, IFRS. Repeat the...Ch. 18 - Prob. 18.11BECh. 18 - Finance Lease, Lessee, Lessor, Guaranteed Residual...Ch. 18 - Finance Lease, Lessee, Lessor, Unguaranteed...Ch. 18 - Composition of Lease Payments, Variable Payments....Ch. 18 - Composition of Lease Payments. Variable Payments....Ch. 18 - Determining the Implicit Rate In the Lease. Assume...Ch. 18 - Prob. 18.17BECh. 18 - Prob. 18.18BECh. 18 - Prob. 18.1ECh. 18 - Allocation of Total Payments to Lease and Nonlease...Ch. 18 - Operating Lease, Nonlease Components, Lessee....Ch. 18 - Operating Lease, Rate or Index, Effect of Variable...Ch. 18 - Prob. 18.5ECh. 18 - Prob. 18.6ECh. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Prob. 18.9ECh. 18 - Prob. 18.10ECh. 18 - Prob. 18.11ECh. 18 - Prob. 18.12ECh. 18 - Prob. 18.13ECh. 18 - Finance Lease, Purchase Option, Lessee,...Ch. 18 - Prob. 18.15ECh. 18 - Prob. 18.16ECh. 18 - Prob. 18.17ECh. 18 - Operating Lease, Lessor. True Image Copier Company...Ch. 18 - Operating Lease, Lessee, Amortization Schedules,...Ch. 18 - Prob. 18.20ECh. 18 - Prob. 18.21ECh. 18 - Classification as Finance or Operating Lease....Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance, Sales-Type, or...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Prob. 18.8PCh. 18 - Prob. 18.9PCh. 18 - Prob. 18.10PCh. 18 - Prob. 18.11PCh. 18 - Direct Financing Lease, Deferred Selling Profit,...Ch. 18 - Cases Judgment Cases Judgment Case 1: Comparison...Ch. 18 - Judgment Case 2: Lease Classification On January...Ch. 18 - Prob. 1FSCCh. 18 - Prob. 2FSCCh. 18 - Surfing the Standards Case 1: Lease Contracts...Ch. 18 - Prob. 2SSCCh. 18 - Prob. 3SSCCh. 18 - Basis for Conclusions Case 1: Operating Lease...Ch. 18 - Prob. 2BCCCh. 18 - Basis for Conclusions Case 3: Lease Classification...
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