Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
thumb_up100%
Chapter 20, Problem 6P
Sales-Type Lease with Unguaranteed Residual Value Lessor Company and Lessee Company enter into a 5-year, noncancelable, sales-type lease on January 1, 2019, for equipment that cost Lessor $375,000 (useful life is 5 years). The fair value of the equipment is $400,000. Lessor expects a 12% return on the cost of the asset over the 5-year period of the lease. The equipment will have an estimated unguaranteed residual value of $20,000 at the end of the fifth year of the lease. The lease provisions require 5 equal annual amounts, payable each January 1, beginning with January 1, 2019. Lessee pays all executory costs directly to a third party. The equipment reverts to the lessor at the termination of the lease. Assume there are no initial direct costs, and the lessor expects to be able to collect all lease payments.
Required:
- 1. Show how Lessor should compute the annual rental amounts.
- 2. Prepare a table summarizing the lease and interest receipts that would be suitable for Lessor.
- 3. Prepare a table showing the accretion of the unguaranteed residual asset.
- 4. Prepare the
journal entries for Lessor for the years 2019, 2020, and 2021.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
On January 1, 2019, Intouch Corp. signed a five-year non-cancelable lease for machine with UWMA Company. The terms of the lease called for Intouch to make annual payments of P86,680 at the beginning of each year starting January 1, 2019. The machine has an estimated useful life of 6 years and a P50,000 unguaranteed residual value at the end of the five-year lease term. The machine reverts to the lessor at the end of five-year lease term. Intouch uses straight-line method of depreciation for all of its fixed assets. The implicit rate of the contract which is known by Intouch is 10%. The fair value of the machine on January 1, 2019 is P392,490. Intouch incurred P10,000 to install the machine. Intouch has an obligation to restore the machine to a condition suitable for use at the end of the lease term. Estimated cost of restoration is P20,000. (Use four decimal places for the PV factor) Applying IFRS 16, how much is the current and the non-current portion of the liability to be presented…
On January 1, 2020, Bacarra Company leased an asset for a term of six years. Annual rentals of P500,000 is payable every yearend. The cost of the leased asset is P2,100,000. Initial direct costs paid by Bacarra totaled P6,360. The asset will revert to Bacarra at the end of the lease term, when its residual value would amount to P100,000.
1. Assume it is a sales-type lease with an implicit rate of 10%, how much is the net lease receivable as of yearend 2020?
2. Assume the residual value is unguaranteed and the fair value of the leased asset at the end of the lease term is P80,000, how much is the loss on finance lease?
CUPID Corporation leased equipment to a lessee on April 1, 2021 for an eight-year period expiring April 1, 2029. Equal payments under the lease are ₱600,000 and are due on April 1 of each year. The first payment was made on April 1, 2021. The list selling price of the equipment is ₱3,520,000 and the carrying amount is ₱2,800,000. The lease is appropriately accounted for as a sales-type lease. The present value of the lease payments is ₱3,300,000. What is the amount of profit on the sale that should be reported for 2021?
Chapter 20 Solutions
Intermediate Accounting: Reporting And Analysis
Ch. 20 - Prob. 1GICh. 20 - List four potential benefits to the lessor of...Ch. 20 - Prob. 3GICh. 20 - What is a substitution right, and when does that...Ch. 20 - Prob. 5GICh. 20 - List the five criteria used to determine if a...Ch. 20 - Prob. 7GICh. 20 - Prob. 8GICh. 20 - Describe briefly the procedures followed by the...Ch. 20 - Owens Company leased equipment for 4 years at...
Ch. 20 - Describe the difference between how a lessee would...Ch. 20 - Prob. 12GICh. 20 - What is the basic difference between the...Ch. 20 - Why are compound interest concepts appropriate and...Ch. 20 - Describe briefly the accounting procedures...Ch. 20 - Prob. 16GICh. 20 - Prob. 17GICh. 20 - Which of the following should be included by the...Ch. 20 - East Company leased a new machine from North...Ch. 20 - Prob. 3MCCh. 20 - Fox Company, a dealer in machinery and equipment,...Ch. 20 - Fox Company, a dealer in machinery and equipment,...Ch. 20 - In the third year of a 6-year finance lease, the...Ch. 20 - Prob. 7MCCh. 20 - At its inception, the lease term of Lease G is 65%...Ch. 20 - Rent received in advance by the lessor for an...Ch. 20 - On August 1, 2019, Kern Company leased a machine...Ch. 20 - Next Level Keller Corporation (the lessee) entered...Ch. 20 - Use the information in RE20-1. Prepare the journal...Ch. 20 - Next Level Garvey Company (the lessee) entered...Ch. 20 - Use the information in RE20-3. Prepare the journal...Ch. 20 - Use the information in RE20-3. Prepare the journal...Ch. 20 - Montevallo Corporation leased equipment from Folio...Ch. 20 - Use the information in RE20-6. However, assume...Ch. 20 - Use the following information to decide whether...Ch. 20 - Use the information in RE20-3. Prepare the journal...Ch. 20 - Determining Type of Lease and Subsequent...Ch. 20 - Lessee Accounting with Payments Made at Beginning...Ch. 20 - Lessee Accounting Issues Sax Company signs a lease...Ch. 20 - Lessee Accounting for Finance Lease On January 1,...Ch. 20 - Prob. 5ECh. 20 - Lessor Accounting Issues Ramsey Company leases...Ch. 20 - Lessor Accounting with Receipts at End of Year...Ch. 20 - Lessor Accounting with Unguaranteed Residual Value...Ch. 20 - Lessor Accounting with Guaranteed Residual Value...Ch. 20 - Determining Type of Lease and Subsequent...Ch. 20 - Guaranteed and Unguaranteed Residual Values...Ch. 20 - Lessor Accounting Issues Rexon Company leases...Ch. 20 - Lessee and Lessor Accounting Issues Diego Leasing...Ch. 20 - Lessee and Lessor Accounting Issues The following...Ch. 20 - Lease Income and Expense Reuben Company retires a...Ch. 20 - Determining Type of Lease and Subsequent...Ch. 20 - Determining Type of Lease and Subsequent...Ch. 20 - Accounting for Leases by Lessee and Lessor Scupper...Ch. 20 - Lessee Accounting Issues Timmer Company signs a...Ch. 20 - Sales-Type Lease with Guaranteed Residual Value...Ch. 20 - Sales-Type Lease with Unguaranteed Residual Value...Ch. 20 - Sales-Type Lease with Receipts at End of Year...Ch. 20 - Initial Direct Costs and Related Issues On January...Ch. 20 - Various Lease Issues for Lessor and Lessee Lessee...Ch. 20 - Prob. 10PCh. 20 - Various Lease Issues Farrington Company leases a...Ch. 20 - Comprehensive Landlord Company and Tenant Company...Ch. 20 - Prob. 1CCh. 20 - Identified Asset A customer enters into a 3-year...Ch. 20 - Prob. 3CCh. 20 - Types of Leases On January 1, Hazard Company, a...Ch. 20 - Initial Direct Costs Efland Company leases...Ch. 20 - Prob. 6C
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
- Lessee Accounting Issues Sax Company signs a lease agreement dated January 1, 2019, that provides for it to lease computers from Appleton Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows: 1. The lease term is 5 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year. The computers are not specialized for Sax. 2. The computers have an estimated life of 5 years, a fair value of 300,000, and a zero estimated residual value. 3. Sax agrees to pay all executory costs directly to a third party. 4. The lease contains no renewal or bargain purchase options. 5. The annual payment is set by Appleton at 83,222.92 to earn a rate of return of 12% on its net investment. Sax is aware of this rate. Saxs incremental borrowing rate is 10%. 6. Sax uses the straight-line method to record depreciation on similar equipment. Required: 1. Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Sax. 2. Calculate the amount of the asset and liability of Sax at the inception of the lease (round to the nearest dollar). 3. Prepare a table summarizing the lease payments and interest expense. 4. Prepare journal entries for Sax for the years 2019 and 2020.arrow_forwardComprehensive Landlord Company and Tenant Company enter into a noncancelable, direct financing lease on January 1, 2019, for nonspecialized equipment that cost the Landlord 280,000 (useful life is 6 years with no residual value). The fair value of the equipment is 300,000. The interest rate implicit in the lease is 14%. The 6-year lease requires 6 equal annual amounts payable each January 1, beginning with January 1, 2019. Tenant pays all executory costs directly to a third party on December 1 of each year. The equipment reverts to the lessor at the termination of the lease. Assume that there are no initial direct costs. Landlord expects to collect all rental payments. Required: 1. Next Level (a) Show how landlord should compute the annual rental amounts, (b) Discuss how the Tenant Company should compute the present value of the lease payments. What additional information would be required to make this computation? 2. Next Level Prepare a table summarizing the lease and interest receipts that would be suitable for Landlord. Under what conditions would this table be suitable for Tenant? 3. Assuming that the table prepared in Requirement 2 is suitable for both the lessee and the lessor, prepare the journal entries for both firms for the years 2019 and 2020. Use the straight-line depreciation method for the leased equipment. The executory costs paid by the lessee are in 2019: insurance, 700 and property taxes, 800; in 2020: insurance, 600 and property taxes, 750. 4. Next Level Show the items and amounts that would be reported on the comparative 2019 and 2020 income statements and ending balance sheets for both the lessor and the lessee, using the change in present value approach.arrow_forwardLessee Accounting Issues Timmer Company signs a lease agreement dated January 1, 2019, that provides for it to lease equipment from Landau Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows: The lease is noncancelable and has a term of 5 years. The annual rentals are 83,222.92, payable at the end of each year, and provide Landau with a 12% annual rate of return on its net investment. Timmer agrees to pay all executory costs directly to a third party on December 1 of each year. In 2019, these were insurance, 3,760; property taxes, 5,440. In 2020: insurance, 3,100; property taxes, 5,330. There is no renewal or bargain purchase option. Timmer estimates that the equipment has a fair value of 300,000, an economic life of 5 years, and a zero residual value. Timmers incremental borrowing rate is 16%, it knows the rate implicit in the lease, and it uses the straightline method to record depreciation on similar equipment. Required: 1. Calculate the amount of the asset and liability of Timmer at the inception of the lease. (Round to the nearest dollar.) 2. Prepare a table summarizing the lease payments and interest expense. 3. Prepare journal entries on the books of Timmer for 2019 and 2020. 4. Next Level Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2019. Use the present value of next years payment approach to classify the finance lease obligation between current and noncurrent. 5. Next Level Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2019. Use the change in present value approach to classify the finance lease obligation between current and noncurrent.arrow_forward
- Lessee and Lessor Accounting Issues Diego Leasing Company agrees to provide La Jolla Company with equipment under a noncancelable lease for 5 years. The equipment has a 5-year life, cost Diego 25,000, and will have no residual value when the lease term ends. The fair value of the equipment is 30,000. La Jolla agrees to pay all executory costs (500 per year) throughout the lease period directly to a third party. On January 1, 2019, the equipment is delivered. Diego expects a 14% return on its net investment. The five equal annual rents are payable in advance starting January 1, 2019. Required: 1. Assuming this is a sales-type lease for the Diego and a finance lease for the La Jolla, prepare a table summarizing the lease and interest payments suitable for use by either party. 2. Next Level On the assumption that both companies adjust and close books each December 31, prepare journal entries relating to the lease for both companies through December 31, 2020, based on data derived in the table. Assume that La Jolla depreciates similar equipment by the straight line methodarrow_forwardLessee Accounting with Payments Made at Beginning of Year Adden Company signs a lease agreement dated January 1, 2019, that provides for it to lease non-specialized heavy equipment from Scott Rental Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows: 1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of 20,000 to be paid in advance at the beginning of each year. 2. The cost, and also fair value, of the heavy equipment to Scott at the inception of the lease is 68,036.62. The equipment has an estimated life of 4 years and has a zero estimated residual value at the end of this time. 3. Adden agrees to pay all executory costs directly to a third party. 4. The lease contains no renewal or bargain purchase options. 5. Scotts interest rate implicit in the lease is 12%. Adden is aware of this rate, which is equal to its borrowing rate. 6. Adden uses the straight-line method to record depreciation on similar equipment. 7. Executory costs paid at the end of the year by Adden are: Required: 1. Next Level Determine what type of lease this is for Adden. 2. Prepare a table summarizing the lease payments and interest expense for Adden. 3. Prepare journal entries for Adden for the years 2019 and 2020.arrow_forwardSales-Type Lease with Guaranteed Residual Value Calder Company, the lessor, enters into a lease with Darwin Company, the lessee, to provide heavy equipment beginning January 1, 2017. The lease is appropriately classified as a sales-type lease. The lease terms, provisions, and related events are as follows: The lease is noncancelable, has a term of 8 years, and has no renewal or bargain purchase option. The annual rentals are 65,000, payable at the end of each year. The interest rate implicit in the lease is 15%. Darwin agrees to pay all executory costs directly to a third party. The cost of the equipment is 280,000. The fair value of the equipment to Calder is 308,021.03. Calder incurs no material initial direct costs. Calder expects that it will be able to collect all lease payments. Calder estimates that the fair value at the end of the lease term will be 50,000 and that the economic life the equipment is 9 years. This residual value is guaranteed by Darwin. The following present value factors are relevant: PV of an ordinary annuity n = 8, i = 15% = 4.487322 PV n = 8, i = 15% = 0.326902 PV n = 1, i = 15% = 0.869565 Required: 1. Determine the proper classification of the lease. 2. Prepare a table summarizing the lease receipts and interest income earned by Calder for this lease. 3. Prepare journal entries for Calder for the years 2019, 2020, and 2021. 4. Next Level Prepare partial balance sheets for December 31, 2019, and December 31, 2020, showing how the accounts should be reported. Use the present value of next years payment approach to classify the lease receivable as current and noncurrent. 5. Next Level Prepare partial balance sheets for December 31, 2019, and December 31, 2020, showing how the accounts should be reported. Use the change in present value approach to classify the lease receivable as current and noncurrent.arrow_forward
- Owens Company leased equipment for 4 years at 50,000 a year with an option to renew the lease for 6 years at 2,000 per month or to purchase the equipment for 25,000 (a price considerably less than the expected fair value) after the initial lease term of 4 years. Why would this lease qualify as a finance lease?arrow_forwardUse the information in RE20-3. Prepare the journal entries that Richie Company (the lessor) would make in the first year of the lease assuming the lease is classified as a sales-type lease. Assume that the lessee is required to make payments on December 31 each year. Also assume that Richie had purchased the equipment at a cost of 200,000.arrow_forwardDetermining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a 10-year cancelable (at the option of either party) agreement to lease a storage building from Wake Company. The following information pertains to this lease agreement: 1. The agreement requires rental payments of 100,000 at the beginning of each year. 2. The cost and fair value of the building on January 1, 2019, is 2 million. The storage building has not been specialized for Caswell. 3. The building has an estimated economic life of 50 years, with no residual value. Caswell depreciates similar buildings according to the straight-line method. 4. The lease does not contain a renewable option clause. At the termination of the lease, the building reverts to the lessor. 5. Caswells incremental borrowing rate is 14% per year. Wake set the annual rental to ensure a 16% rate of return (the loss in service value anticipated for the term of the lease). Caswell knows the implicit interest rate. 6. Executory costs of 7,000 annually, related to taxes on the property, are paid by Caswell directly to the taxing authority on Dec. 31 of each year. Required: 1. Determine what type of lease this is for the lessee. 2. Prepare appropriate journal entries on the lessees books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2019 and 2020.arrow_forward
- Use the information in RE20-3. Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. However, assume that Garvey is now required to make the 65,949.37 payments on January 1 each year and that the fair value at the lease inception is now 275,000 (65,949:37 4:169865).arrow_forwardDetermining Type of Lease and Subsequent Accounting On January 1, 2019, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions: The lease is noncancelable and has a term of 8 years. The annual rentals arc 35,000, payable at the beginning of each year. The interest rate implicit in the lease is 14%. Anderson agrees to pay all executory costs directly to a third party and is given an option to buy the equipment for 1 at the end of the lease term, December 31, 2026. The cost of the equipment to the lessee is 150,000, and the fair value is approximately 185,100. Ballieu incurs no material initial direct costs. It is probable that Ballieu will collect the lease payments. Ballieu estimates that the fair value is expected to be significantly greater than 1 at the end of the lease term. Ballieu calculates that the present value on January 1, 2019, of 8 annual payments in advance of 35,000 discounted at 14% is 185,090.68 (the 1 purchase option is ignored as immaterial). Required: 1. Next Level Identify the classification of the lease transaction from Ballices point of view. Give the reasons for your classification. 2. Prepare all the journal entries tor Ballieu for the years 2019 and 2020. 3. Discuss the disclosure requirements for the lease transaction in Ballices notes to the financial statements.arrow_forwardLessor Accounting with Guaranteed Residual Value Use the information for Edom Company in E20-8, except that the residual value was guaranteed by Davis Company (the lessee). Required: 1. Assuming that the lease is a sales-type lease, calculate the selling price. 2. Prepare a table summarizing the lease receipts and interest income earned by Edom. 3. Prepare journal entries for Edom tor the years 2019 and 2020.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:Cengage Learning
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