On August 31, 2022, Avalon Ltd. had entered into a 6 year lease for some equipment that has a useful life of 7 years. The lease payments are $26,269 with the first payment having being made August 31, 2022. At the end of the lease, ownership of the equipment will transfer to Avalon. Because the lease was entered into on the last day of Avalon's fiscal year, no depreciation was taken in fiscal 2022 on the leased equipment. This right-of-use asset will be depreciated on the straight line basis. The interest rate implicit in the lease is known to Avalon and is 5%. The August 31, 2022 journal entry for this lease was correctly made (Dr. Lease asset 140,000; Cr. Lease liability 113,731; Cr. Cash 26,269) Your tasks are: (a) Prepare an amortization table for the lease liability from the August 31, 2022 commencement of the lease to its end; (b) Prepare a journal entry to record the August 31, 2023 lease payment; (c) Prepare a journal entry to record the depreciation on the lease asset for the year ended August 31, 2023.

On August 31, 2022, Avalon Ltd. had entered into a 6 year lease for some equipment that has a useful life of 7 years. The lease payments are $26,269 with the first payment having being made August 31, 2022. At the end of the lease, ownership of the equipment will transfer to Avalon. Because the lease was entered into on the last day of Avalon's fiscal year, no depreciation was taken in fiscal 2022 on the leased equipment. This right-of-use asset will be depreciated on the straight line basis. The interest rate implicit in the lease is known to Avalon and is 5%. The August 31, 2022 journal entry for this lease was correctly made (Dr. Lease asset 140,000; Cr. Lease liability 113,731; Cr. Cash 26,269) Your tasks are: (a) Prepare an amortization table for the lease liability from the August 31, 2022 commencement of the lease to its end; (b) Prepare a journal entry to record the August 31, 2023 lease payment; (c) Prepare a journal entry to record the depreciation on the lease asset for the year ended August 31, 2023.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 1E: Determining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a...

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Determining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a 10-year cancelable (at the option of either party) agreement to lease a storage building from Wake Company. The following information pertains to this lease agreement: 1. The agreement requires rental payments of 100,000 at the beginning of each year. 2. The cost and fair value of the building on January 1, 2019, is 2 million. The storage building has not been specialized for Caswell. 3. The building has an estimated economic life of 50 years, with no residual value. Caswell depreciates similar buildings according to the straight-line method. 4. The lease does not contain a renewable option clause. At the termination of the lease, the building reverts to the lessor. 5. Caswells incremental borrowing rate is 14% per year. Wake set the annual rental to ensure a 16% rate of return (the loss in service value anticipated for the term of the lease). Caswell knows the implicit interest rate. 6. Executory costs of 7,000 annually, related to taxes on the property, are paid by Caswell directly to the taxing authority on Dec. 31 of each year. Required: 1. Determine what type of lease this is for the lessee. 2. Prepare appropriate journal entries on the lessees books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2019 and 2020.
Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2023. The 10 year lease requires lease payments of $4,000, beginning on January 1, 2023, and at each December 31 thereafter through 2031. The equipment is estimated to have a 10 year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 11%. Initial direct costs of $1,000 are incurred by the lessee on January 1, 2023. Righteous Leasing acquired the asset just prior to the lease term at a cost of $27,000. Collection of all lease payments is reasonably assured.What is the proper classification of the lease to Nace? Group of answer choices Either A or B Operating lease Sales-type lease Finance lease
Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2023. The 10 year lease requires lease payments of $6000, beginning on January 1, 2023, and at each December 31 thereafter through 2031. The equipment is estimated to have a 10 year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 10%. Initial direct costs of $1100 are incurred by the lessee on January 1, 2023. Righteous Leasing acquired the asset just prior to the lease term at a cost of $41,608. Collection of all lease payments is reasonably assured.What is the reduction in the lease liability recorded with the first and second lease payments, respectively? Group of answer choices $6000; $2545 $4165; $4165 $4055; $3650 $36,499; $2350
Vaughn Company, as lessee, enters into a lease agreement on January 1, 2022, for equipment. The following data are relevant to the lease agreement: 1. The term of the noncancelable lease is 4 years, with no renewal option. Payments of $422,689 are due on January 1 of each year. 2. The fair value of the equipment on January 1, 2022 is $1,512,000. The equipment has an economic life of 6 years with no salvage value. 3. Vaughn depreciates similar machinery it owns on the straight-line basis. 4. The lessee pays all executory costs. 5. Vaughn’s incremental borrowing rate is 10%, but Vaughn knows that 8% is the lessor’s implicit interest rate. 6. Vaughn has a December 31 year-end. Required: a. Indicate the type of lease that Vaughn Company has entered into and why. b. Prepare an amortization table for Vaughn in Excel. c. Prepare the journal entries on Vaughn’s books for the first two years of the lease.
Vaughn Company, as lessee, enters into a lease agreement on January 1, 2022, for equipment. The following data are relevant to the lease agreement: The term of the noncancelable lease is 4 years, with no renewal option. Payments of $422,689 are due on January 1 of each year. The fair value of the equipment on January 1, 2022 is $1,512,000. The equipment has an economic life of 6 years with no salvage value. Vaughn depreciates similar machinery it owns on the straight-line basis. The lessee pays all executory costs. Vaughn’s incremental borrowing rate is 10%, but Vaughn knows that 8% is the lessor’s implicit interest rate. Vaughn has a December 31 year-end. Required: Indicate the type of lease that Vaughn Company has entered into and why. Prepare an amortization table for Vaughn in Excel. Prepare the journal entries on Vaughn’s books for the first two years of the lease.
On January 1, 2021, Sandhill Corporation signed a 5-year noncancelable lease for equipment. The terms of the lease called for Sandhill to make annual payments of $196000 at the beginning of each year for 5 years beginning on January 1, 2021 with the title passing to Sandhill at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sandhill uses the straight-line method of depreciation for all of its fixed assets. Sandhill accordingly accounts for this lease transaction as a finance lease. The lease payments were determined to have a present value of $830985 at an effective interest rate of 9%.In 2021, Sandhill should record interest expense of $138851. $74789. $57149. $121211.
On January 1, 2022, Dire Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dire to make annual payments of P150,000 at the end of each year for ten years with title to pass to Dire at the end of this period. The machinery has an estimated useful life of 15 years. Dire uses the straight-line method of depreciation for all of its fixed assets. Dire accordingly accounted for this lease transaction as a finance lease. The interest rate of 8% is implicit in the lease. Dire has an option to purchase the asset at the end of lease term at P120,000 which is reasonably certain to exercise by Dire. Estimated residual value at the end of 10 years is P100,000 and end of 15 years is P80,000. Dire incurred a total of P350,000 direct cost to enter the lease. Dire should record for 2022: ANSWER: interest expense of P84,968 and depreciation expense of P88,806. Show full solution
On January 1, 2025, Windsor Co. leased a building to Wildhorse Inc. The relevant information related to the lease is as follows. 1. The lease arrangement is for 10 years. The building is expected to have a residual value at the end of the lease of $3,100,000 (unguaranteed), 2. The leased building has a cost of $3,600,000 and was purchased for cash on January 1, 2025. 3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value. 4. Lease payments are $250,000 per year and are made at the beginning of the year. 5. Wildhorse has an incremental borrowing rate of 9%, and the rate implicit in the lease is unknown to Wildhorse. 6. Both the lessor and the lessee are on a calendar-year basis. Click here to view factor tables. (For caiculation purposes, use 5 decimal places as displayed in the factor table provided.) Prepare the journal entries that Windsor should make in 2025. (List oll debit entries before credit entries. Credit account…
On January 1, 2023, Carla Vista Inc. sold a piece of equipment to Sunland Ltd. For $182,000, and immediately leased the equipment back. At the time, the equipment was carried on Carla Vista's books at a cost of $273,000, less accumulated depreciation of $109,000. The lease is a capital lease to Carla Vista, with a lease term of 5 years. The equipment under capital lease will be depreciated in Carla Vista's books over five years using double-declining balance depreciation. Calculate the amortization of the deferred gain on sale to be recorded at the end of 2023, if Carla Vista follows ASPE.
Eubank Company, as lessee, enters into a lease agreement on July 1, 2018, for equipment. The following data are relevant to the lease agreement: The term of the noncancelable lease is 4 years, with no renewal option. Payments of $978,446 are due on July 1 of each year. The fair value of the equipment on July 1, 2018 is $3,500,000. The equipment has an economic life of 6 years with no salvage value. Eubank depreciates similar machinery it owns on the double-declining balance basis. The lessee pays all executory costs. Eubank’s incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3.57710; at 10%, 3.48685). Instructions (a) Indicate the type of lease Eubank Company has entered into and what accounting treatment is applicable. This is a capital lease; therefore, it should be accounted for by the capital lease method. (b) Prepare the journal…
On December 31, 2024, Shamrock corporation signed a 5-year, non - cancelable lease for a machine. The terms of the lease called for Shamrock to make annual payments of $8, 215 at the beginning of each year, starting December 31, 2024. The machine has an estimated useful life of 6 years and a $5, 200 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Shamrock uses the straight-line method of depreciation for all of its plant assets. Shamrock's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown. Prepare all necessary journal entries for shamrock for this lease through December 31, 2025.
On December 31, 2024, Shamrock Corporation signed a 5-year, non-cancelable lease for a machine. The terms of the lease called for Shamrock to make annual payments of $7,909 at the beginning of each year, starting December 31, 2024. The machine has an estimated useful life of 6 years and a $4,500 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Shamrock uses the straight-line method of depreciation for all of its plant assets. Shamrock's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown.