Financial Accounting Lease Amortization Schedule Homework Help
- September 15, 2017
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- Category: Accounting QA
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1.When the classification of a lease is normally carried out?
2.Atwater Equipment Co. manufactures, sells, and leases heavy construction equipment. England Construction Company, a regular customer, leased equipment on July 1, 2008, that had cost Atwater $252,000 to manufacture. The lease payments are $63,161, beginning on July 1, 2008, and continuing annually with the last payment being made on July 1, 2012. If England were to purchase the equipment outright, the fair market value would be $291,881. Because of the heavy wear expected on construction equipment, the lease contains a guaranteed residual value clause wherein the lessee guarantees a residual value on June 30, 2013, of $65,000. England contracted with Weather top Financial Services to serve as a third-party guarantor of the residual value. Atwater’s implicit interest rate is 12%, which is lower than England’s incremental borrowing rate of 14%.
Instructions:
a. Assuming that the equipment reverts to Atwater upon completion of the lease term and that the equipment has an expected useful life of 10 years, prepare the entries that should be made on the books of both Atwater and England in recording the lease on July 1, 2008. (Note: England knows the implicit interest rate for the lease.)
b. Prepare the journal entries that should be made by Atwater and England on July 1, 2009. Ignore fiscal year considerations.
c. What financial statement disclosure should be made by Weather top in its role as a third party guarantor?
3. Peridot Leasing entered into an agreement to lease warehouses to AMC Foods. a. The agreement calls for ownership of the aircraft to be transferred to AMC Foods at the end of the lease term. b. The fair value of the warehouses is expected to be $400,000 at the end of the lease term. AMC has the option to purchase the warehouses at the end of the lease term for $80,000. c. The warehouses have a useful life of 10 years and the term of the lease is 7 years. d. The present value of the lease payments is $4,400,000 and the fair value of the leased warehouses is $5,000,000. e. The warehouses were manufactured to meet specifications provided by AMC to optimize its food delivery processes.
Required
a. In each independent scenario, indicate whether AMC would classify the lease as an operating lease or finance lease under U.S. GAAP. Assume the lease agreement has not met any of the other indicators of a finance lease. Provide brief explanations.
b. In each independent scenario, indicate whether AMC would classify the lease as an operating lease or finance lease under IAS 17. Assume the lease agreement has not met any of the other indicators of a finance lease. Provide brief explanations.
4.Fieval Leasing Company signs an agreement on January 1, 2010, to lease equipment to Reid Company. The following information relates to this agreement.
1. The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.
2. The cost of the asset to the lessor is $343,000. The fair value of the asset at January 1, 2010, is $343,000.
3. The asset will revert to the lessor at the end of the lease term at which time the asset is expected to have a residual value of $61,071, none of which is guaranteed.
4. Reid Company assumes direct responsibility for all executory costs.
5. The agreement requires equal annual rental payments, beginning on January 1, 2010.
6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
(Round all numbers to the nearest cent.)
(a) Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the annual rental payment required. Round to the nearest dollar.
(b) Prepare an amortization schedule that would be suitable for the lessor for the lease term.
(c) Prepare all of the journal entries for the lessor for 2010 and 2011 to record the lease agreement, the receipt of lease payments, and the recognition of income. Assume the lessor’s annual accounting period ends on December 31.
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5.Grady Leasing Company signs an agreement on January 1, 2010, to lease equipment to Azure Company. The following information relates to this agreement.
1. The term of the non-cancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years.
2. The fair value of the asset at January 1, 2010, is $90,000.
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $7,000, none of which is guaranteed.
4. Azure Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $900 to Frontier Insurance Company for insurance and (2) $1,600 to Crawford County for property taxes.
5. The agreement requires equal annual rental payments of $20,541.11 to the lessor, beginning on
January 1, 2010.
6. The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10% and is known to the lessee.
7. Azure Company uses the straight-line depreciation method for all equipment.
8. Azure uses reversing entries when appropriate.
(Round all numbers to the nearest cent.)
(a) Prepare an amortization schedule that would be suitable for the lessee for the lease term.
(b) Prepare all of the journal entries for the lessee for 2010 and 2011 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31.
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