Professional Documents
Culture Documents
1. Emporia Corporation is a lessee with a finance lease. The asset is recorded at $450,000
and has an economic life of 8 years. The lease term is 5 years. The asset is expected to
have a fair value of $150,000 at the end of 5 years, and a fair value of $50,000 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. $90,000 b. $80,000 c. $60,000 d. $50,000
2. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal
annual payments of $86,038, 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 residual 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 finance lease, what is the amount of interest 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 3.16986
a. $0 b. $24,621 c. $17,738 d. $22,798
3. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal
annual payments of $86,038, 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 residual 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 PV Ordinary Annuity
8%, 4 periods 3.57710 3.31213
10%, 4 periods 3.48685 3.16986
a. $0 because the asset is depreciated by Tower Company.
b. $71,242 c. $76,942 d. $75,000
4. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2011 it
leased equipment with a cost of $200,000 to Silver Point Co. The 5-year lease calls for a
10% down payment and equal annual payments of $73,259 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 $325,000, 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, 2011, and what is the balance in the Lease Liability account?
page 1/6
Use the following information for questions 5 and 6.
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2011 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
$155,213 are due on December 31 of each year.
(b) The fair value of the machine on January 1, 2011, is $400,000. The machine has a
remaining economic life of 10 years, with no residual 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.
6. If the present value of the future lease payments is $400,000 at January 1, 2011, 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 finance lease? (Rounded to the nearest
dollar.) a. $115,213 b. $123,213 c. $126,734 d. $133,070
7. 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. Rental Revenue b. Interest Income c. Depreciation Expense
d. Rental Revenue and Depreciation Expense
8. Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the
year ended December 31, 2011, should be
a. $296,000. b. $360,000. c. $656,000. d. $720,000.
9. On January 2, 2011, Gold Star Leasing Company leases equipment to Brick Co. with 5
equal annual payments of $40,000 each, payable beginning December 31, 2011. Brick
Co. agrees to guarantee the $25,000 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, 2011 assuming
this is a direct–financing lease?
Page 2/6
10. Leicester Ltd leases equipment to Wentworth Company that was carried at a cost of
£200,000 and also has a fair value at the inception of the lease of £200,000.All executory
costs are paid by Wentworth directly to third parties. The equipment has a useful life of 6
years with no residual value. The lease has an implicit interest rate of 8%, no bargain
purchase option, and no transfer of title. The term of the lease is 6 years beginning
January 1, 2012. Based on this information, what are the equal rental payments due at the
beginning of each year (to the nearest pound)?
a. £99,854 b. £40,058 c. £33,333 d. £16,000
11. On January 2, 2011, Gold Star Leasing Company leases equipment to Brick Co. with 5
equal annual payments of $40,000 each, payable beginning December 31, 2011. Brick Co.
agrees to guarantee the $25,000 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 December 31, 2011 to record the first lease
payment?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
12. 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,
and at the end of the lease term, before the lessee transfers the asset to the lessor, the
leased asset and liability accounts have the following balances:
Leased equipment under finance lease $400,000
Less accumulated depreciation—finance 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 $8,800, what gain or loss
should Geary record?
a. $6,480 gain b. $7,120 loss c. $7,200 loss d.$8,800 gain
13. Based on this information and rounding all intermediate calculations to the nearest dollar,
what amount of depreciation expense would Elizabeth record on December 31,2013?
a. £17,280 b. £14,400 c. £9,378 d. £11,178
14. Pye Company leased equipment to the Polan Company on July 1, 2011, for a ten-year
period expiring June 30, 2021. Equal annual payments under the lease are $80,000 and
are due on July 1 of each year. The first payment was made on July 1, 2011. The rate of
interest contemplated by Pye and Polan is 9%. The cash selling price of the equipment is
$560,000 and the cost of the equipment on Pye's accounting records was $496,000.
Assuming that the lease is appropriately recorded as a sale for accounting purposes by
Eby, what is the amount of profit on the sale and the interest revenue that Pye would
record for the year ended December 31, 2011?
a. $64,000 and $50,400 b. $64,000 and $43,200 c. $64,000 and $21,600 d. $0 and $0
page 3/6
Use the following information for question 15.
Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on
July 1, 2011. The lease is appropriately accounted for as a sale by Metro and as a purchase by
Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2021. The
first of 10 equal annual payments of $621,000 was made on July 1, 2011. Metro had purchased
the equipment for $3,900,000 on January 1, 2011, and established a list selling price of
$5,400,000 on the equipment. Assume that the present value at July 1, 2011, of the rent
payments over the lease term discounted at 8% (the appropriate interest rate) was $4,500,000.
15. What is the amount of profit on the sale and the amount of interest income that Metro
should record for the year ended December 31, 2011?
a. $0 and $155,160 b. $600,000 and $155,160
c. $600,000 and $180,000 d. $900,000 and $360,000
16. 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
17. The total lease-related expenses recognized by the lessee during 2012 is which of the
following? (Rounded to the nearest dollar.)
a. $64,000 b. $65,098 c. $73,490 d. $61,490
*18. The total lease-related income recognized by the lessee during 2012 is which of the
following?
a. $ -0- b. $2,667 c. $4,000 d. $40,000
* 19. Assume that on January 1, 2012, Hsu Co sells a computer system to Larson Finance Co.
for ¥510,000 and immediately leases the computer system back. The relevant information
is as follows.
1. The computer was carried on Hsu’s books at a value of ¥450,000
2. The term of the non-cancelable lease is 10 years; title will transfer to Hsu.
3. The lease agreement requires equal rental payments of ¥83,000.11 at the end of each
year.
4. The incremental borrowing rate for Hsu is 12%. Hsu is aware that Larson Finance Co.
set the annual rental to ensure a rate of return of 10%.
5. The computer has a fair value of ¥510,000 on January 1, 2011, and an estimated
economic life of 10 years.
6. Hsu plays executory costs of ¥9,000 per year.
Based on this information, which of the following would be recorded by Hsu on December
31, 2012?
a. a debit to Leased Computer under Finance Lease for ¥510,000
b. a credit to Unlearned Profit on Sale-leaseback for ¥60,000
c. a debit to Unlearned Profit on Sale-leaseback for ¥60,000
d. a debit to Unlearned Profit on Sale-leaseback for ¥6,000
page 4/6
20. On January 1, 2012, Stocks plc sold a truck to Raines Finance for £33,000 and
immediately leased it back. The truck was carried on Stock’s books at £28,000. The term
of the lease is 5 years, and title transfers to Stocks at lease-end. The lease requires five
equal rental payments of £8,705 at the end of each year. The appropriate rate of interest
is 10%, and the truck has a useful life of 5 years with no residual value. Based on this
information, the amortization of profit by Stocks on the sale-leaseback at December
31,2012, would include a:
a. debit to Depreciation Expense for £1,000.
b. debit to Unearned Profit on Sale-Leaseback for £5,000.
c. credit to Unearned Profit on Sale-Leaseback for £1,000.
d. credit to Depreciation Expense for £1,000.
21. On December 31, 2011, Burton, Inc. leased machinery with a fair value of $840,000 from
Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual
payments of $160,000 beginning December 31, 2011. The lease is appropriately
accounted for by Burton as a finance lease. Burton's incremental borrowing rate is 11%.
Burton knows the interest rate implicit in the lease payments is 10%.
The present value of an annuity due of 1 for 6 years at 10% is 4.7908.
The present value of an annuity due of 1 for 6 years at 11% is 4.6959.
In its December 31, 2011 statement of financial position, Burton should report a lease liability of
a. $606,528. b. $680,000. c. $751,344. d. $766,528.
22. A lessee had a ten-year finance lease requiring equal annual payments. The reduction of
the lease liability in year 2 should equal
a. the current liability shown for the lease at the end of year 1.
b. the current liability shown for the lease at the end of year 2.
c. the reduction of the lease liability in year 1.
d. one-tenth of the original lease liability.
On January 2, 2011, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill
press. The lease stipulated annual payments of $150,000 starting at the end of the first year, with
title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a
finance lease. The drill press has an estimated useful life of 15 years, with no residual value.
Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments
were determined to have a present value of $900,000, based on implicit interest of 10%.
23. In its 2011 income statement, what amount of depreciation expense should Hernandez
report from this lease transaction?a. $150,000 b. $100,000 c. $90,000 d. $60,000
24. Torrey Co. manufactures equipment that is sold or leased. On December 31, 2011, Torrey
leased equipment to Dalton for a five-year period ending December 31, 2016, at which
date ownership of the leased asset will be transferred to Dalton. Equal payments under
the lease are $220,000 (including $20,000 executory costs) and are due on December 31
of each year. The first payment was made on December 31, 2011. The normal sales price
of the equipment is $770,000, and cost is $600,000. For the year ended December 31,
2011, what amount of income should Torrey realize from the lease transaction?
a. $170,000 b. $220,000 c. $230,000 d. $330,000
*25. On December 31, 2011, Haden Corp. sold a machine to Ryan and simultaneously leased
it back for one year. Pertinent information at this date follows:
Sales price $900,000
Carrying amount 825,000
Present value of reasonable lease rentals
($7,500 for 12 months @ 12%) 85,000
Estimated remaining useful life 12 years
In Haden’s December 31, 2011 statement of financial position, the deferred profit from the
sale of this machine should be
a. $85,000. b. $75,000. c. $10,000. d. $0.
Page 5/6
STRAIGHT PROBLEMS
1. Lessor accounting—sales-type lease.
Hayes Corp. is a manufacturer of truck trailers. On January 1, 2011, Hayes Corp. leases ten
trailers to Lester Company under a six-year noncancelable lease agreement. The following
information about the lease and the trailers is provided:
1. Equal annual payments that are due on December 31 each year provide Hayes Corp. with
an 8% return on net investment (present value factor for 6 periods at 8% is 4.62288).
3. The fair value of each trailer is $50,000. The cost of each trailer to Hayes Corp. is $45,000.
Each trailer has an expected useful life of nine years.
Instructions
(a) What type of lease is this for the lessor? Discuss.
(b) Calculate the annual lease payment. (Round to nearest dollar.)
(c) Prepare a lease amortization schedule for Hayes Corp. for the first three years.
(d) Prepare the journal entries for the lessor for 2011 and 2012 to record the lease agreement,
the receipt of the lease rentals, and the recognition of income (assume the use of a
perpetual inventory method and round all amounts to the nearest dollar).
2. Sale-leaseback.
On January 1, 2011, Hester Co. sells machinery to Beck Corp. at its fair value of $480,000 and
leases it back. The machinery had a carrying value of $420,000, the lease is for 10 years and the
implicit rate is 10%. The lease payments of $71,000 start on January 1, 2011. Hester uses
straight-line depreciation and there is no residual value.
Instructions
(a) Prepare all of Hester's entries for 2011.
(b) Prepare all of Beck's entries for 2011.
Instructions
(a) What kind of lease is this to Krause Company?
(b) What should be considered the lease term?
(c) What are the minimum lease payments?
(d) What is the present value of the minimum lease payments? (PV factor for annuity due of 20
semi-annual payments at 8% annual rate, 14.13394; PV factor for amount due in 20 interest
periods at 8% annual rate, .45639.) (Round to nearest dollar.)
(e) What journal entries would Krause record during the first year of the lease? (Include an
amortization schedule through 1/1/12 and round to the nearest dollar.)
Page 6/6
DR. FILEMON C. AGUILAR MEMORIAL COLLEGE OF LAS PINAS CITY
Accountancy Department
FINANCIAL ACCOUNTING 2
QUIZ- TH- CURRENT LIABILITIES, NON CURRENT LIABILITIES, AND LEASES
1. Emporia Corporation is a lessee with a finance lease. The asset is recorded at $450,000
and has an economic life of 8 years. The lease term is 5 years. The asset is expected to
have a fair value of $150,000 at the end of 5 years, and a fair value of $50,000 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. $90,000 b. $80,000 c. $60,000 d. $50,000
76. d ($450,000 – $50,000) ÷ 8 = $50,000.
2. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal
annual payments of $86,038, 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 residual 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 finance lease, what is the amount of interest 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 3.16986
a. $0 b. $24,621 c. $17,738 d. $22,798
3. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal
annual payments of $86,038, 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 residual 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 PV Ordinary Annuity
8%, 4 periods 3.57710 3.31213
10%, 4 periods 3.48685 3.16986
a. $0 because the asset is depreciated by Tower Company.
b. $71,242 c. $76,942 d. $75,000
80. c $86,038 3.57710 = $307,767
($307,767 – 0) 4 = $76,942.
4. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2011 it
leased equipment with a cost of $200,000 to Silver Point Co. The 5-year lease calls for a
10% down payment and equal annual payments of $73,259 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 $325,000, 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, 2011, and what is the balance in the Lease Liability account?
Use the following information for questions 5 and 6. (Annuity tables on page 21-25.)
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2011 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
$155,213 are due on December 31 of each year.
(b) The fair value of the machine on January 1, 2011, is $400,000. The machine has a
remaining economic life of 10 years, with no residual 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.
$385,991
———— = 96% > 90%.
$400,000
6. If the present value of the future lease payments is $400,000 at January 1, 2011, 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 finance lease? (Rounded to the nearest
dollar.)
a. $115,213 b. $123,213 c. $126,734 d. $133,070
86. c $400,000 – [$155,213 – ($400,000 × .1)] = $284,787.
$155,213 – ($284,787 ×.1) = $126,734.
7. 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. Rental Revenue b. Interest Income c. Depreciation Expense
d. Rental Revenue and Depreciation Expense
88. d Conceptual.
8. Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the
year ended December 31, 2011, should be
a. $296,000. b. $360,000. c. $656,000. d. $720,000.
90. d $720,000.
9. On January 2, 2011, Gold Star Leasing Company leases equipment to Brick Co. with 5
equal annual payments of $40,000 each, payable beginning December 31, 2011. Brick
Co. agrees to guarantee the $25,000 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, 2011 assuming
this is a direct–financing lease?
10. Leicester Ltd leases equipment to Wentworth Company that was carried at a cost of
£200,000 and also has a fair value at the inception of the lease of £200,000.All executory
costs are paid by Wentworth directly to third parties. The equipment has a useful life of 6
years with no residual value. The lease has an implicit interest rate of 8%, no bargain
purchase option, and no transfer of title. The term of the lease is 6 years beginning
January 1, 2012. Based on this information, what are the equal rental payments due at the
beginning of each year (to the nearest pound)?
a. £99,854 b. £40,058 c. £33,333 d. £16,000
94 b £200,000 4.99271 = £40,058.
11. On January 2, 2011, Gold Star Leasing Company leases equipment to Brick Co. with 5
equal annual payments of $40,000 each, payable beginning December 31, 2011. Brick Co.
agrees to guarantee the $25,000 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 December 31, 2011 to record the first lease
payment?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
12. 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,
and at the end of the lease term, before the lessee transfers the asset to the lessor, the
leased asset and liability accounts have the following balances:
Leased equipment under finance lease $400,000
Less accumulated depreciation—finance 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 $8,800, what gain or loss
should Geary record?
a. $6,480 gain b. $7,120 loss c. $7,200 loss d.$8,800 gain
98. c $8,800 – $16,000 = ($7,200).
13. Based on this information and rounding all intermediate calculations to the nearest dollar,
what amount of depreciation expense would Elizabeth record on December 31,2013?
a. £17,280 b. £14,400 c. £9,378 d. £11,178
100. c (£15,000 5.56376) + (£24,000 .40388) = £93,150
[(£93,150 – £15,000) .12] = £9,378.
14. Pye Company leased equipment to the Polan Company on July 1, 2011, for a ten-year
period expiring June 30, 2021. Equal annual payments under the lease are $80,000 and
are due on July 1 of each year. The first payment was made on July 1, 2011. The rate of
interest contemplated by Pye and Polan is 9%. The cash selling price of the equipment is
$560,000 and the cost of the equipment on Pye's accounting records was $496,000.
Assuming that the lease is appropriately recorded as a sale for accounting purposes by
Eby, what is the amount of profit on the sale and the interest revenue that Pye would
record for the year ended December 31, 2011?
a. $64,000 and $50,400 b. $64,000 and $43,200 c. $64,000 and $21,600 d. $0 and $0
102. c $560,000 – $496,000 = $64,000; ($560,000 – $80,000) × .09 × 6/12 = $21,600.
Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on
July 1, 2011. The lease is appropriately accounted for as a sale by Metro and as a purchase by
Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2021. The
first of 10 equal annual payments of $621,000 was made on July 1, 2011. Metro had purchased
the equipment for $3,900,000 on January 1, 2011, and established a list selling price of
$5,400,000 on the equipment. Assume that the present value at July 1, 2011, of the rent
payments over the lease term discounted at 8% (the appropriate interest rate) was $4,500,000.
15. What is the amount of profit on the sale and the amount of interest income that Metro
should record for the year ended December 31, 2011?
a. $0 and $155,160 b. $600,000 and $155,160
c. $600,000 and $180,000 d. $900,000 and $360,000
104. b $4,500,000 – $3,900,000 = $600,000.
($4,500,000 – $621,000) × .04 = $155,160.
16. 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
106. c Conceptual.
17. The total lease-related expenses recognized by the lessee during 2012 is which of the
following? (Rounded to the nearest dollar.)
a. $64,000 b. $65,098 c. $73,490 d. $61,490
108. d [($400,000 – $40,000) ÷ 15] + $37,490 = $61,490.
*18. The total lease-related income recognized by the lessee during 2012 is which of the
following?
a. $ -0- b. $2,667 c. $4,000 d. $40,000
*110. b ($400,000 – $360,000) ÷ 15 = $2,667.
* 19. Assume that on January 1, 2012, Hsu Co sells a computer system to Larson Finance Co.
for ¥510,000 and immediately leases the computer system back. The relevant information
is as follows.
1. The computer was carried on Hsu’s books at a value of ¥450,000
2. The term of the non-cancelable lease is 10 years; title will transfer to Hsu.
3. The lease agreement requires equal rental payments of ¥83,000.11 at the end of each
year.
4. The incremental borrowing rate for Hsu is 12%. Hsu is aware that Larson Finance Co.
set the annual rental to ensure a rate of return of 10%.
5. The computer has a fair value of ¥510,000 on January 1, 2011, and an estimated
economic life of 10 years.
6. Hsu plays executory costs of ¥9,000 per year.
Based on this information, which of the following would be recorded by Hsu on December
31, 2012?
a. a debit to Leased Computer under Finance Lease for ¥510,000
b. a credit to Unlearned Profit on Sale-leaseback for ¥60,000
c. a debit to Unlearned Profit on Sale-leaseback for ¥60,000
d. a debit to Unlearned Profit on Sale-leaseback for ¥6,000
*112 d ¥510,000 – ¥450,000 = ¥60,000; ¥60,000 10 = ¥6,000.
20. On January 1, 2012, Stocks plc sold a truck to Raines Finance for £33,000 and
immediately leased it back. The truck was carried on Stock’s books at £28,000. The term
of the lease is 5 years, and title transfers to Stocks at lease-end. The lease requires five
equal rental payments of £8,705 at the end of each year. The appropriate rate of interest
is 10%, and the truck has a useful life of 5 years with no residual value. Based on this
information, the amortization of profit by Stocks on the sale-leaseback at December
31,2012, would include a:
a. debit to Depreciation Expense for £1,000.
b. debit to Unearned Profit on Sale-Leaseback for £5,000.
c. credit to Unearned Profit on Sale-Leaseback for £1,000.
d. credit to Depreciation Expense for £1,000.
*114 d £33,000 – £28,000 = £5,000; £5,000 5 = £1,000 Cr.
21. On December 31, 2011, Burton, Inc. leased machinery with a fair value of $840,000 from
Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual
payments of $160,000 beginning December 31, 2011. The lease is appropriately
accounted for by Burton as a finance lease. Burton's incremental borrowing rate is 11%.
Burton knows the interest rate implicit in the lease payments is 10%.
The present value of an annuity due of 1 for 6 years at 10% is 4.7908.
The present value of an annuity due of 1 for 6 years at 11% is 4.6959.
In its December 31, 2011 statement of financial position, Burton should report a lease
liability of
a. $606,528. b. $680,000. c. $751,344. d. $766,528.
116. a ($160,000 × 4.7908) – $160,000 = $606,528.
22. A lessee had a ten-year finance lease requiring equal annual payments. The reduction of
the lease liability in year 2 should equal
a. the current liability shown for the lease at the end of year 1.
b. the current liability shown for the lease at the end of year 2.
c. the reduction of the lease liability in year 1.
d. one-tenth of the original lease liability.
118. a Conceptual.
On January 2, 2011, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill
press. The lease stipulated annual payments of $150,000 starting at the end of the first year, with
title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a
finance lease. The drill press has an estimated useful life of 15 years, with no residual value.
Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments
were determined to have a present value of $900,000, based on implicit interest of 10%.
23. In its 2011 income statement, what amount of depreciation expense should Hernandez
report from this lease transaction?
a. $150,000 b. $100,000 c. $90,000 d. $60,000
120. d $900,000 ÷ 15 = $60,000.
24. Torrey Co. manufactures equipment that is sold or leased. On December 31, 2011, Torrey
leased equipment to Dalton for a five-year period ending December 31, 2016, at which
date ownership of the leased asset will be transferred to Dalton. Equal payments under
the lease are $220,000 (including $20,000 executory costs) and are due on December 31
of each year. The first payment was made on December 31, 2011. The normal sales price
of the equipment is $770,000, and cost is $600,000. For the year ended December 31,
2011, what amount of income should Torrey realize from the lease transaction?
a. $170,000 b. $220,000 c. $230,000
d. $330,000
*122. a $770,000 – $600,000 = $170,000.
*25. On December 31, 2011, Haden Corp. sold a machine to Ryan and simultaneously leased
it back for one year. Pertinent information at this date follows:
Sales price $900,000
Carrying amount 825,000
Present value of reasonable lease rentals
($7,500 for 12 months @ 12%) 85,000
Estimated remaining useful life 12 years
In Haden’s December 31, 2011 statement of financial position, the deferred profit from the
sale of this machine should be
a. $85,000. b. $75,000. c. $10,000. d. $0.
$85,000
*124. d = 9.44%, < 10% of FV of asset it is a minor leaseback.
$900,000
STRAIGHT PROBLEMS
1. Equal annual payments that are due on December 31 each year provide Hayes Corp. with
an 8% return on net investment (present value factor for 6 periods at 8% is 4.62288).
3. The fair value of each trailer is $50,000. The cost of each trailer to Hayes Corp. is $45,000.
Each trailer has an expected useful life of nine years.
Instructions
(a) What type of lease is this for the lessor? Discuss.
(b) Calculate the annual lease payment. (Round to nearest dollar.)
(c) Prepare a lease amortization schedule for Hayes Corp. for the first three years.
(d) Prepare the journal entries for the lessor for 2011 and 2012 to record the lease agreement,
the receipt of the lease rentals, and the recognition of income (assume the use of a
perpetual inventory method and round all amounts to the nearest dollar).
Solution 21-130
(a) It is a sales-type lease to the lessor, Hayes Corp. Hayes's (the manufacturer) profit upon
sale is $50,000, which is recognized in the year of sale (2011). It is not an operating lease
because title to the assets passes to the lessee, and the present value ($500,000) of the
minimum lease payments equals or exceeds 90% ($450,000) of the fair value of the leased
trailers. The remaining accounting treatment is similar to that accorded a direct-financing
lease.
2. Sale-leaseback.
On January 1, 2011, Hester Co. sells machinery to Beck Corp. at its fair value of $480,000 and
leases it back. The machinery had a carrying value of $420,000, the lease is for 10 years and the
implicit rate is 10%. The lease payments of $71,000 start on January 1, 2011. Hester uses
straight-line depreciation and there is no residual value.
Instructions
(a) Prepare all of Hester's entries for 2011.
(b) Prepare all of Beck's entries for 2011.
*Solution 21-132
(a) Hester Co. (Lessee)
January 1, 2011
Cash............................................................................................. 480,000
Machinery......................................................................... 420,000
Unearned Profit on Sale-Leaseback................................. 60,000
Cash............................................................................................. 71,000
Lease Receivable............................................................. 71,000
Instructions
(a) What kind of lease is this to Krause Company?
(b) What should be considered the lease term?
(c) What are the minimum lease payments?
(d) What is the present value of the minimum lease payments? (PV factor for annuity due of 20
semi-annual payments at 8% annual rate, 14.13394; PV factor for amount due in 20 interest
periods at 8% annual rate, .45639.) (Round to nearest dollar.)
(e) What journal entries would Krause record during the first year of the lease? (Include an
amortization schedule through 1/1/12 and round to the nearest dollar.)
Solution 21-134
(a) This lease is a finance lease to Krause Company because its term (10 years—see
computation in b below) exceeds 75% of the equipment's estimated useful life. In addition,
the present value (see computation in d below) of the minimum lease payments (see
computation in c below) exceeds 90% of the fair value of the equipment ($3,000,000).
January 1, 2011
Lease Liability............................................................................... 200,000
Property Taxes.............................................................................. 19,000
Cash................................................................................. 219,000
July 1, 2011
Lease Liability............................................................................... 93,103
Property Taxes ............................................................................. 19,000
Interest Expense .......................................................................... 106,897
Cash................................................................................. 219,000