Intermediate Accounting
3rd Edition
ISBN: 9780136912644
Author: Elizabeth A. Gordon; Jana S. Raedy; Alexander J. Sannella
Publisher: Pearson Education (US)
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 18, Problem 18.5BE
Classification as Finance or Operating Lease, Lessee. Iman Iron Works signed a lease on January 1 with Borko Bank for an iron-stamping machine. The equipment is not specialized in nature. The lease has a 12-year term with no purchase option or transfer of ownership Under the terms of the contract, Iman must pay $3,500 on January 1 of each year. Borko Bank's implicit rate is 12%. The iron-stamping machine has an economic life of 25 years and a fair value of $35,000. If Iman borrowed at Borko Bank, the loan would carry an interest rate of 14%. The lessee knows the implicit rate. Is this contract an operating or a finance lease for the lessee?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Keller Corporation (the lessee) entered into an equipment lease with Dallo Company (the lessor) on January 1 of Year 1.
1.
The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option.
2.
The lease term is 8 years and requires annual payments of $10,000 at the end of each year.
3.
The equipment’s fair value at lease inception is $100,000. Assume that the present value of minimum lease payments is $50,000.
4.
The equipment has an estimated economic life of 20 years and has zero residual value at the end of this time.
Required:
Prepare the journal entry that Keller Corporation would make each year, assuming the lease is classified as an operating lease.
Wilcox Ltd finance company purchases a machine for $160,000 at the request of Upland Manufacturing Ltd, which then leases it to Upland for $60,000 per annum for three years. The payments are to be made at the commencement of each year including the first year of the lease period. Wilcox Ltd incurs costs of $1,500 to establish the lease. The lease is non-cancellable and classified as a finance lease by the lessor. The interest rate implicit in the lease is 10%. There is no guaranteed or unguaranteed residual value at the end of the lease period.
Required:
Prepare the journal entries for Wilcox Ltd to record the initial recognition of lease related assets and interest income for three years under AASB 16/IFRS 16
Keller Corporation (the lessee) entered into a general equipment lease with Dallo Company (the lessor) on January 1 of Year 1. The following information pertains to this lease agreement:
1.
The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option.
2.
The lease term is 8 years and requires annual payments of $10,000 at the beginning of each year.
3.
The fair value of the equipment at lease inception is $100,000. Assume that the present value of lease payments discounted at a 10% interest rate is $58,684.19.
4.
The equipment has an estimated economic life of 20 years and has zero residual value at the end of this time.
Required:
Prepare the journal entry that Keller Corporation would make during the first year of the lease assuming that the lease is classified as an operating lease.
there are 6 entries
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...
Additional Business Textbook Solutions
Find more solutions based on key concepts
What are assets limited as to use and how do they differ from restricted assets?
Accounting For Governmental & Nonprofit Entities
Place the letter of the appropriate accounting cost in Column 2 in the blank next to each decision category in ...
Fundamentals Of Cost Accounting (6th Edition)
Fundamental and Enhancing Characteristics. Identify whether the following items are fundamental characteristics...
Intermediate Accounting
18. What is the calculation for return on assets (ROA)? Explain what ROA measures.
Horngren's Financial & Managerial Accounting, The Financial Chapters (6th Edition)
How would the decision to dispose of a segment of operations using a split-off rather than a spin-off impact th...
Advanced Financial Accounting
Discussion Analysis A13-41 Discussion Questions 1. How do managers use the statement of cash flows? 2. Describ...
Managerial Accounting (4th Edition)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Keller Corporation (the lessee) entered into a general equipment lease with Dallo Company (the lessor) on January 1 of Year 1. The following information pertains to this lease agreement: 1. The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option. 2. The lease term is 8 years and requires annual payments of $10,000 at the beginning of each year. 3. The fair value of the equipment at lease inception is $100,000. Assume that the present value of lease payments discounted at a 10% interest rate is $58,684.19. 4. The equipment has an estimated economic life of 20 years and has zero residual value at the end of this time. Required: Prepare the journal entry that Keller Corporation would make during the first year of the lease assuming that the lease is classified as an operating lease. CHART OF ACCOUNTS Keller Corporation General Ledger ASSETS 111 Cash 121 Accounts Receivable 141…arrow_forwardKeller Corporation (the lessee) entered into a general equipment lease with Dallo Company (the lessor) on January 1 of Year 1. The following information pertains to this lease agreement: 1. The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option. 2. The lease term is 8 years and requires annual payments of $10,000 at the beginning of each year. 3. The fair value of the equipment at lease inception is $100,000. Assume that the present value of lease payments discounted at a 10% interest rate is $58,684.19. 4. The equipment has an estimated economic life of 20 years and has zero residual value at the end of this time. Required: Prepare the journal entry that Keller Corporation would make during the first year of the lease assuming that the lease is classified as an operating lease. X Chart of Accounts CHART OF ACCOUNTS Keller Corporation General Ledger ASSETS 111…arrow_forwardZhang Company leased equipment from Mann Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $49,677 over a five-year lease term (also the asset's useful life), with the first payment on January 1, the beginning of the lease. The interest rate is 4%. The asset being leased cost Mann $180,000 to produce. 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 the lessor is "selling" the asset (present value of the lease payments). 2. What would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31 (ignore taxes)?. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Determine the price at which the lessor is "selling" the asset (present value of the lease payments). Note: Round your intermediate and final answers to the nearest whole…arrow_forward
- Zhang Company leased equipment from Mann Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $52,538 over a six-year lease term (also the asset's useful life), with the first payment on January 1, the beginning of the lease. The interest rate is 5%. The asset being leased cost Mann $230,000 to produce. Note: Use tables, Excel, or a financial calculator. (FV of $1. PV of $1. FVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) Required: 1. Determine the price at which the lessor is "selling" the asset (present-value of the lease payments). 2. What would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31 (ignore taxes)? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Determine the price at which the lessor is "selling" the asset (present value of the lease payments). Note: Round your intermediate and final answers to the nearest whole…arrow_forwardRachel Company used leases as a method of selling products. In the current year, Rachel Company completed construction of a construction equipment. At the beginning of the current year, the construction equipment was leased on a contract specifying that ownership of thereon will transfer to the lessee at the end of the lease period. The annual lease payments do not include executory costs. Original cost of the construction equipment is P9,000,000. Lease payments payable at beginning of each year is P2,000,000. Estimated residual value is P1,000,000. Implicit interest rate is 12%, 10-year lease term. Present value of an annuity due of 1 at 12% for 10 periods is 6.33 and PV of 1 at 12% for 10 periods is 0.32. 1. What amount should be reported as gross profit on sale? 2. How much is the interest income for the current year?arrow_forwardRachel Company used leases as a method of selling products. In the current year, Rachel Company completed construction of a construction equipment. At the beginning of the current year, the construction equipment was leased on a contract specifying that ownership of thereon will transfer to the lessee at the end of the lease period. The annual lease payments do not include executory costs. Original cost of the construction equipment is P9,000,000. Lease payments payable at beginning of each year is P2,000,000. Estimated residual value is P1,000,000. Implicit interest rate is 12%, 10-year lease term. Present value of an annuity due of 1 at 12% for 10 periods is 6.33 and PV of 1 at 12% for 10 periods is 0.32. How much is the total financial revenue over the lease term? What amount should be reported as gross profit on sale? How much is the interest income for the current year?arrow_forward
- On January 1, Dallas Corp. leases a truck they have manufactured to Valley Corp. Dallas has calculated the lease payments to Valley to be $40,000 per year for 4 years, and the sales price of the truck is $130,000. It cost Dallas $100,000 to manufacture the truck. Dallas follows IFRS. Instructions Prepare the journal entries to set up the lease on January 1 on the books of the lessor, Dallasarrow_forwardKeller Corporation (the lessee) entered into a general equipment lease with Dallo Company (the lessor) on January 1 of Year 1. The following information pertains to this lease agreement: The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option. The lease term is 8 years and requires annual payments of $10,000 at the beginning of each year. The fair value of the equipment at lease inception is $100,000. Assume that the present value of lease payments discounted at a 10% interest rate is $58,684.19. The equipment has an estimated economic life of 20 years and has zero residual value at the end of this time. Required: Prepare the journal entry that Keller Corporation would make during the first year of the lease assuming that the lease is classified as an operating lease. Prepare the journal entry that Keller Corporation would make during the first year of the lease assuming that the lease is…arrow_forwardZhang Company leased equipment from Mann Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $53,750 over a five-year lease term (also the asset's useful life), with the first payment on January 1, the beginning of the lease. The interest rate is 6%. The asset being leased cost Mann $190,000 to produce. 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 the lessor is "selling" the asset (present value of the lease payments). 2. What would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31 (ignore taxes)? Required 1 Required 2 Determine the price at which the lessor is "selling" the asset (present value of the lease payments). Note: Round your intermediate and final answers to the nearest whole dollar. PV factors based on Table or Calculator function: Lease…arrow_forward
- Adams Storage and Appraisal leased equipment to OAC Corporation for an eight-year period, at which time possession of the leased asset will revert back to Adams. The equipment cost Adams $32 million and has an expected useful life of 11 years. Its normal sales price is $45 million. The present value of the minimum lease payments for both the lessor and lessee is $40 million. The first payment was made at the inception of the lease. How would OAC classify this lease if it prepares its financial statements using IFRS? Why?arrow_forwardCorinth Co. leased equipment to Athens Corporation for an eight-year period, at which time possession of the leased asset will revert back to Corinth. The equipment cost Corinth $16 million and has an expected useful life of 12 years. Its normal sales price is $22.4 million. The present value of the minimum lease payments for both the lessor and lessee is $20.4 million. The first payment was made at the inception of the lease. Collectibility of the remaining lease payments is reasonably assured, and Corinth has no material cost uncertainties. How should Athens classify this lease? Why?arrow_forwardCullumber Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a finance lease for Cullumber. The six-year lease requires payment of $171000 at the beginning of each year, including $25100 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 11%; the lessor’s implicit rate is 9% and is known by the lessee. The present value of an annuity due of 1 for six years at 11% is 4.69590. The present value of an annuity due of 1 for six years at 9% is 4.88965. Cullumber should record the leased asset at $685132. $713400. $802999. $836130.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
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:PEARSON
Intermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill Education
Financial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education
Accounting for Finance and Operating Leases | U.S. GAAP CPA Exams; Author: Maxwell CPA Review;https://www.youtube.com/watch?v=iMSaxzIqH9s;License: Standard Youtube License