**Lease Agreement Case Study: Sax Company**On January 1, 2016, Sax Company entered into a lease agreement with Appleton Company to lease computers with the following terms and conditions:1. **Lease Term**: 5 years. The lease is noncancelable, with equal rental payments due at the end of each year.2. **Asset Details**: The computers have an estimated life of 5 years, a fair value of $300,000, and no residual value.3. **Cost Responsibility**: Sax is responsible for all executory costs.4. **Lease Options**: No renewal or bargain purchase option is included.5. **Payment Details**: Sax makes annual payments of $83,222.92, reflecting a rate of return of 12% on the net investment. Sax is aware of this rate, which aligns with their borrowing rate.6. **Depreciation Method**: Sax uses the straight-line method for similar equipment.**Required Tasks:**1. **Analysis**: Evaluate each capitalization criterion and establish the type of lease for Sax.2. **Calculations**: Determine the asset and liability amount for Sax at lease inception.3. **Table Preparation**: Create a table summarizing the lease payments and interest expenses.4. **Journal Entries**: Prepare journal entries for Sax for the years 2016 and 2017.5. **Next-Level Analysis**: If the lease term is 3 years with an annual payment of $110,000, analyze how Sax would classify the lease under: - (a) U.S. GAAP - (b) IFRS

Lease is the term of accounting which refers to the contractual contract that calls for the user to…

Answered: 1. The lease term is 5 years. The lease…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Garvey Company (the lessee) entered into an equipment lease with Richie Company (the lessor) on January 1 of Year 1. 1. The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option. The equipment is not specialized for Garvey. 2. The lease term is 5 years and requires Garvey to make annual payments of $65,949.37 at the end of each year. 3. The discount rate is 10%, which is implicit in the lease. Garvey knows this rate. 4. The fair value of the equipment at the lease inception is $250,000. The present value of an ordinary annuity of five payments of $65,949.37 each at 10% is $250,000. 5. The equipment has an estimated economic life of 7 years and has zero residual value at the end of this time. Straight-line depreciation is used for similar assets. Required: Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. Assume that Garvey…
Teal Mountaln Leasing Company slgns a lease agreement on January 1, 2020, to lease electronic equipment to Sandhill Company. The term of the non-cancelable lease Is 2 years, and payments are required at the end of each year. The following Information relates to thts agreement: 1. Sandhill has the option to purchase the equlpment for S25,000 upon terminatlon of the lease. it is not reasonably certaln that Sandhill will exercse this optlon. 2. The equlpment has a cost of $300,000 and falr value of $349,000 to Teal Mountaln Leasing. The useful economic life is 2 years, with a residual value of $25,000, 3. Teal Mountaln Leasing desIres to eam a retum of 5%% en Its Investment. 4. Collectibility of the payments by Teal Mountaln Leasing Is probable. Click here bO View factor tables., Prepare the journal entries on the books of Teal Mountain Leasing to reflect the payments recelved under the lease and to recognize Income for the years 2020 and 2021. (credit account titles are automadcally…
On January 1, 2020, Monty Animation sold a truck to Peete Finance for $38,000 and immediately leased it back. The truck was carried on Monty's books at $30,000. The term of the lease is 3 years, there is no bargain purchase option, and title does not transfer to Monty at lease-end. The lease requires three equal rental payments of $11,000 at the end of each year (first payment on January 1, 2021). The appropriate rate of interest is 7%, the truck has a useful life of 5 years, and the residual value at the end of the lease term is expected to be $14,000, none of which is guaranteed. Prepare Monty's 2020 journal entries. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to O decimal places, e.g. 5,265. Record journal entries in the order presented in the problem.) Click here to view factor tables. Date Account Titles and…
8. On January 1, 2019, an entity leased a machinery for 4 years which is the same as the useful life of the machinery at annual rental or fixed payment of P120,000. The lease provides for a transfer of ownership of the underlying asset to the lessee at the end of the lease term. The implicit interest rate of the lease is 12%. (Do not round off the PVF). The lease payment is to be made at the end of each year. Determine the noncurrent portion of the lease liability at the end of 2019. (Round off final answer to whole number)
On January 1, 2025, Oriole Animation sold a truck to Pharoah Finance for $43,000 and immediately leased it back. The truck was carried on Oriole's books at $35,000. The term of the lease is 5 years, there is no bargain purchase option, and title does not transfer to Oriole at lease-end. The lease requires five equal rental payments of $9,932 at the end of each year (first payment on January 1,2026). The appropriate rate of interest is 5%, the truck has a useful life of 5 years, with no expected residual value at the end of the lease term. Prepare Oriole's 2025 journal entries. (List all debit entries before credit entries. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275. Record journal entries in…
Kit Company leased equipment at an annual rental of P45,000 payable in advance for five years. Under the lease contract, Kit is given the option to purchase the asset for P75,000 at the end of the lease term and Kit is reasonably certain to exercise this option. The appropriate interest rate is 12%. Present value of 1 at 12% for 5 periods is 0.5674. Present value of an annuity due of 1 at 12% for 5 periods is 4.0373. What is the capitalized cost of right of use equipment? a. 225,000 b. 300,000 c. 224,234 d. 189,679
C
On January 1, 2020, Mountain Inc. leases a machine used in its operations. The annual lease payment is $10,000 due on December 31 of 2020, 2021, and 2022. The fair value of the machine on January 1, 2020 is $26,730. The machine has no residual value. Mountain could borrow on a three-year collateralized loan at 6%. If the lease is accounted for as a finance lease, the total expenses related to this lease contract that Mountain Inc. will report in its income statement for the year ending December 31, 2020 is Select one: a. $10,600 b. $10,514 c. $10,717 d. $10,000
Vaibhav
On January 1, 2020, Most Inc. leases a machine used in its operations. The annual lease payment is $20,000 due on December 31 of 2020, 2021, 2022, and 2023. The fair value of the machine on January 1, 2020 is $69,302. The machine has no residual value. Most could borrow on a four-year collateralized loan at 6%. If the lease is accounted for as a finance lease, Most’s December 31, 2020 balance sheet would show a right-to-use asset and a finance lease liability of Select one: a. Right-to-use asset $51,976; Finance lease liability $ 53,460 b. Right-to-use asset $53,460; Finance lease liability $ 55,273 c. Right-to-use asset $60,000; Finance lease liability $ 60,000 d. Right-to-use asset $49,355; Finance lease liability $ 57,343
Glade Co. leases computer equipment to customers under direct-financing leases. The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options. Glade wishes to earn 8% interest on a five-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for five years is 4.312. What is the total amount of interest revenue that Glade will recognize over the life of the lease? a. $ 51,600 b. $ 75,000 c. $129,360 d. $139,450
On January 1, 2020, Indigo Animation sold a truck to Peete Finance for $48,000 and immediately leased it back. The truck was carried on Indigo's books at $43,000. The term of the lease is 5 years, there is no bargain purchase option, and title does not transfer to Indigo at lease-end. The lease requires 5 equal rental payments of $11,707 at the end of each year (first payment on January 1, 2021). The appropriate rate of interest is 7%, the truck has a useful life of 5 years, with no expected residual value at the end of the lease term. Prepare Indigo's 2020 journal entries. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to O decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.) Click here to view factor tables. Date Account Titles and Explanation Debit Credit /20 Cash Lease Receivable…

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