On Jan 1, 2022, Baton Corporation signed a five-year non-cancelable lease for equipment from Bram. The terms of the lease called for Baton to make annual payments of $50,000 each Jan 1, beginning with Jan 1, 2022 for five years with the equipment going back to the lessor at the end of this period.
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On Jan 1, 2022, Baton Corporation signed a five-year non-cancelable lease for equipment from Bram.
The terms of the lease called for Baton to make annual payments of $50,000 each Jan 1, beginning with Jan 1, 2022 for five years with the equipment going back to the lessor at the end of this period.
The equipment has an estimated useful life of 5 years and no salvage value.
Baton accordingly accounts for this lease transaction as a finance lease.
The minimum lease payments were determined to have a present value of $208,493 at an effective interest rate of 10%.
Bram manufactured the equipment for $155,000. For Bram, it is a sales type lease.
- Prepare a lease amortization table for the life of the lease.
- Record Baton’s (Lessee)
journal entries for 1/1/22, 12/31/22, 1/1/23, 12/31/23. - Record Bram’s (Lessor) journal entries for 1/1/22, 12/31/22, 1/1/23, 12/31/23.
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- Comprehensive Landlord Company and Tenant Company enter into a noncancelable, direct financing lease on January 1, 2019, for nonspecialized equipment that cost the Landlord 280,000 (useful life is 6 years with no residual value). The fair value of the equipment is 300,000. The interest rate implicit in the lease is 14%. The 6-year lease requires 6 equal annual amounts payable each January 1, beginning with January 1, 2019. Tenant pays all executory costs directly to a third party on December 1 of each year. The equipment reverts to the lessor at the termination of the lease. Assume that there are no initial direct costs. Landlord expects to collect all rental payments. Required: 1. Next Level (a) Show how landlord should compute the annual rental amounts, (b) Discuss how the Tenant Company should compute the present value of the lease payments. What additional information would be required to make this computation? 2. Next Level Prepare a table summarizing the lease and interest receipts that would be suitable for Landlord. Under what conditions would this table be suitable for Tenant? 3. Assuming that the table prepared in Requirement 2 is suitable for both the lessee and the lessor, prepare the journal entries for both firms for the years 2019 and 2020. Use the straight-line depreciation method for the leased equipment. The executory costs paid by the lessee are in 2019: insurance, 700 and property taxes, 800; in 2020: insurance, 600 and property taxes, 750. 4. Next Level Show the items and amounts that would be reported on the comparative 2019 and 2020 income statements and ending balance sheets for both the lessor and the lessee, using the change in present value approach.Owens Company leased equipment for 4 years at 50,000 a year with an option to renew the lease for 6 years at 2,000 per month or to purchase the equipment for 25,000 (a price considerably less than the expected fair value) after the initial lease term of 4 years. Why would this lease qualify as a finance lease?Use the information in RE20-3. Prepare the journal entries that Richie Company (the lessor) would make in the first year of the lease assuming the lease is classified as a sales-type lease. Assume that the lessee is required to make payments on December 31 each year. Also assume that Richie had purchased the equipment at a cost of 200,000.
- 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.Lessee and Lessor Accounting Issues Diego Leasing Company agrees to provide La Jolla Company with equipment under a noncancelable lease for 5 years. The equipment has a 5-year life, cost Diego 25,000, and will have no residual value when the lease term ends. The fair value of the equipment is 30,000. La Jolla agrees to pay all executory costs (500 per year) throughout the lease period directly to a third party. On January 1, 2019, the equipment is delivered. Diego expects a 14% return on its net investment. The five equal annual rents are payable in advance starting January 1, 2019. Required: 1. Assuming this is a sales-type lease for the Diego and a finance lease for the La Jolla, prepare a table summarizing the lease and interest payments suitable for use by either party. 2. Next Level On the assumption that both companies adjust and close books each December 31, prepare journal entries relating to the lease for both companies through December 31, 2020, based on data derived in the table. Assume that La Jolla depreciates similar equipment by the straight line methodOn January 1, 2022, Lenore Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Lenore to make annual payments of $10,000 at the beginning of each year, starting January 1, 2022. Lenore correctly accounts for the lease as a finance lease. The machine has an estimated useful life of 6 years and a $5,000 guaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Lenore uses the straight-line method of depreciation for all of its plant assets. Lenore’s incremental borrowing rate is 8% and the Lessor’s implicit rate is known to be 6%. Required: Compute the present value of the minimum lease payments for Lenore (lessee) assuming that the anticipated value of the machine at the end of the lease term will be at least $5,000. Compute the present value of the minimum lease payments for Lenore (lessee) assuming that the anticipated value of the machine at the end of the lease term will be $3,000.
- Sarasota Limited has signed a lease agreement with Lantus Corp. to lease equipment with an expected lifespan of eight years, no estimated salvage value, and a cost to Lantus, the lessor of $170,000. The terms of the lease are as follows: ● The lease term begins on January 1, 2019, and runs for 5 years. The lease requires payments of $38,073 at the beginning of each year starting January 1, 2019. At the end of the lease term, the equipment is to be returned to the lessor. Lantus' implied interest rate is 6%, while Sarasota's borrowing rate is 7%. Sarasota uses straight-line depreciation for similar equipment. The year-end for both companies is December 31. Assuming that both companies follow ASPE. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY DUE. Show Transcribed Text Date Jan. 1, 2019 Dec. 31, 2019 Account Titles and Explanation Equipment Acquired for Lessee (To record purchase of equipment.) (To record…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 solutionVaughn 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 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.On January 1, 2023, Riverbed Ltd., a private company following ASPE, leased a building to Candle Corp. for a ten-year term at an annual rental of $86500. At the inception of the lease, Riverbed received $346000 covering the first two years rent of $173000 and a security deposit of $173000. This deposit will NOT be returned to Candle upon expiration of the lease but will be applied to payment of rent for the last two years of the lease. What portion of the $346000 should be shown as a current and long-term liability, respectively, in Riverbed's December 31, 2023 statement of financial position? Current Liability. Long-term Liability $0 $346000 $86500 $173000 $173000 $173000 $173000 $86500On 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.