Intermediate Accounting, 10 Ed
10th Edition
ISBN: 9781260310177
Author: Mark W. Nelson, Wayne B. Thomas J. David Spiceland
Publisher: McGraw-Hill Education
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Chapter 5, Problem 5.21E
Lease payments; solve for unknown interest rate
• LO6–8, LO6–9
On March 31, 2018, Southwest Gas leased equipment from a supplier and agreed to pay $200,000 annually for 20 years beginning March 31, 2019. Generally accepted accounting principles require that a liability be recorded for this lease agreement for the present value of scheduled payments. Accordingly, at inception of the lease, Southwest recorded a $2,293,984 lease liability.
Required:
Determine the interest rate implicit in the lease agreement.
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Carla Corporation enters into a 7-year lease of equipment on December 31, 2019, which requires 7 annual payments of $37,300 each, beginning December 31, 2019. In addition, Carla guarantees the lessor a residual value of $19,400 at the end of the lease. However, Carla believes it is probable that the expected residual value at the end of the lease term will be $9,700. The equipment has a useful life of 7 years.Prepare Carlas' December 31, 2019, journal entries assuming the implicit rate of the lease is 9% and this is known to Carla. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places e.g. 5,275.)Click here to view factor tables.
Date
Account Titles and Explanation
Debit
Credit…
Problem 15-3 (Algo) Lease amortization schedule [LO15-2]
On January 1, 2024, Majestic Mantles leased a lathe from Equipment Leasing under a finance lease. Lease payments are made
annually. Title does not transfer to the lessee and there is no purchase option or guarantee of a residual value by Majestic Portions of
the Equipment Leasing's lease amortization schedule appear below:
January 1
2024
2025
2026
2027
2028
2029
2030
2041
2042
2043
Payments
$ 26,500
$ 26,500
$ 26,500
$ 26,500
$ 26,500
$ 26,500
$ 26,500
$ 26,500
$ 26,500
$ 26,500
Effective
Interest
$ 22,167
$ 21,734
$ 21,257
$ 20,733
$ 20,156
$ 19,522
1. Lease liability
2. Right-of-use asset
3. Lease term
4. Effective annual interest rate
5. Total of lease payments
6. Total effective interest expense
Decrease in
Balance
$ 26,500
$ 4,333
$ 4,766
$ 5,243
$ 5,767
$ 6,344
$ 6,978
$ 6,590
$ 19,910
$ 4,599
$ 21,901
$ 2,409 $ 24,091
Outstanding
Balance
$ 248,178
$ 221,679
$ 217,337
$ 212,571
$ 207,328
$ 201,561
$ 195,217
$ 188,238…
PROBLEM NO. 3
Assume that DBP Leasing Corp. and Minasugbo Inc. sign a lease contract effective on January 1, 2019
where DBP Leasing leases to Minasugbo a bulldozer. The terms and provisions of the lease contract and
other pertinent date are as follows:
• The term of the lease is five years. The lease agreement is non-cancelable, requiring equal rental
payments of P20,711.11 at the beginning of each year (annuity-due basis).
The bulldozer has a fair value at the commencement of the lease of P100,000, an estimated
economic life of five years, and a guaranteed residual value of P5,000. (Minasugbo expects that
it is probable that the expected value of the residual value at the end of the lease will be greater
than the guaranteed amount of P5,000.)
The lease contains no renewal options. The bulldozer reverts to DBP Leasing at the termination
of the lease.
Minasugbo's incremental borrowing rate is 5 percent per year.
• Minasugbo depreciates its equipment on a straight-line basis.
DBP Leasing…
Chapter 5 Solutions
Intermediate Accounting, 10 Ed
Ch. 5 - Prob. 5.1QCh. 5 - Explain compound interest.Ch. 5 - Prob. 5.3QCh. 5 - Prob. 5.4QCh. 5 - Prob. 5.5QCh. 5 - Prob. 5.6QCh. 5 - What is an annuity?Ch. 5 - Explain the difference between an ordinary annuity...Ch. 5 - Prob. 5.9QCh. 5 - Prepare a time diagram for the present value of a...
Ch. 5 - Prepare a time diagram for the present value of a...Ch. 5 - What is a deferred annuity?Ch. 5 - Assume that you borrowed 500 from a friend and...Ch. 5 - Compute the required annual payment in Question...Ch. 5 - Explain how the time value of money concept is...Ch. 5 - Prob. 5.1BECh. 5 - Prob. 5.2BECh. 5 - Prob. 5.3BECh. 5 - Present value; single amount LO63 John has an...Ch. 5 - Present value; solving for unknown; single amount ...Ch. 5 - Future value; ordinary annuity LO66 Leslie...Ch. 5 - Future value; annuity due LO66 Refer to the...Ch. 5 - Prob. 5.8BECh. 5 - Prob. 5.9BECh. 5 - Prob. 5.10BECh. 5 - Solve for unknown; annuity LO68 Kingsley Toyota...Ch. 5 - Price of a bond LO69 On December 31, 2018,...Ch. 5 - Lease payment LO69 On September 30, 2018,...Ch. 5 - Prob. 5.1ECh. 5 - Future value; single amounts LO62 Determine the...Ch. 5 - Prob. 5.3ECh. 5 - Prob. 5.5ECh. 5 - Prob. 5.6ECh. 5 - Prob. 5.7ECh. 5 - Prob. 5.10ECh. 5 - Deferred annuities LO67 Required: Calculate the...Ch. 5 - Solving for unknowns; annuities LO68 For each of...Ch. 5 - Solving for unknown annuity amount LO68 Required:...Ch. 5 - Prob. 5.15ECh. 5 - Price of a bond LO69 On September 30, 2018, the...Ch. 5 - Price of a bond; interest expense LO69 On June...Ch. 5 - Prob. 5.18ECh. 5 - Prob. 5.19ECh. 5 - Lease payments LO69 On June 30, 2018,...Ch. 5 - Lease payments; solve for unknown interest rate ...Ch. 5 - Analysis of alternatives LO63, LO67 Esquire...Ch. 5 - Analysis of alternatives LO63, LO67 Harding...Ch. 5 - Investment analysis LO63, LO67 John Wiggins is...Ch. 5 - Prob. 5.5PCh. 5 - Prob. 5.6PCh. 5 - Deferred annuities LO67 On January 1, 2018, the...Ch. 5 - Prob. 5.8PCh. 5 - Noninterest-bearing note; annuity and lump-sum...Ch. 5 - Prob. 5.10PCh. 5 - Solving for unknown lease payment LO68, LO69...Ch. 5 - Solving for unknown lease payment; compounding...Ch. 5 - Lease v s. buy alternatives LO63, LO67, LO69...Ch. 5 - Prob. 5.14PCh. 5 - Prob. 5.15PCh. 5 - Prob. 5.1DMPCh. 5 - Prob. 5.2DMPCh. 5 - Prob. 5.3DMPCh. 5 - Prob. 5.4DMPCh. 5 - Judgment Case 65 Replacement decision LO63, LO67...Ch. 5 - Prob. 5.6DMPCh. 5 - Prob. 5.7DMP
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- 23. Partially correct answer icon Your answer is partially correct. Tamarisk Corporation enters into a 7-year lease of equipment on December 31, 2019, which requires 7 annual payments of $38,200 each, beginning December 31, 2019. In addition, Tamarisk guarantees the lessor a residual value of $18,500 at the end of the lease. However, Tamarisk believes it is probable that the expected residual value at the end of the lease term will be $8,500. The equipment has a useful life of 7 years. Assume that for Lost Ark Company, the lessor, collectibility of lease payments is probable and the carrying amount of the equipment is $170,000.Prepare Lost Ark’s 2019 and 2020 journal entries, assuming the implicit rate of the lease is 11% and this is known to Tamarisk. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal…arrow_forward19 On September 30, 2024, Truckee Garbage leased equipment from a supplier and agreed to pay $125,000 annually for 15 years beginning September 30, 2025. Generally accepted accounting principles require that a liability be recorded for this lease agreement for the present value of scheduled payments. Accordingly, at inception of the lease, Truckee recorded a $1,214,031 lease liability. Determine the interest rate implicit in the lease agreement. 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)arrow_forwardS Exercise 15-3 (Algo) Finance lease; lessee; balance sheet and income statement effects [LO15-2] On June 30, 2024, Georgia-Atlantic, Incorporated leased warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $604,152 over a four-year lease term, payable each June 30 and December 31, with the first payment on June 30, 2024. Georgia-Atlantic's incremental borrowing rate is 10%, the same rate IC uses to calculate lease payment amounts. Amortization is recorded on a straight-line basis at the end of each fiscal year. The fair value of the equipment is $4.10 million. 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 present value of the lease payments on June 30, 2024 that Georgia-Atlantic uses to record the right-of-use asset and lease liability. 2. What amount related to the lease would Georgia-Atlantic report in…arrow_forward
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- 26. Incorrect answer icon Your answer is incorrect. Martinez Corporation entered into a finance lease to lease equipment from Highlander, Inc. on January 1, 2020. The lease calls for annual lease payments of $16,000, beginning on December 31, 2020 for each of the 5 years of the lease. In addition, Highlander, Inc. will pay Martinez Corporation $3,300 as a cash incentive for entering the lease by January 1, 2020. In relation to the lease agreement, Martinez incurred the following costs. Commissions for selling agents $800 Internal engineering costs 500 Legal fees resulting from the execution of the lease 3,800 If the value of the lease liability is $72,735, what amount will Martinez record as the value of the right-of-use asset on January 1, 2020, at commencement of the lease? Value of the right-of-use asset $arrow_forward22. Partially correct answer icon Your answer is partially correct. Carla Corporation enters into a 7-year lease of equipment on December 31, 2019, which requires 7 annual payments of $37,300 each, beginning December 31, 2019. In addition, Carla guarantees the lessor a residual value of $19,400 at the end of the lease. However, Carla believes it is probable that the expected residual value at the end of the lease term will be $9,700. The equipment has a useful life of 7 years.Prepare Carlas' December 31, 2019, journal entries assuming the implicit rate of the lease is 9% and this is known to Carla. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places e.g. 5,275.)Click here to view factor tables. Date Account Titles and Explanation Debit Credit December 31, 2019…arrow_forwardExercise 15-9 (Algo) Lessor calculation of annual lease payments; lessee calculation of asset and liability [LO15-2] Each of the three independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit rate of return. 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) Lease term (years) Lessor's rate of return (known by lessee) Lessee's incremental borrowing rate Fair value of lease asset Situation 1 Situation 2 Situation 3 Lease Payments Right-of-use Asset/Lease 1 Payable 10 10% 11% $790,000 Situation 2 20 8% 9% Required: a. & b. Determine the amount of the annual lease payments as calculated by the lessor and the amount the lessee would record as a right-of-use asset and a lease liability, for each of the above situations. Note: Round your answers to the nearest whole dollar. $1,170,000 5 11% 10% $375,000arrow_forward
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