ABC Company leased into a ten-year non-cancelable lease requiring year-end payments of P1,200,000 on January 1, 2020. The incremental borrowing rate is 12% and the lessor's implicit interest rate is 10%. An initial direct cost of P150,000 in negotiating and securing the leasing arrangement was paid on the same day. Ownership of the property remains with the lessor at expiration of the lease. There is no purchase option. The lease property has an economic life of 12 years. 1. What amount should be financed initially as cost of the right of use asset? 2.What amount should be recognized as lease liability on December 31, 2020? 3.What is the annual depreciation of the right of use asset?

ABC Company leased into a ten-year non-cancelable lease requiring year-end payments of P1,200,000 on January 1, 2020. The incremental borrowing rate is 12% and the lessor's implicit interest rate is 10%. An initial direct cost of P150,000 in negotiating and securing the leasing arrangement was paid on the same day. Ownership of the property remains with the lessor at expiration of the lease. There is no purchase option. The lease property has an economic life of 12 years. 1. What amount should be financed initially as cost of the right of use asset? 2.What amount should be recognized as lease liability on December 31, 2020? 3.What is the annual depreciation of the right of use asset?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

On January 1, 2020, Dulcinea Company enters a ten-year noncancelable lease for equipment having an estimated useful life of 10 years and a fair value to the lessor, Mojito Corp., at the inception of the lease of $6,000,000. Dulcinea's incremental borrowing rate is 4%. Dulcinea uses the straight-line method to depreciate its assets. The lease contains the following provisions: (Assume the cost to the lessor was $4,000,000.) 1. Rental payments of $687,268, payable at the beginning of each year. 2. There is a guaranteed residual value of $300,000. The expected residual value is $250,000. Required: a. What kind of lease is this to the two companies and why? b. Prepare the journal entries for both companies during the first year of the lease.
Wells Leasing Company signs an agreement on January 1. 2020, to lease equipment to Manchester Company. The following information relates to this agreement. The term of the non-cancellable lease is 6 years with no renewal option. 1. The equipment has an estimated economic life of 6 years. The cost of the asset to the lessor is S250,000. The fair value of the asset at January 1, 2020, is $250,000. The asset will revert to the lessor at the end of the lease term, at which 3. time the asset is expected to have a residual value of $25000, none of which is guaranteed. The agreement requires equal annual rental payments, beginning on 4. January 1, 2020. 5. Collectability of the lease payments by Windsor is probable. A. Assuming the lessor desires a 6o rate of return on its investment, calculate the amount of the annual rental payment required.
BestHuskies Corporation leases equipment from Falls Company on January 1, 2021. The lease agreement does not transfer ownership, contain a bargain purchase option, and is not a specialized asset. It covers 3 years of the equipment's 8-year useful life, and the present value of the lease payments is less than 90% of the fair value of the asset leased. Assume the annual lease payment is $35,000 at the beginning of each year, and BestHuskies' incremental borrowing rate is 6%, which is the same as the lessor's implicit rate. Prepare BestHuskies' journal entries on January 1, 2021, and December 31, 2021. Show your work for partial credits.
Plessings Company leased a piece of machinery to Banana, Inc. on January 1, 2023. The lease is correctly classified as a sales-type lease. Plessings will receive three annual lease payments of $20,900, with the first one received on January 1, 2023. There is no guaranteed or unguaranteed residual value. The fair value of the machine is $50,000 and Plessings incurs initial direct costs of $5,000. What is the implicit rate assuming the initial direct costs are expensed? Group of answer choices 27.95% 14.72% 6.85% 12.23%
On January 1, 2020, Dulcinea Company enters into a ten-year noncancelable lease for equipment having an estimated useful life of 10 years and a fair value to the lessor, Mojito Corp., at the inception of the lease of $6,000,000. Dulcinea's incremental borrowing rate is 4%. Dulcinea uses the straight-line method to depreciate its assets. The lease contains the following provisions: 1. Rental payments of $687,268, payable at the beginning of each year. 2. There is a guaranteed residual value of $300,000. The expected residual value is $250,000. Required: What kind of lease is this to the two companies and why? а. b. Prepare the journal entries for both companies during the first year of the lease.
Wilcox Ltd finance company purchases a machine for $160,000 at the request of Upland Manufacturing Ltd, which then leases it to Upland for $60,000 per annum for three years. The payments are to be made at the commencement of each year including the first year of the lease period. Wilcox Ltd incurs costs of $1,500 to establish the lease. The lease is non-cancellable and classified as a finance lease by the lessor. The interest rate implicit in the lease is 10%. There is no guaranteed or unguaranteed residual value at the end of the lease period. Required: Prepare the journal entries for Wilcox Ltd to record the initial recognition of lease related assets and interest income for three years under AASB 16/IFRS 16
Whispering Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental payments of $54,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 6%; Whispering’s incremental borrowing rate is 8%. Whispering is unaware of the rate being used by the lessor. At the end of the lease, Whispering has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Whispering uses the straight-line method of depreciation on similar owned equipment.
On January 1, 2021, Red Company leased equipment by signing a four-year lease. Annual rentals of P1,200,000 are payable at the beginning of each year starting January 1, 2021. Red guarantees the residual value of P400,000 at the end of the lease term. The useful life of the equipment is 5 years with estimated scrap value of P100,000. Red uses straight-line method of depreciation. The interest implicit in the lease is 10%. The present value factors are:PV of 1 discounted at 10% for 4 periods---------0.68301PV of 1 discounted at 10% for 5 periods---------0.62092PV of annuity due of 1 for 4 periods at 10%------3.48685PV of 1 ordinary annuity at 10% for 4 periods---3.16987 What was the carrying value of the right-of-use equipment at December 31, 2021?
Under leases
Whispering Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental payments of $54,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 6%; Whispering's incremental borrowing rate is 8%. Whispering is unaware of the rate being used by the lessor. At the end of the lease, Whispering has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Whispering uses the straight-line method of depreciation on similar owned equipment. Click here to view factor tables.
Blossom, Inc. leases a piece of equipment to Wildhorse Company on January 1, 2025. The contract stipulates a lease term of 5 years, with equal annual rental payments of $8,880 at the end of each year. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. The asset has a fair value of $48,000, a book value of $43,000, and a useful life of 8 years. At the end of the lease term, Blossom expects the residual value of the asset to be $12,000, and this amount is guaranteed by a third party. Assuming Blossom wants to earn a 5% return on the lease and collectibility of the lease payments is probable, record its journal entry at the commencement of the lease on January 1, 2025. (List all debit entries before credit entries. Credit account titles are automatically
AC Milan Sales and Service entered into a lease agreement to lease a fleet of six vehicles from FC Inter Motors. The term of the lease is five years and AC Milan makes annual payments of $30,000 per year beginning on 1 January 2019 (and then every 31 December through 31 December 2022). 1 January 2019 is also the lease commencement date. AC Milan does not guarantee any residual value in the lease agreement. AC Milan received $8,000 on 1 Jan 2019 as an incentive to sign the lease agreement and incurred initial direct costs in 2018 of $4,000 related to the lease that were recorded as prepaid assets. The estimated economic life of the vehicles is eight years and their fair value at lease commencement is $200,000. AC Milan is unaware of FC Inter's implicit rate, but AC Milan's incremental borrowing rate is 4% per year. There is no transfer of ownership at the end of the lease, nor is there a purchase option. The vehicles are not of a specialized nature. 1. What type of lease has AC Milan…