ACME Coal paid $5,000 to lease a railcar from the Reading Railroad. Under the terms of the lease, $1,000 of this payment is refundable if the railcar is returned within two days of sign- ing the lease. 1. Upon signing the lease and paying $5,000, how large are ACME's fixed costs? Its sunk costs? 2. One day after signing the lease, ACME realizes that it has no use for the railcar. A farmer has a bumper crop of corn and has offered to sublease the railcar from ACME at a price of $4,500. Should ACME accept the farmer's offer?

ACME Coal paid $5,000 to lease a railcar from the Reading Railroad. Under the terms of the lease, $1,000 of this payment is refundable if the railcar is returned within two days of sign- ing the lease. 1. Upon signing the lease and paying $5,000, how large are ACME's fixed costs? Its sunk costs? 2. One day after signing the lease, ACME realizes that it has no use for the railcar. A farmer has a bumper crop of corn and has offered to sublease the railcar from ACME at a price of $4,500. Should ACME accept the farmer's offer?

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

Abbott Equipment leased a protein analyzer to Werner Chemical, Incorporated, on September 30, 2024. • Abbott purchased the machine from NutraLabs, Incorporated, at a cost of $6.35 million. • The five-year lease agreement calls for Werner to make quarterly lease payments of $449,273, payable each September 30, December 31, March 31, and June 30, with the first payment on September 30, 2024. • Abbott's implicit interest rate is 16%. The useful life of the equipment is five years. Note: Use tables, Excel, or a financial calculator. (FV of $1. PV of $1, FVA of $1. PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. What pretax amounts related to the lease would Abbott report in its balance sheet on December 31, 2024? 2. What pretax amounts related to the lease would Abbott report in its income statement for the year ended December 31, 2024? 3. What pretax amounts related to the lease would Abbott report in its statement of cash flows for the year ended December 31, 2024? Complete this…
6....con Cheyenne Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $276,779, and its unguaranteed residual value at the end of the lease term is estimated to be $18,400. National will pay annual payments of $39,900 at the beginning of each year. Cheyenne incurred costs of $189,300 in manufacturing the equipment and $3,700 in sales commissions in closing the lease. Cheyenne has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 10%. (c) Prepare all of the lessor’s journal entries for the first year. (Credit account titles are automatically indented when 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. Round answers to 0 decimal places e.g. 5,275.) Account Titles and Explanation…
Crane, Inc. leased equipment from Tower Company under a 4-year lease requiring equal annual payments of $224152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4- year useful life and no salvage value. If Crane, Inc.'s incremental borrowing rate is 11% and the rate implicit in the lease (which is known by Crane, Inc.) is 9%, what is the amount recorded for the leased asset at the lease inception? 9%, 4 periods 11%, 4 periods O $695420 O$791546 O $771914 O $726190 PV Annuity Due 3.53129 3.44371 PV Ordinary Annuity 3.23972 3.10245 Attempts: 0 of 1 used Submit Answer
Wildhorse, Inc. manufactures machinery used in the mining industry. On January 2, 2021 it leased equipment with a cost of $570000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments of $190966 at the end of each year. The equipment has an expected useful life of 5 years. Silver Point's incremental borrowing rate is 9%, and it depreciates similar equipment using the double - declining balance method. The selling price of the equipment is $870000, and the rate implicit in the lease is 7%, which is known to Silver Point Co. What is the book value of the leased asset at December 31, 2021? $696000 $522000 $870000 $556800
6. Cheyenne Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $276,779, and its unguaranteed residual value at the end of the lease term is estimated to be $18,400. National will pay annual payments of $39,900 at the beginning of each year. Cheyenne incurred costs of $189,300 in manufacturing the equipment and $3,700 in sales commissions in closing the lease. Cheyenne has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 10%.Click here to view factor tables. (a) Discuss the nature of this lease in relation to the lessor.This is a .Compute the amount of each of the following items. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places, e.g.…
Assume that on January 1, 2020, Elmer's Restaurants sells a computer system to Liquidity Finance Co. for $680,000 and immediately leases back the computer system. The relevant information is as follows. 1. The computer was carried on Elmer's books at a value of $600,000. 2. The term of the non-cancelable lease is 3 years; title will not transfer to Elmer's, and the expected residual value at the end of the lease is $450,000, all of which is unguaranteed. 3. The lease agreement requires equal rental payments of $115,970 at the beginning of each year. 4. The incremental borrowing rate for Elmer's is 8%. Elmer's is aware that Liquidity Finance set the annual rental to ensure a rate of return of 8%. 5. The computer has a fair value of $680,000 on January 1, 2020, and an estimated economic life of 10 years. Instructions Prepare the journal entries for both the lessee and the lessor for 2020 to reflect the sale and leaseback agreement.
Teal Mountain Company is negotiating to lease a piece of equipment to MTBA, Inc. MTBA requests that the lease be for 9 years. The equipment has a useful life of 10 years. Teal Mountain wants a guarantee that the residual value of the equipment at the end of the lease is at least $4,000. MTBA agrees to guarantee a residual value of this amount though it expects the residual value of the equipment to be only $2,500 at the end of the lease term.If the fair value of the equipment at lease commencement is $60,000, what would be the amount of the annual rental payments Teal Mountain demands of MTBA, assuming each payment will be made at the beginning of each year and Teal Mountain wishes to earn a rate of return on the lease of 6%? (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answer to 0 decimal places, e.g. 5,275.)
Pharoah Corporation, which uses ASPE, manufactures replicators. On May 29, 2023, it leased to Bonita Limited a replicator that cost $266,600 to manufacture and usually sells for $415,000. The lease agreement covers the replicator's 7-year useful life and requires 7 equal annual rentals of $77,545 each, beginning May 29, 2023. The equipment reverts to Pharoah at the end of the lease, at which time it is expected that the replicator will have a residual value of $41,200, which has been guaranteed by Bonita, the lessee. An interest rate of 12% is implicit in the lease agreement. Collectibility of the rentals is reasonably assured, and there are no important uncertainties concerning costs. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY DUE. Prepare Pharoah's May 29, 2023 journal entries. (List all debit entries before credit entries. Credit account titles are automatically indented when the amount is entered. Do not…
Assume that on January 1, 2025, Elmer's Restaurants sells a computer system to Sunland Finance Co. for $620,000 and immediately leases back the computer system. The relevant information is as follows. 1. The computer was carried on Elmer's books at a value of $540,000. 2 The term of the non-cancelable lease is 3 years; title will not transfer to Elmer's, and the expected residual value at the end of the lease is $390,000, all of which is unguaranteed. 3. The lease agreement requires equal rental payments of $112,790 at the beginning of each year. 4. The incremental borrowing rate for Elmer's is 8%. Elmer's is aware that Sunland Finance set the annual rental to ensure a rate of return of 8%. 5. The computer has a fair value of $620,000 on January 1, 2025, and an estimated economic life of 10 years. Prepare the journal entries for both the lessee and the lessor for 2025 to record the sale and leaseback agreement. (For calculation purposes, use 5 decimal places as displayed in the factor…
To raise working capital, ABC Company sold its storage building to Best Bank on January 1, 2021, for $950,000 and immediately leased the building back. The operating lease is for the next 10 years of the building’s estimated 20-year remaining useful life. The building has a fair value of $950,000 and a book value of $660,000 (its original cost was $1,000,000). The annual lease payments of $120,000 are payable to Best Bank each December 31, beginning from December 31, 2021. The lease has an implicit rate of 8%. Let's assume that both ABC Company and Best Bank use the straight-line depreciation method for fixed assets with zero residual value. Information of Time Value (i) present value of an ordinary annuity of $1 (n=10, i=8%) = 6.71008 (ii) present value of an annuity due of $1 (n=10, i=8%) = 7.24689 (iii) present value of $1 (n=10, i=8%) = 0.46319 Required: Prepare the appropriate entries for ABC Company on January 1, 2021 and December 31, 2021, to record the transaction and…
Elton Electronics leases testing equipment to Startup Corporation. The equipment is not specialized and is delivered on January 1, 2023. The fair value of the equipment is $118,000. The cost of the equipment to Elton is $113,000 and the expected life of the testing equipment is 8 years. Elton incurs initial direct costs of $10,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2023 and ending on December 31, 2029. Elton's implicit rate is 5% and they expect that collection of the $14,500 lease payments is probable.What is the principal balance in the Net Investment in Lease — Sale Type account after the second payment on December 31, 2023? Group of answer choices $98,402 $83,902 $113,000 $73,597
Stowe Construction Company is considering selling excess machinery with a book value of $281,500 (original cost of $400,300 less accumulated depreciation of $118,800) for $274,900, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $285,500 for 5 years, after which it is expected to have no residual value. During the period of the lease, Stowe Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $24,900. Question Content Area a. Prepare a differential analysis dated March 21 to determine whether Stowe Construction Company should lease (Alternative 1) or sell (Alternative 2) the machinery. If required, use a minus sign to indicate a loss. Differential AnalysisLease (Alt. 1) or Sell (Alt. 2) MachineryMarch 21 Line Item Description LeaseMachinery(Alternative 1) SellMachinery(Alternative 2) DifferentialEffects(Alternative 2) Revenues $Revenues $Revenues $Revenues Costs Costs Costs Costs…