Question 1

In a sale-leaseback arrangement, the lessee is also:

Accepted Answer

In a sale-leaseback arrangement, the lessee is the seller of the property. They sell the property to a buyer and then lease it back from the buyer. Therefore, the lessee cannot be the new owner of the property, the buyer or a third party guarantor.

Question 2

On December 31, 2009, B Corp. sold a machine to Royal and simultaneously leased it back for one year. Pertinent information at this date follows: In B's December 31, 2009, balance sheet, the deferred revenue from the sale of this machine should be

Accepted Answer

Since the leaseback is for only one year, it is considered an operating lease. In an operating lease, the sale is recognized, and there is no deferred revenue.

Question 3

Python Company leased equipment from Hope Leasing on January 1, 2009. Hope purchased the equipment at a cost of $222,666.
There is no expected residual value.
Required:
Prepare appropriate journal entries for Python for 2009. Assume straight-line depreciation and a December 31 year-end.

Accepted Answer

The answer of Python Company leased equipment from Hope Leasing...

Question 4

Required:
1. Calculate the amount to be recorded as a leased asset and the associated lease liability.
2. Prepare Rumsfeld's journal entries for this lease for 2009 and 2010.

Accepted Answer

The answer of Required:
1. Calculate the amount to be recorded...

Question 5

On January 1, 2009, Salvatore Company leased several machines from Nola Corporation under a 3-year operating lease agreement. The lease calls for semiannual payments of $15,000 each, payable on June 30 and December 31 of each year. The machines were acquired by Nola at a cost of $90,000 and are expected to have a useful life of 5 years with no expected residual value.
Required:
Prepare the appropriate journal entries for the lessee from the inception of the lease through the end of 2009.

Accepted Answer

The answer of On January 1, 2009, Salvatore Company leased...

Question 6

On January 1, 2009, Holbrook Company leased a building under a 3-year operating lease. The annual rental payments are $40,000 on January 1, 2009, $30,000 on January 1, 2010, and $20,000 on January 1, 2011.
Required:
Prepare the appropriate journal entries for Holbrook Company from the inception of the lease through the end of 2011.

Accepted Answer

The answer of On January 1, 2009, Holbrook Company leased...

Question 7

On December 31, 2009, Perry Corporation leased equipment to Admiral Company for a 5-year period. The annual lease payment, excluding executory costs is $40,000. The interest rate for this lease is 10%. The payments are due on December 31 of each year. The first payment was made on December 31, 2009. The normal cash price for this type of equipment is $125,000 while the cost to Perry was $105,000. For the year ended December 31, 2009, by what amount will Perry's pretax earnings increase from this lease?

Accepted Answer

Perry's pretax earnings will increase by the amount of the first lease payment received, which is $40,000, minus the interest income recognized for the year. The interest income for the first year is calculated as 10% of the normal cash price of $125,000, which is $12,500. Therefore, the increase in pretax earnings is $40,000 - $12,500 = $27,500. However, since the cost of the equipment is $105,000, the gross profit on the sale is $125,000 - $105,000 = $20,000. Thus, the pretax earnings increase by $20,000.

Question 8

Southern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2009.
There is no expected residual value.
Required:
Prepare appropriate journal entries for Southern Edison for 2009 and 2010. Assume straight-line depreciation and a December 31 year-end.

Accepted Answer

The answer of Southern Edison Company leased equipment from Hi-Tech...

Question 9

Diablo Company leased a machine from Juniper Corporation on January 1, 2009. The machine has a fair value of $20,000,000. The lease agreement calls for four equal payments at the end of each year in the amount of $6,309,410. The useful life of the machine was expected to be four years with no residual value. The appropriate interest rate for this lease is 10%.
Required:
1. Prepare the journal entry for Diablo Company at the inception of the lease.
2. Prepare the journal entry for the first lease payment.
3. Prepare the journal entry for the second lease payment.

Accepted Answer

The answer of Diablo Company leased a machine from Juniper...

Question 10

Each of the independent situations below describes a nonoperating lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit interest rate.
For convenience, here are some table values:
Required:
For each situation determine the amount of the annual lease payment, as calculated by the lessor.

Accepted Answer

The answer of Each of the independent situations below describes...

Question 11

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs. Initial direct costs are expensed at the inception of the lease in

Accepted Answer

In a sales-type lease, initial direct costs are expensed at the inception of the lease because the lessor recognizes a profit or loss on the sale of the leased asset.

Question 12

Eastern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2009.
Required:
Prepare appropriate journal entries for Hi-Tech Leasing for 2009 and 2010. Assume a December 31 year-end.
 $$\begin{array}{l}
\text { Other information: }\
\begin{array} { l l } 
\text { Lease term } & 3 \text { years } \
\text { Annual payments } & \$ 80,000 \text { on January } 1 \text { each year } \
\text { Life of asset } & 3 \text { years } \
\text { Implicit interest rate } & 8 \% \
\text { Incremental rate } & 8 \% \
\text { PV, annuity due, } 3 \text { periods, } 8 \% & 2.7833 \
\text { PV, ordinary annuity, } 3 \text { periods, } 8 \% & 2.5771 \
\text { Hi-Tech's cost of the equipment } & \$ 222,666 \
\text { There is no expected residual value. }
\end{array}
\end{array}$$

Accepted Answer

The answer of Eastern Edison Company leased equipment from Hi-Tech...

Question 13

If the lessee and lessor use different interest rates to account for a capital lease, then:

Accepted Answer

If the lessee and lessor use different interest rates to account for a capital lease, then the total expenses for the lessee will be different from the lessor's total revenues because the lessee will be accounting for the lease based on their own interest rate, while the lessor will be accounting for the lease based on their own interest rate. This difference in interest rates will cause a discrepancy in the total expenses and revenues reported by the lessee and the lessor.

Question 14

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs. Initial direct costs are matched with the interest revenues they help generate in

Accepted Answer

In a direct financing lease, initial direct costs are deferred and amortized over the lease term, matching them with the interest revenue generated from the lease.

Question 15

Diablo Company leased a machine from Juniper Corporation on January 1, 2009. The machine has a fair value of $20,000,000. The lease agreement calls for four equal payments at the end of each year. The useful life of the machine was expected to be four years with no residual value. The appropriate interest rate for this lease is 10%.
Other information:
PV of an ordinary annuity @10% for 4 periods: 3.16987
PV of an annuity due @ 10% for 4 periods: 3.4869
Required:
1. Determine the amount of each lease payment.
2. Prepare the journal entry for Diablo Company at the inception of the lease.
3. Prepare the journal entry for the first lease payment.
4. Prepare the journal entry for the second lease payment.

Accepted Answer

The answer of Diablo Company leased a machine from Juniper...

Question 16

On January 1, 2009, Holbrook Company leased a building under a 3-year operating lease. The annual rental payments are $68,000 on January 1, 2009, the inception of the lease, and $50,000 January 1 of 2010 and 2011. Holbrook made structural modifications to the building costing $90,000 before occupying the building. The useful life of the building and the modifications is 30 years with no expected residual value.
Required:
Prepare the appropriate journal entries for Holbrook Company for 2009. Holbrook's fiscal year is the calendar year, and the company uses straight-line depreciation.

Accepted Answer

The answer of On January 1, 2009, Holbrook Company leased...

Question 17

On January 1, 2009, Salvatore Company leased several machines from Nola Corporation under a 3-year operating lease agreement. The lease calls for semiannual payments of $15,000 each, payable on June 30 and December 31 of each year. The machines were acquired by Nola at a cost of $90,000 and are expected to have a useful life of 5 years with no expected residual value.
Required:
Prepare the appropriate journal entries for the lessor from the inception of the lease through the end of 2009.

Accepted Answer

The answer of On January 1, 2009, Salvatore Company leased...

Question 18

Southwestern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2009. Hi-Tech manufactured the equipment at a cost of $90,000.
There is no expected residual value.
Required:
Prepare appropriate journal entries for Hi-Tech Leasing for 2009. Assume a December 31 year-end.
 $$\begin{array}{l}
\text { Other information: }\
\begin{array} { l l } 
\text { Lease term } & 3 \text { years } \
\text { Annual payments } & \$ 40,000 \text { on January } 1 \text { each year } \
\text { Life of asset } & 3 \text { years } \
\text { Fair value of asset } & \$ 111,332 \
\text { Implicit interest rate } & 8 \% \
\text { Incremental rate } & 8 \%
\end{array}
\end{array}$$

Accepted Answer

The answer of Southwestern Edison Company leased equipment from Hi-Tech...

Question 19

Northwestern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2009. Hi-Tech manufactured the equipment at a cost of $90,000.
There is no expected residual value.
Required:
Prepare appropriate journal entries for Hi-Tech Leasing for 2009 and 2010. Assume a December 31 year-end.
 $$\begin{array}{l}
\text { Other information: }\
\begin{array} { l l } 
\text { Lease term } & 3 \text { years } \
\text { Annual payments } & \$ 40,000 \text { on January } 1 \text { each year } \
\text { Life of asset } & 3 \text { years } \
\text { Implicit interest rate } & 8 \% \
\text { Incremental rate } & 8 \% \
\text { PV, annuity due, } 3 \text { periods, } 8 \% & 2.7833 \
\text { PV, ordinary annuity, } 3 \text { periods, } 8 \% & 2.5771
\end{array}
\end{array}$$

Accepted Answer

The answer of Northwestern Edison Company leased equipment from Hi-Tech...

Question 20

N Corp. entered into a nine-year capital lease on a warehouse on December 31, 2009. Lease payments of $26,000, which includes real estate taxes of $1,000, are due annually, beginning on December 31, 2010, and every December 31 thereafter. Neal does not know the interest rate implicit in the lease; N's incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should N report as capitalized lease liability at December 31, 2009?

Accepted Answer

The capitalized lease liability should be the annual lease payments less the executory cost (real estate taxes) times the present value factor for an ordinary annuity of 1 for nine years at 9%. The calculation would be: ($26,000 - $1,000) x 6.0 = $150,000. The real estate taxes are a period cost and should be charged to expense.

Quiz 15: Leases

In a sale-leaseback arrangement, the lessee is also:

On December 31, 2009, B Corp. sold a machine to Royal and simultaneously leased it back for one year. Pertinent information at this date follows: In B's December 31, 2009, balance sheet, the deferred revenue from the sale of this machine should be

Python Company leased equipment from Hope Leasing on January 1, 2009. Hope purchased the equipment at a cost of $222,666. There is no expected residual value. Required: Prepare appropriate journal entries for Python for 2009. Assume straight-line depreciation and a December 31 year-end.

Required: 1. Calculate the amount to be recorded as a leased asset and the associated lease liability. 2. Prepare Rumsfeld's journal entries for this lease for 2009 and 2010.

Southern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2009. There is no expected residual value. Required: Prepare appropriate journal entries for Southern Edison for 2009 and 2010. Assume straight-line depreciation and a December 31 year-end.

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs. Initial direct costs are expensed at the inception of the lease in

If the lessee and lessor use different interest rates to account for a capital lease, then:

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs. Initial direct costs are matched with the interest revenues they help generate in