Berne Company (lessor) enters into a lease with Fox Company to lease equipment to Fox beginning January 1, 2016. The lease terms, provisions, and related events are as follows:1. The lease term is 4 years. The leasenoncancelable and requires annual rental payments of $50,000 to be made at the end of each year.2. The equipment costs $130,000. The equipment has an estimated life of 4 years and an estimated residual value at the end of the lease term ofzero3. Fox agrees to pay all executory costs.4. The interest rate implicit in the lease is 12%.5. The initial direct costs are insignificant and assumed to be zero.6. The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costsyet to be incurred by the lessor.Required:1. Next Level Determine if the lease is a sales-type or direct financing lease from Berne's point of view (calculate the selling price and assumethat this is also the fair value).2. Prepare a table summarizing the lease receipts and interest revenue earned by the lessor.3. Prepare journal entries for Berne, the lessor, for the years 2016 and 2017.

Journal entries refer to the systematic documentation of the financial transactions of a company in…

Answered: Berne Company (lessor) enters into a…

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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Company A leases a motor vehicle from Company B.• The lease became effective 1 January 2014 and the lease term is for 4 years.• The annual lease payments are 10 000 per annum, in arrears.• There is no option of renewal (of the lease agreement).• The implicit interest rate is 10%.• The fair value of the motor vehicle at 1 January 2014 is 31,700. Required:For each of the scenarios below, discuss whether or not the above lease agreementconstitutes a finance lease: Scenario 1: The useful life of the motor vehicle is 8 years. At the end of the lease period,ownership of the motor vehicle transfers from Company B to Company A.  Scenario 2: The useful life of the motor vehicle is 4 years. At the end of the lease period,ownership of the motor vehicle remains with Company B.  Scenario 3: If the lease payments per annum is $5,000 and the useful life of the vehicle is8 years.
LSE-5 (Operating Lease) On January 1, 2017, Pym Co. leases an armored suit it constructed at a cost of $850,000 to Van Dyne Co for 3 years. The suit has a fair market value is $900,000 and an expected life of 8 years with no salvage value. The lease requires equal annual payments at the beginning of each year. Pym expects the residual value of suit to be $583,262 and has priced a 7% implicit return into the lease because Van Dyne has not guaranteed any of the residual value. Van Dyne has a 6% incremental borrowing rate and does not know the implicit rate of the lease. Both companies use straight-line depreciation for their assets and operate on a calendar-year basis. Required: 1. Calculate the annual payments Pym requires for the lease. 2. Classify the lease for both the lessor and lessee. 3. Record all journal entries for the lessee (Van Dyne) over the life of the lease. 4. Record all journal entries for the lessor (Pym) over the life of the lease. 5. Suppose the lease was only for…
Glaze Leasing Company agrees to lease machinery to Johnsen Corporation on January 1, 2017. The following information relates to the lease agreement.1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.2. The cost of the machinery is $525,000, and the fair value of the asset on January 1, 2017, is $700,000.3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $100,000. Jensen depreciates all of its equipment on a straight-line basis.4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017.5. The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surroundingthe amount of costs yet to be incurred by the lessor.6. Glaze desires a 10% rate of return on its investments. Johnsen’s incremental borrowing rate is 11%, and the lessor’s implicitrate is unknown.Instructions (4*5 =20)(Assume the…
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Skysong Dairy leases its milking equipment from Concord Finance Company under the following lease terms. 1. The lease term is 10 years, noncancelable, and requires equal rental payments of $32,500 due at the beginning of each year starting January 1, 2020. 2. The equipment has a fair value at the commencement of the lease (January 1, 2020) of $244,649 and a cost of $267,000 on Concord Finance’s books. It also has an estimated economic life of 15 years and an expected residual value of $15,300, though Skysong Dairy has guaranteed a residual value of $19,700 to Concord Finance. 3. The lease contains no renewal options, and the equipment reverts to Concord Finance upon termination of the lease. The equipment is not of a specialized use. 4. Skysong Dairy’s incremental borrowing rate is 8% per year. The implicit rate is also 8%. 5. Skysong Dairy depreciates similar equipment that it owns on a straight-line basis. 6. Collectibility of the payments is probable. A)…
Skor Co. leased equipment to Douglas Corp. on January 2, 2011, for an 8-year period expiring December 31, 2018. Equal payments under the lease are $600,000 and are due on January 2 of each year. The first payment was made on January 2, 2011. The cost of the equipment is $2,800,000. The lease is appropriately accounted for as a sales-type lease. The present value of the lease payments is $3,300,000. What amount of net profit on the sale should Skor report for the year ended December 31, 2011? a. $720,000 b. $500,000 c. $90,000 d. $600,000 e. $2,800,000
Under leases
7
King Company leased equipment from Mann Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $52,538 over a six-year lease term (also the asset’s useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 5%. The asset being leased cost Mann $230,000 to produce. Required:1. Determine the price at which the lessor is “selling” the asset (present value of the lease payments).2. What would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31 (ignore taxes)?
Glaze Leasing Company agrees to lease machinery to Johnsen Corporation on January 1, 2017.The following information relates to the lease agreement.1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.2. The cost of the machinery is $525,000, and the fair value of the asset on January 1, 2017, is $700,000.3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $100,000. Jensen depreciates all of its equipment on a straight-line basis.4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017.5. The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.6. Glaze desires a 10% rate of return on its investments. Johnsen’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.(Assume the accounting period ends…

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