Financial Accounting Lessee Entries With Residual Value Homework Help
- September 15, 2017
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1. The following facts pertain to a no cancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee.
Inception date | January 1, 2012 |
Annual lease payment due at the beginning of each year, beginning with January 1, 2012 | $124,798 |
Residual value of equipment at end of lease term, guaranteed by the lessee | $50,000 |
Lease term | 6 years |
Economic life of leased equipment | 6 years |
Fair value of asset at January 1, 2012 | $600,000 |
Lessor’s implicit rate | 12% |
Lessee’s incremental borrowing rate | 12% |
The lessee assumes responsibility for all executory costs, which are expected to amount to $5,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straight-line depreciation method for all equipment.
Instructions
(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 the entire journal entries for the lessee for 2012 and 2013 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 and reversing entries are used when appropriate.
2.Assume that the following facts pertain to a non-cancelable lease agreement between Fifth-Third Leasing Company and Bob Evans Farms, a lessee.
Inception date | January 1 2014 |
Annual lease payment due at the beginning of each year, beginning with January 1, 2014 | $81,365 |
Residual value of equipment at end of lease term, guaranteed by the lessee | $50,000 |
Lease term | 6 years |
Economic life of leased equipment | 6 years |
Fair value of asset at January 1, 2014 | $400,000 |
Lessor’s implicit rate | 12% |
Lessee’s incremental borrowing rate | 12% |
The lessee assumes responsibility for all executory costs, which are expected to amount to $4,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straight-line depreciation method for all equipment.
1. Using the Excel Template spreadsheet, linked here, prepare an amortization schedule that would be suitable for the lessee for the lease term.
2. Using the same spreadsheet set up an area for journal entries, prepare the journal entries for the lessee for 2014 and 2015 to record the lease agreement and all expenses related to the lease. Record them clearly in that spreadsheet. Assume the lessee’s annual accounting period ends on December 31 and that reversing entries are used when appropriate.
3.Astle Manufacturing Company manufactures and leases a variety of items. On January 2, 2008, Astle leased a piece of equipment to Haws Industries Co. The lease is for six years for an annual amount of $33,500, payable in advance. The lease payment includes executory costs of $1,500 per year. The equipment has an estimated useful life of nine years, and it was manufactured by Astle at a cost of $120,000. It is estimated that the equipment will have a residual value of $60,000 at the end of the 6-year lease term. There is no provision for purchase or renewal by Haws at the end of the lease term. However, a third party has guaranteed the residual value of $60,000. The equipment has a fair market value at the lease inception of $187,176. The implicit rate of interest in the contract is 10%, the same rate at which Haws can borrow money at its bank. All lease payments after the first one are made on December 31 of each year. Both companies use the straight-line method of depreciation.
Instructions:
a. Give all the entries relating to the lease on the books of the lessor and lessee for 2008.
b. Show how the lease would appear on the balance sheet of Astle Manufacturing Company and Haws Industries Co. (if applicable) as of December 31, 2008.
c. Assume that Astle sold the equipment at the end of the 6-year lease for $85,000. Give the entry to record the sale, assuming that all lease entries have been properly made.
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4.Daniel Hardware Co. is considering alternative financing arrangements for equipment used in its warehouses. Besides purchasing the equipment outright, Daniel is also considering a lease. Account- ing for the outright purchase is fairly straightforward, but because Daniel has not used equipment leases in the past, the accounting staff is less informed about the specific accounting rules for leases. The staff is aware of some general lease rules related to “risks and rewards,” but they are unsure about the meanings of these terms in lease accounting. Daniel has asked you to conduct some research on these items related to lease capitalization criteria.
Instructions
Access the IFRS authoritative literature at the IASB website ( http://eifrs.iasb.o r g /). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.)
(a) What is the objective of lease classification criteria?
(b) An important element of evaluating leases is determining whether substantially all of the risks and rewards of ownership are transferred in the lease. How is “substantially all” defined in the authoritative literature?
(c) Besides the non-cancelable term of the lease, name at least th r ee other considerations in determining the “lease term.”
5.The following facts pertain to a non-cancelable lease agreement between Lennox Leasing Company and Gill Compan y , a lessee. (Round all numbers to the nearest cent.)
Inception date: May 1, 2014
Annual lease payment due at the beginning of each year, beginning with May 1, 2014: $18,829.49
Bargain-purchase option price at end of lease term: $4,000.00
Lease term: 5 years
Economic life of leased equipment: 10 years
Lessor ’s cost: $65,000.00; fair value of asset at May 1, 2014, $81,000.00
Lessor ’s implicit rate: 10%; lessee’s incremental borrowing rate 10% The lessee assumes responsibility for all executory costs.
Instructions
(a) Discuss the nature of this lease to Gill Company.
(b) Discuss the natu r e of this lease to Lennox Compan y .
(c) Prepare a lease amortization schedule for Gill Company for the 5-year lease term.
(d) Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2014 and 2015. Gill’s annual accounting period ends on December 31. Reversing entries are used by Gill.
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