chap 21
On December 31, 2021, Kuhn Corporation leased a plane from Bell Company for an 7-year period expiring December 31, 2028. Equal annual payments of $450000 are due on December 31 of each year, beginning with December 31, 2021. The lease is properly classified as a finance lease on Kuhn's books. The present value at December 31, 2021 of the 8 lease payments over the lease term discounted at 10% is $2640788. 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, 2021 balance sheet is $2640788. $2454867. $2190788. $2409867.
$2640788 - $450000 = $2190788.
On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable 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, 2021 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 using 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. Future Value of Ordinary Annuity of 1Period 5% 6% 8% 10% 12% 11.000001.000001.000001.000001.0000022.050002.060002.080002.100002.1200033.152503.183603.246403.310003.3744044.310134.374624.506114.641004.7793355.525635.637095.866606.105106.3528566.801916.975327.335927.715618.1151978.142018.393848.922809.4871710.0890189.549119.8974710.6366311.4358912.29969911.0265611.4913212.4875613.5794814.775661012.5778913.1807914.4865615.9374317.54874 Present Value of an Annuity Due of 1Period 5%6%8%10%12% 11.000001.000001.000001.000001.00000 21.952381.943401.925931.909091.89286 32.859412.833392.783262.735542.69005 43.723253.673013.577103.486853.40183 54.545954.465114.312134.169864.03735 65.329485.212364.992714.790794.60478 76.075695.917325.622885.355265.11141 86.786376.582386.206375.868425.56376 97.463217.209796.746646.334935.96764108.107827.801697.246896.759026.32825 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? Finance lease Operating lease Sales-type lease Direct-financing lease
8/10 = .8 > 75% of economic life. Finance lease
Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2021 it leased equipment with a cost of $480000 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 $780000, and the rate implicit in the lease is 8%, what are the equal annual payments? PV Annuity Due PV Ordinary Annuity PV Single Sum 8%, 5 periods 4.31213 3.99271 0.68058 10%, 5 periods 4.16987 3.79079 0.622092 $195356 $162797 $185186 $175820
($780000 × 0.9) ÷ 3.99271 = $175820.
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 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 $574864 are due on January 1 of each year.(b) The fair value of the machine on January 1, 2021, is $1600000. 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.If Yates records this lease as a direct-financing lease, what amount would be recorded as Lease Receivable at the inception of the lease? $574864 $1724592 $1025136 $1600000
Fair value = $1600000.
Which of the following would be included in the Lease Receivable account?I. Guaranteed residual value. II. Unguaranteed residual value. III. Executory costs IV. Rental payments. I and III only. II, III, and IV. I and II only. I, II, and IV.
I, II, and IV.
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 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, 2021, 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. Future Value of Ordinary Annuity of 1Period 5% 6% 8% 10% 12% 11.000001.000001.000001.000001.0000022.050002.060002.080002.100002.1200033.152503.183603.246403.310003.3744044.310134.374624.506114.641004.7793355.525635.637095.866606.105106.3528566.801916.975327.335927.715618.1151978.142018.393848.922809.4871710.0890189.549119.8974710.6366311.4358912.29969911.0265611.4913212.4875613.5794814.775661012.5778913.1807914.4865615.9374317.54874 Present Value of an Annuity Due of 1Period 5%6%8%10%12% 11.000001.000001.000001.000001.00000 21.952381.943401.925931.909091.89286 32.859412.833392.783262.735542.69005 43.723253.673013.577103.486853.40183 54.545954.465114.312134.169864.03735 65.329485.212364.992714.790794.60478 76.075695.917325.622885.355265.11141 86.786376.582386.206375.868425.56376 97.463217.209796.746646.334935.96764108.107827.801697.246896.759026.32825 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, 2021? Interest Expense Amortization Expense and Interest Expense Amortization Expense Lease Expense
Lease Expense
Alt Corporation (the lessee) enters into an agreement with Yates Rentals Co. (the lessor) on January 1, 2021 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, 2021, 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. Future Value of Ordinary Annuity of 1Period 5% 6% 8% 10% 12% 11.000001.000001.000001.000001.0000022.050002.060002.080002.100002.1200033.152503.183603.246403.310003.3744044.310134.374624.506114.641004.7793355.525635.637095.866606.105106.3528566.801916.975327.335927.715618.1151978.142018.393848.922809.4871710.0890189.549119.8974710.6366311.4358912.29969911.0265611.4913212.4875613.5794814.775661012.5778913.1807914.4865615.9374317.54874 Present Value of an Annuity Due of 1Period 5%6%8%10%12% 11.000001.000001.000001.000001.00000 21.952381.943401.925931.909091.89286 32.859412.833392.783262.735542.69005 43.723253.673013.577103.486853.40183 54.545954.465114.312134.169864.03735 65.329485.212364.992714.790794.60478 76.075695.917325.622885.355265.11141 86.786376.582386.206375.868425.56376 97.463217.209796.746646.334935.96764108.107827.801697.246896.759026.32825 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? Interest Revenue only Depreciation Expense only Lease Revenue and Depreciation Expense Lease Revenue only
Lease Revenue and Depreciation Expense
The basic difference between a direct-financing lease and a sales-type lease is the amount of the depreciation recorded each year by the lessor. recognition of the profit on the sale. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements. manner in which rental receipts are recorded as rental income.
recognition of the profit on the sale
The lease receivable amount includes the present value of rental payments plus the present value of the guaranteed residual value only. rental payments plus the present value of guaranteed and unguaranteed residual values. rental payments only. rental payments plus the present value of the unguaranteed residual value only.
rental payments plus the present value of guaranteed and unguaranteed residual values.
In computing the present value of the lease payments, the lessee should use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. use the implicit rate in all cases. use its incremental borrowing rate in all cases. use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee.
use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee.
In an operating lease, the lessee records lease expense. amortization expense and lease expense. interest expense. amortization expense.
lease expense.
The right-of-use asset is increased by initial direct costs incurred by the lessee only. lease prepayments made by the lessee and initial direct costs incurred by the lessee. prepaid lease payments only. lease incentives received.
lease prepayments made by the lessee and initial direct costs incurred by the lessee.
On January 1, 2021, Dean Corporation signed a 10-year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of $220000 at the end of each year for 10 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 financial lease. The lease payments were determined to have a present value of $1342016 at an effective interest rate of 8%. With respect to this lease, Dean should record for 2021 interest expense of $91361 and amortization expense of $134202. interest expense of $89468 and amortization expense of $76134. lease expense of $107361. interest expense of $107361 and amortization expense of $89468.
$1342016 × 0.08 = $107361$1342016 ÷ 15 = $89468. interest expense of $107361 and amortization expense of $89468.
Pisa, Inc. leased equipment from Tower Company under a 4-year lease requiring equal annual payments of $344152, 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 PV Ordinary Annuity 8%, 4 periods 3.5771 3.31213 10%, 4 periods 3.48685 3.16987 $1200006 $1090917 $1139876 $1231066
$344152 × 3.5771 = $1231066.
Pisa, Inc. leased equipment from Tower Company under a 4-year lease requiring equal annual payments of $344152, 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 amortize similar assets. What is the amount of amortization expense recorded by Pisa, Inc. in the first year of the asset's life? PV Annuity Due PV Ordinary Annuity 8%, 4 periods 3.57710 3.31213 10%, 4 periods 3.48685 3.16987 $0 because the asset is amortized by Pisa Company $307767 $300002 $284969
$344152 × 3.57710 = $1231066; ($1231066 - 0) ÷ 4 = $307767
On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable 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 $6000000; however, the book value to Holt is $4950000.(c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings using 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 $15000 of executory costs related to taxes on the property.Click here to view factor tables.What is the annual lease payment excluding executory costs? (Rounded to the nearest dollar.) $872703 $887703 $902703 $272703
$6000000 ÷ 6.75902 = $887703 (PV of Annuity Due Table).
On December 1, 2021, Goetz Corporation leased office space for 10 years at a monthly rental of $80000. On that date Goetz paid the landlord the following amounts: Rent deposit $80000 First month's rent 80000 Last month's rent 80000 Installation of new walls and offices 640000 $880000 The entire amount of $880000 was charged to rent expense in 2021. What amount should Goetz have charged to expense for the year ended December 31, 2021? $640000 $165333 $80000 $85333
$80000 + [($640000 ÷ 10) x (1 ÷ 12)] = $85333.
On January 1, 2021, Sauder Corporation signed a 5-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $200000 at the beginning of each year for 5 years beginning on January 1, 2021 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 finance lease. The lease payments were determined to have a present value of $833973 at an effective interest rate of 10%.In 2022, Sauder should record interest expense of $49737. $69737. $63397. $43397.
$833973 - $200000 = $633973[$633973 - ($200000 - $63397)] × 0.1 = $49737.
Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a finance lease for Metcalf. The six-year lease requires payment of $170000 at the beginning of each year, including $25000 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 $723943. $814434. $694665. $848761.
$848761.
On January 1, 2021, Sauder Corporation signed a 5-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $200000 at the beginning of each year for 5 years beginning on January 1, 2021 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 finance lease. The lease payments were determined to have a present value of $833973 at an effective interest rate of 10%.In 2021, Sauder should record interest expense of $63397. $116603. $136603. $83397.
($833973 - $200000) × 0.1 = $63397.
Emporia Corporation is a lessee with a finance lease. The asset is recorded at $900000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a fair value of $300000 at the end of 5 years, and a fair value of $100000 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 amortization expense would the lessee record for the first year of the lease? $160000 $120000 $100000 $180000
($900000 - $100000) ÷ 8 = $100000.
On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable 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, 2021 is $6000000; however, the book value to Holt is $4950000.(c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings using 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 $15000 of executory costs related to taxes on the property.Click here to view factor tables.What is the amount of the total annual lease payment? $887703 $272703 $902703 $872703
6000000 ÷ 6.75902 = $887703 $887703 + $15000 = $902703
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 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, 2021, 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. Future Value of Ordinary Annuity of 1Period 5% 6% 8% 10% 12% 11.000001.000001.000001.000001.0000022.050002.060002.080002.100002.1200033.152503.183603.246403.310003.3744044.310134.374624.506114.641004.7793355.525635.637095.866606.105106.3528566.801916.975327.335927.715618.1151978.142018.393848.922809.4871710.0890189.549119.8974710.6366311.4358912.29969911.0265611.4913212.4875613.5794814.775661012.5778913.1807914.4865615.9374317.54874 Present Value of an Annuity Due of 1Period 5%6%8%10%12% 11.000001.000001.000001.000001.00000 21.952381.943401.925931.909091.89286 32.859412.833392.783262.735542.69005 43.723253.673013.577103.486853.40183 54.545954.465114.312134.169864.03735 65.329485.212364.992714.790794.60478 76.075695.917325.622885.355265.11141 86.786376.582386.206375.868425.56376 97.463217.209796.746646.334935.96764108.107827.801697.246896.759026.32825 From the viewpoint of Yates, what type of lease agreement exists? Direct-financing lease Finance lease Sales-type lease Operating lease
Sales-type lease
While only certain leases are currently accounted for as a sale or purchase, there is theoretical justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that a lease reflects the purchase or sale of a quantifiable right to the use of property. all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal. during the life of the lease the lessee can effectively treat the property as if it were owned. at the end of the lease the property usually can be purchased by the lessee.
a lease reflects the purchase or sale of a quantifiable right to the use of property.
In a finance lease, the lessee records amortization expense and interest expense. lease expense only. amortization expense only. interest expense only.
amortization expense and interest expense
When lessors account for residual values related to leased assets, they reduce the residual value by the executory costs. recognize more gross profit on a sales-type lease with a guaranteed residual value than on a sales-type lease with an unguaranteed residual value. include the residual value in the receivable measurement because it is assumed the residual value will be realized. include the unguaranteed residual value in sales revenue.
include the residual value in the receivable measurement because it is assumed the residual value will be realized.
