Chapter 21 Computational
B
52. On December 1, 2018, Goetz Corporation leased office space for 10 years at a monthly rental of $80,000. On that date Goetz paid the landlord the following amounts: Rent deposit $ 80,000 First month's rent 80,000 Last month's rent 80,000 Installation of new walls and offices 640,000 $880,000 The entire amount of $880,000 was charged to rent expense in 2018. What amount should Goetz have charged to expense for the year ended December 31, 2018? a. $80,000 b. $85,333 c. $165,333 d. $640,000
A
74. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2018 it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an expected useful life of 5 years. If the selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, what are the equal annual payments? PV Annuity Due 8%, 5 periods 4.31213 10%, 5 periods 4.16986 PV Ordinary Annuity 8%, 5 periods 3.99271 10%, 5 periods 3.79079 PV Single Sum 8%, 5 periods .68508 10%, 5 periods .62092 a. $175,820 b. $162,795 c. $181,972 d. $195,356
C
88. Geary Co. leased a machine to Dains Co. Assume the lease payments were made on the basis that the residual value was guaranteed and Geary gets to recognize all the profits. At the end of the lease term, before the lessee transfers the asset to the lessor, the leased asset and obligation accounts have the following balances: Leased equipment $400,000 Less accumulated depreciation--capital lease 384,000 $ 16,000 Interest payable $ 1,520 Lease liability 14,480 $16,000 If, at the end of the lease, the fair value of the residual value is $11,800, what gain or loss should Geary record? a. $2,680 gain b. $6,280 loss c. $4,200 loss d. $11,800 gain
C
53. On January 1, 2018, Dean Corporation signed a ten-year non-cancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of $220,000 at the end of each year for ten years with the title passing to Dean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $1,342,016 at an effective interest rate of 8%. With respect to this capitalized lease, Dean should record for 2018 a. lease expense of $200,000. b. interest expense of $89,468 and depreciation expense of $76,136. c. interest expense of $107,361 and depreciation expense of $89,468. d. interest expense of $91,363 and depreciation expense of $134,202.
C
65. On January 1, 2018, Ogleby Corporation signed a five-year non-cancelable lease for equipment. The terms of the lease called for Ogleby to make annual payments of $180,000 at the beginning of each year for five years with title passing to Ogleby at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of depreciation for all of its fixed assets. Ogleby accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $750,578 at an effective interest rate of 10%. With respect to this capitalized lease, for 2018 Ogleby should record a. rent expense of $180,000. b. interest expense of $57,058 and depreciation expense of $150,116. c. interest expense of $57,058 and depreciation expense of $107,225. d. interest expense of $90,000 and depreciation expense of $181,956.
C
60. Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a capital lease for Metcalf. The six-year lease requires payment of $170,000 at the beginning of each year, including $25,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271. Metcalf should record the leased asset at a. $848,761. b. $814,435. c. $723,943. d. $694,665.
C
61. On December 31, 2018, Lang Corporation leased a ship from Fort Company for an eight year period expiring December 30, 2026. Equal annual payments of $500,000 are due on December 31 of each year, beginning with December 31, 2018. The lease is properly classified as a capital lease on Lang 's books. The present value at December 31, 2018 of the eight lease payments over the lease term discounted at 10% is $2,934,213. Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total obligation under capital leases on its December 31, 2019 balance sheet is a. $2,727,635. b. $2,500,397. c. $2,177,634. d. $3,000,000.
A
62. On January 1, 2018, Sauder Corporation signed a five-year non-cancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $200,000 at the beginning of each year for five years beginning on January 1, 2018 with the title passing to Sauder at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. Sauder accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $833,972 at an effective interest rate of 10%. In 2018, Sauder should record interest expense of a. $63,397. b. $116,604. c. $83,396. d. $136,604.
B
63. On January 1, 2018, Sauder Corporation signed a five-year non-cancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $200,000 at the beginning of each year for five years beginning on January 1, 2018 with the title passing to Sauder at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. Sauder accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $833,972 at an effective interest rate of 10%. In 2019, Sauder should record interest expense of a. $43,397. b. $49,737. c. $69,737. d. $63,397.
D
64. On December 31, 2018, Kuhn Corporation leased a plane from Bell Company for an seven-year period expiring December 31, 2025. Equal annual payments of $450,000 are due on December 31 of each year, beginning with December 31, 2018. The lease is properly classified as a capital lease on Kuhn's books. The present value at December 31, 2018 of the eight lease payments over the lease term discounted at 10% is $2,640,792. Assuming the first payment is made on time, the amount that should be reported by Kuhn Corporation as the lease liability on its December 31, 2018 balance sheet is a. $2,640,792. b. $2,454,870. c. $2,376,714. d. $2,190,792.
C
66. On January 1, 2018, Ogleby Corporation signed a five-year non-cancelable lease for equipment. The terms of the lease called for Ogleby to make annual payments of $180,000 at the beginning of each year for five years with title passing to Ogleby at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of depreciation for all of its fixed assets. Ogleby accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $750,578 at an effective interest rate of 10%. With respect to this capitalized lease, for 2019 Ogleby should record a. interest expense of $57,058 and depreciation expense of $107,225. b. interest expense of $75,058 and depreciation expense of $107,225. c. interest expense of $44,764 and depreciation expense of $107,225. d. interest expense of $62,764 and depreciation expense of $107,225.
D
67. Emporia Corporation is a lessee with a capital lease. The asset is recorded at $900,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a fair value of $300,000 at the end of 5 years, and a fair value of $100,000 at the end of 8 years. The lease agreement provides for the transfer of title of the asset to the lessee at the end of the lease term. What amount of depreciation expense would the lessee record for the first year of the lease? a. $180,000 b. $160,000 c. $120,000 d. $100,000
A
68. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. If Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%, what is the amount recorded for the leased asset at the lease inception? PV Annuity Due 8%, 4 periods 3.57710 10%, 4 periods 3.48685 PV Ordinary Annuity 8% 4 periods: 3.31213 10% 4 periods: 3.16986 a. $1,231,066 b. $1,090,912 c. $1,139,874 d. $1,200,000
C
69. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pisa, Inc. in the first year of the asset's life? PV Annuity Due 8%, 4 periods 3.57710 10%, 4 periods 3.48685 PV Ordinary Annuity 8% 4 periods: 3.31213 10% 4 periods: 3.16986 a. $0 b. $98,482 c. $70,953 d. $91,192
D
70. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4 year useful life and no salvage value. Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of principal reduction recorded when the second lease payment is made in Year 2? PV Annuity Due 8%, 4 periods 3.57710 10%, 4 periods 3.48685 PV Ordinary Annuity 8% 4 periods: 3.31213 10% 4 periods: 3.16986 a. $344,152 b. $245,666 c. $252,960 d. $273,199
C
71. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Pisa, Inc. uses the straight-line method to depreciate similar assets. What is the amount of depreciation expense recorded by Pisa, Inc. in the first year of the asset's life? PV Annuity Due 8%, 4 periods 3.57710 10%, 4 periods 3.48685 PV Ordinary Annuity 8% 4 periods: 3.31213 10% 4 periods: 3.16986 a. $0 because the asset is depreciated by Tower Company. b. $284,968 c. $307,767 d. $300,000
B
72. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2018 it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an expected useful life of 5 years. Silver Point's incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is the amount of interest expense recorded by Silver Point Co. for the year ended December 31, 2018? PV Annuity Due 8%, 5 periods 4.31213 10%, 5 periods 4.16986 PV Ordinary Annuity 8%, 5 periods 3.99271 10%, 5 periods 3.79079 PV Single Sum 8%, 5 periods .68508 10%, 5 periods .62092 a. $70,200 b. $56,160 c. $62,400 d. $78,000
C
73. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2018 it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments of $219,777 at the end of each year. The equipment has an expected useful life of 5 years. Silver Point's incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is the book value of the leased asset at December 31, 2018? a. $780,000 b. $624,000 c. $468,000 d. $499,200
B
75. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2018, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. What type of lease is this from Alt Corporation's viewpoint? a. Operating lease b. Capital lease c. Sales-type lease d. Direct-financing lease
B
76. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2018, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. If Alt accounts for the lease as an operating lease, what expenses will be recorded as a consequence of the lease during the fiscal year ended December 31, 2018? a. Depreciation Expense b. Rent Expense c. Interest Expense d. Depreciation Expense and Interest Expense
C
77. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2018, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. If the present value of the future lease payments is $1,600,000 at January 1, 2018, what is the amount of the reduction in the lease liability for Alt Corp. in the second full year of the lease if Alt Corp. accounts for the lease as a capital lease? (Rounded to the nearest dollar.) a. $414,852 b. $446,852 c. $472,350 d. $456,350
A
78. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2018, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. From the viewpoint of Yates, what type of lease agreement exists? a. Operating lease b. Capital lease c. Sales-type lease d. Direct-financing lease
C
79. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2018, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. If Yates records this lease as a direct-financing lease, what amount would be recorded as Lease Receivable at the inception of the lease? a. $574,864 b. $1,572,564 c. $1,600,000 d. $1,724,592
D
80. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2018, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. Which of the following lease-related revenue and expense items would be recorded by Yates if the lease is accounted for as an operating lease? a. Rent Revenue only b. Interest Revenue only c. Depreciation Expense only d. Rent Revenue and Depreciation Expense
A
81. Hook Company leased equipment to Emley Company on July 1, 2017, for a one-year period expiring June 30, 2018, for $80,000 a month. On July 1, 2018, Hook leased this piece of equipment to Terry Company for a three-year period expiring June 30, 2021, for $100,000 a month. The original cost of the equipment was $6,400,000. The equipment, which has been continually on lease since July 1, 2013, is being depreciated on a straightline basis over an eight-year period with no salvage value. Assuming that both the lease to Emley and the lease to Terry are appropriately recorded as operating leases for accounting purposes, what is the amount of income (expense) before income taxes that each would record as a result of the above facts for the year ended December 31, 2018?
D
82. Hull Co. leased equipment to Riggs Company on May 1, 2018. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2019. Riggs could have bought the equipment from Hull for $5,600,000 instead of leasing it. Hull's accounting records showed a book value for the equipment on May 1, 2018, of $4,900,000. Hull's depreciation on the equipment in 2018 was $630,000. During 2018, Riggs paid $1,260,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $112,000 in 2018. After the lease with Riggs expires, Hull will lease the equipment to another company for two years. Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the year ended December 31, 2018, should be a. $518,000. b. $630,000. c. $1,148,000. d. $1,260,000.
A
83. Hull Co. leased equipment to Riggs Company on May 1, 2018. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2019. Riggs could have bought the equipment from Hull for $5,600,000 instead of leasing it. Hull's accounting records showed a book value for the equipment on May 1, 2018, of $4,900,000. Hull's depreciation on the equipment in 2018 was $630,000. During 2018, Riggs paid $1,260,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $112,000 in 2018. After the lease with Riggs expires, Hull will lease the equipment to another company for two years. The income before income taxes derived by Hull from this lease for the year ended December 31, 2018, should be a. $518,000. b. $630,000. c. $1,148,000. d. $1,260,000.
D
84. On January 2, 2018, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $160,000 each, payable beginning January 2, 2018. Brick Co. agrees to guarantee the $100,000 residual value of the asset at the end of the lease term. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What journal entry would Gold Star make at January 2, 2018 assuming this is a direct-financing lease? PV Annuity Due 8%, 5 periods 4.31213 10%, 5 periods 4.16986 PV Ordinary Annuity 8%, 5 periods 3.99271 10%, 5 periods 3.79079 PV Single Sum 8%, 5 periods .68508 10%, 5 periods .62092 a. Cash 160,000 Lease Receivable 740,000 Equipment 900,000 b. Cash 160,000 Lease Receivable 529,940 Loss 210,060 Equipment 900,000 c. Cash 160,000 Lease Receivable 569,270 Equipment 729,270 d. Cash 160,000 Lease Receivable 598,449 Equipment 758,449
B
85. Mays Company has a machine with a cost of $750,000 which also is its fair value on the date the machine is leased to Park Company. The lease is for 6 years and the machine is estimated to have an unguaranteed residual value of $75,000. If the lessor's interest rate implicit in the lease is 12%, the six beginning-of-the-year lease payments would be a. $162,874. b. $154,623. c. $146,587. d. $125,000.
B
86. On January 2, 2018, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $160,000 each, payable beginning January 2, 2018. Brick Co. agrees to guarantee the $100,000 residual value of the asset at the end of the lease term. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What journal entry would Brick Co. make at January 2, 2018 to record the lease? PV Annuity Due 8%, 5 periods 4.31213 10%, 5 periods 4.16986 PV Ordinary Annuity 8%, 5 periods 3.99271 10%, 5 periods 3.79079 PV Single Sum 8%, 5 periods .68508 10%, 5 periods .62092 a. Lease Equipment 598,449 Lease Liability 598,449 b. Leased Equipment 758,449 Cash 160,000 Lease Liability 598,449 c. Leased Equipment 689,940 Cash 160,000 Lease Liability 529,940 d. Leased Equipment 707,342 Cash 160,000 Lease Liability 547,342
C
87. On January 2, 2018, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $160,000 each, payable beginning January 2, 2018. Brick Co. agrees to guarantee the $100,000 residual value of the asset at the end of the lease term. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What journal entry would Brick Co. make at January 1, 2019 to record the second lease payment? PV Annuity Due 8%, 5 periods 4.31213 10%, 5 periods 4.16986 PV Ordinary Annuity 8%, 5 periods 3.99271 10%, 5 periods 3.79079 PV Single Sum 8%, 5 periods .68508 10%, 5 periods .62092 a. Lease Liability 160,000 Cash 160,000 b. Lease Liability 117,604 Interest Payable 42,396 Cash 160,000 c. Lease Liability 112,124 Interest Payable 47,876 Cash 160,000 d. Lease Liability 116,212 Interest Payable 43,788 Cash 160,000
C
89. Harter Company leased machinery to Stine Company on July 1, 2018, for a ten-year period expiring June 30, 2028. Equal annual payments under the lease are $250,000 and are due on July 1 of each year. The first payment was made on July 1, 2018. The rate of interest used by Harter and Stine is 9%. The cash selling price of the machinery is $1,750,000 and the cost of the machinery on Harter's accounting records was $1,550,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Harter, what amount of interest revenue would Harter record for the year ended December 31, 2018? a. $157,500 b. $135,000 c. $67,500 d. $0
C
90. Pye Company leased equipment to the Polan Company on July 1, 2018, for a ten-year period expiring June 30, 2028. Equal annual payments under the lease are $240,000 and are due on July 1 of each year. The first payment was made on July 1, 2018. The rate of interest contemplated by Pye and Polan is 9%. The cash selling price of the equipment is $1,680,000 and the cost of the equipment on Pye's accounting records was $1,488,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Pye, what is the amount of profit on the sale and the interest revenue that Pye would record for the year ended December 31, 2018? a. $192,000 and $151,200 b. $192,000 and $129,600 c. $192,000 and $64,800 d. $0 and $0
A
91. Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July 1, 2018. The lease is appropriately accounted for as a sales-type lease by Metro and as a capital lease by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2028. The first of 10 equal annual payments of $828,000 was made on July 1, 2018. Metro had purchased the equipment for $5,250,000 on January 1, 2018, and established a list selling price of $7,200,000 on the equipment. Assume that the present value at July 1, 2018, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $6,000,000. Assuming that Sands, Inc. uses straight-line depreciation, what is the amount of depreciation and interest expense that Sands should record for the year ended December 31, 2018? a. $300,000 and $206,880 b. $300,000 and $240,000 c. $3,600,000 and $206,880 d. $3,600,000 and $160,000
B
92. Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July 1, 2018. The lease is appropriately accounted for as a sales-type lease by Metro and as a capital lease by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2028. The first of 10 equal annual payments of $828,000 was made on July 1, 2018. Metro had purchased the equipment for $5,250,000 on January 1, 2018, and established a list selling price of $7,200,000 on the equipment. Assume that the present value at July 1, 2018, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $6,000,000. What is the amount of profit on the sale and the amount of interest revenue that Metro should record for the year ended December 31, 2018? a. $0 and $137,920 b. $750,000 and $206,880 c. $750,000 and $240,000 d. $1,200,000 and $480,000
C
93. Roman Company leased equipment from Koenig Company on July 1, 2018, for an eight year period expiring June 30, 2026. Equal annual payments under the lease are $800,000 and are due on July 1 of each year. The first payment was made on July 1, 2018. The rate of interest contemplated by Roman and Koenig is 8%. The cash selling price of the equipment is $4,965,000 and the cost of the equipment on Koenig's accounting records was $4,400,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Koenig, what is the amount of profit on the sale and the interest income that Koenig would record for the year ended December 31, 2018? a. $0 and $0 b. $0 and $166,600 c. $565,000 and $166,600 d. $565,000 and $198,600
C
94. Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2018, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows: From the viewpoint of the lessor, what type of lease is involved above? a. Sales-type lease b. Sale-leaseback c. Direct-financing lease d. Operating lease
B
95. Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2018, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows: What is the discount rate implicit in the amortization schedule presented above? a. 12% b. 10% c. 8% d. 6%
D
96. Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2018, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows: The total lease-related expenses recognized by the lessee during 2019 is a. $96,000. b. $97,647. c. $110,235. d. $92,235.
D
97. Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2018, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows: What is the amount of the lessee's liability to the lessor after the December 31, 2020 payment? a. $600,000 b. $562,353 c. $520,942 d. $475,389
B
98. Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2018, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows: The total lease-related income recognized by the lessee during 2019 is which of the following? a. $ -0- b. $4,000 c. $6,000 d. $60,000
B
99. On June 30, 2018, Falk Co. sold equipment to an unaffiliated company for $2,000,000. The equipment had a book value of $1,080,000 and a remaining useful life of 10 years. That same day, Falk leased back the equipment at $12,000 per month for 5 years with no option to renew the lease or repurchase the equipment. Falk's rent expense for this equipment for the year ended December 31, 2018, should be a. $288,000. b. $72,000. c. $120,000. d. $96,000.
C
Use the following information for questions 54 through 59. (Annuity tables on page 21-30.) On January 1, 2018, Yancey, Inc. signs a 10-year non-cancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2018 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. 54. What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.) a. $272,703 b. $872,703 c. $887,703 d. $902,703
D
Use the following information for questions 54 through 59. (Annuity tables on page 21-30.) On January 1, 2018, Yancey, Inc. signs a 10-year non-cancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2018 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. 55. What is the amount of the total annual lease payment? a. $272,703 b. $872,703 c. $887,703 d. $902,703
C
Use the following information for questions 54 through 59. (Annuity tables on page 21-30.) On January 1, 2018, Yancey, Inc. signs a 10-year non-cancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2018 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. 56. From the lessee's viewpoint, what type of lease exists in this case? a. Sales-type lease b. Sale-leaseback c. Capital lease d. Operating lease
A
Use the following information for questions 54 through 59. (Annuity tables on page 21-30.) On January 1, 2018, Yancey, Inc. signs a 10-year non-cancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2018 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. 57. From the lessor's viewpoint, what type of lease is involved? a. Sales-type lease b. Sale-leaseback c. Direct-financing lease d. Operating lease
C
Use the following information for questions 54 through 59. (Annuity tables on page 21-30.) On January 1, 2018, Yancey, Inc. signs a 10-year non-cancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2018 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. 58. Yancey, Inc. would record depreciation expense on this storage building in 2018 of (Rounded to the nearest dollar.) a. $0. b. $495,000. c. $600,000. d. $976,471.
D
Use the following information for questions 54 through 59. (Annuity tables on page 21-30.) On January 1, 2018, Yancey, Inc. signs a 10-year non-cancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2018 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. 59. If the lease was nonrenewable, there was no bargain purchase option, title to the building does not pass to the lessee at termination of the lease and the lease term was only for eight years, what type of lease would this be for the lessee? a. Sales-type lease b. Direct-financing lease c. Operating lease d. Capital lease
