Concept explainers
Classification as Finance or Operating Lease, Lessee,
Required
- a. Determine the lease classification for Gump Sales.
- b. Prepare the journal entries over Years 1-3 for Gump Sales based on your answer to part (a).
- c. Include an amortization table for the lease liability and right-of-use asset.
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Intermediate Accounting
- Eastern Edison Company leased equipment from Low-Tech Leasing on January 1, 2018. Low-Tech recently purchased the equipment at a cost of $366,951. Other information: 5 years $88,000 on January 1 each year 5 years Lease term Annual payments Life of asset Fair value of asset $366,951 Implicit interest rate 10% Incrementa1 rate 10% There is no expected residual value. Required: Prepare appropriate journal entries for Low-Tech Leasing for 2018. Assume a December 31 year-end. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest whole dollar amounts.) View transaction list Journal entry worksheet 1 2 3 Record the entry at the inception of the lease. Note: Enter debits before credits. Date General Journal Debit Credit January 01, 2018arrow_forwardEastern Edison Company leased equipment from Low-Tech Leasing on January 1, 2018. Low-Tech recently purchased the equipment at a cost of $334.936. Other information: 5 years $79,000 on January 1 each year 5 years Lease term Annual payments Life of asset Fair value of asset $334,936 Implicit interest rate 9% Incremental rate 9% There is no expected residual value. Required: Prepare appropriate journal entries for Low-Tech Leasing for 2018. Assume a December 31 year-end. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest whole dollar amounts.) View transaction list Journal entry worksheet 1 2 3 > Record the entry at the inception of the lease. Note: Enter debits before credits. Date General Journal Debit Credit January 01, 2018arrow_forwardHappy Company purchased a packing machine intended for leasing at a cost of P330,000. The machine was leased to Great Company on January 1, 2021, at an annual rental of P58,860 payable in advance over a period of 10 years. The lease qualifies as a direct financing lease. There is no expected residual value for the asset. Implicit interest rate is 16%. Happy Company uses the calendar year. What is the amount of interest revenue recognized in profit or loss by Happy Company for the years 2021 and 2022? A. P43,382 and P40,906 B. P52,800 and P51,830 C. P43,832 and P40,609 D. P52,800 and P51,380arrow_forward
- On January 1, Year 1, Amira’s Stables Corp., which reports its financial results inaccordance with ASPE, entered into a contract to lease a tractor, details of which follow: Lease term 2 years Economic life of equipment 5 years Lease payment $7,000 first due January 1, Year 1 FV of asset $15,000 Implicit rate in the lease (not known by lessee) 4% Incremental borrowing rate 6% Option to purchase NoGuaranteed residual value No Amira uses the straight-line method of depreciation for its assets. Using the issue-analysis-recommendation (IAR) approach, determine if AmiraStables should classify the lease as a capital lease or an operating lease byevaluating the three primary ASPE criteria.arrow_forwardAt January 1 of the current year, Widget World Corporation leased manufacturing equipment from Clinton Corporation under a 6-year lease agreement. The lease agreement specifies annual payments of $25,000 beginning January 1 of the current year, the beginning of the lease, and on each December 31 thereafter. The equipment was acquired recently by Clinton at a cost of $146,163 (its fair value) and was expected to have a useful life of 8 years with no salvage value at the end of its life. Because the lease term is only 6 years, the asset does have an expected residual value at the end of the lease term of $28,000. Clinton seeks a 7% return on its lease investments. By this arrangement, the lease is deemed to be a finance lease. Required: 1. Determine the present value of the lease using Excel's PV function. 2. Prepare the journal entry for Widget World Corporation at the beginning of the lease on January 1 of the current year. 3. Prepare a partial amortization schedule for the first year…arrow_forwardShamrock, Inc. has entered an agreement to lease an old warehouse with a useful life of 5 years and a fair value of $40,000 from United Corporation. The agreement stipulates the following. ● Rental payments of $9,435 are to be made at the start of each year of the 5-year lease. No residual value is expected at the end of the lease. ● Shamrock must reimburse United each year for any real estate taxes incurred for the year. Last year, the cost of real estate taxes was $800, though these costs vary from year to year. ● Shamrock must make a payment of $500 with the rental payment each period to cover the insurance United has on the warehouse. ● Shamrock paid legal fees of $3,000 in executing the lease. Assuming Shamrock’s incremental borrowing rate is 9% and the rate implicit in the lease is unknown, prepare the journal entry to record the initial lease liability and right-of-use asset for Shamrock. (Credit account titles are automatically indented when the amount is…arrow_forward
- Shamrock, Inc. has entered an agreement to lease an old warehouse with a useful life of 5 years and a fair value of $40,000 from United Corporation. The agreement stipulates the following. ● Rental payments of $9,435 are to be made at the start of each year of the 5-year lease. No residual value is expected at the end of the lease. ● Shamrock must reimburse United each year for any real estate taxes incurred for the year. Last year, the cost of real estate taxes was $800, though these costs vary from year to year. ● Shamrock must make a payment of $500 with the rental payment each period to cover the insurance United has on the warehouse. ● Shamrock paid legal fees of $3,000 in executing the lease. Assuming Shamrock’s incremental borrowing rate is 9% and the rate implicit in the lease is unknown, prepare the journal entry to record the initial lease liability and right-of-use asset for Shamrock. (Credit account titles are automatically indented when the amount is…arrow_forwardOn January 1, 2021 Richmond Leasing corporation, a public company leased an equipment with a fair value of $100,000 and a cost of $90,000 to Alpha Inc. the following information relates to the agreement: - Rental payments are due on January 1 of each year. - The lease term is for 5 years (with no renewal), - The asset economic life is 7 years - There is an unguaranteed residual value (URV) of $4,000. The VP finance asked how much the annual lease rent should be to ensure a 9% return rate? Select one: a. $20,615. b. $16,007. c. $22,973. d. $23,586.arrow_forwardOn January 1, 2018, Yancey, Inc. signs a 10 year concancelable lease agreement to lease a storage building from Holt Warehouse company. Lease payments is predictable and no important uncertainties surround the amount of costs to be incurred by the lessor: Following information: 1. equal rental payments at beginning of each year 2. Fair value of building is $6,000,000, book value is $4,950,000 3. Building has a life of 10 years with no residual value. Yancey uses straight line method 4. At end of lease, ownership transfer to the lessee. 5. Yancey's borrowing rate is 11%. Holt set the annual rental to insure a 10% rate of return. 6. The yearly rental payment includes $15,000 of executory costs. What is the amount of the total annual lease payment?arrow_forward
- Vaughn Company, as lessee, enters into a lease agreement on January 1, 2022, for equipment. The following data are relevant to the lease agreement: The term of the noncancelable lease is 4 years, with no renewal option. Payments of $422,689 are due on January 1 of each year. The fair value of the equipment on January 1, 2022 is $1,512,000. The equipment has an economic life of 6 years with no salvage value. Vaughn depreciates similar machinery it owns on the straight-line basis. The lessee pays all executory costs. Vaughn’s incremental borrowing rate is 10%, but Vaughn knows that 8% is the lessor’s implicit interest rate. Vaughn has a December 31 year-end. Required: Indicate the type of lease that Vaughn Company has entered into and why. Prepare an amortization table for Vaughn in Excel. Prepare the journal entries on Vaughn’s books for the first two years of the lease.arrow_forwardbuilding from Warehouse Company. The agreement required ten-year noncancelable lease agreement to lease a storage At the beginning of current year, Yolk Company signed a equal rental payments at the end of each year. The fair value of the building at the inception of the lease is P2,949,600. However, the carrying amount to Warehouse economic life of 10 years with no residual value. Company is P2,458,000. The building has an estimated rate of Yolk Company is 12% per year. 13 / 19 65% Problem 13-15 (IAA) Company is P2,458,000. The building has an estimated At the termination of the lease, the title to the building will transferred to Yolk Company. The incremental borrowing te of Yolk Company is 12% per year. Warehouse Company set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by the lessee. The annual total lease payment included P20,000 of executory costs related to taxes on the property. Round off present value factor to three decimal places.…arrow_forwardScape Corp. manufactures hi-tech equipment. Scape leased equipment to User, Inc., on January 1, 2019. Scape manufactured the equipment at a cost of $3,700,000. Lease description: Annual rental payments $1,000,000 at beginning of each period Lease term 5 years No Bargain Purchase – Or special use at the end Implicit interest rate and lessee’s incremental borrowing rate 12% Fair value of asset Expected Life of the Asset (SL depreciation with no salvage value) $6,000,000 6 years Prepare appropriate entries for both User and Scape from the inception of the lease through the end of the first fiscal year (December 31).arrow_forward
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