Canada M. manufactures special equipment with an estimated economic life of 12 years and leases it to Phranka for a period of 10 years commencing January 1, 2021. The unguaranteed residual value at the end of the lease term is estimated to be $15,000. Phranka will make annual payments of $25,000 at the beginning of each year and pay for all maintenance and insurance costs. Canada M. incurred costs of $105,000 in manufacturing the equipment but is looking to make a profit on the sale of equipment. In addition, Phranka incurred $7000 in costs tied to negotiating and closing the lease. Canada M. has determined that the collectability of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 8%. Phranka has a borrowing rate of 8%.
Canada M. manufactures special equipment with an estimated economic life of 12 years and leases it to Phranka for a period of 10 years commencing January 1, 2021. The unguaranteed residual value at the end of the lease term is estimated to be $15,000. Phranka will make annual payments of $25,000 at the beginning of each year and pay for all maintenance and insurance costs. Canada M. incurred costs of $105,000 in manufacturing the equipment but is looking to make a profit on the sale of equipment. In addition, Phranka incurred $7000 in costs tied to negotiating and closing the lease. Canada M. has determined that the collectability of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 8%. Phranka has a borrowing rate of 8%.
How should Canada M. classify this lease transaction?
a.
Classify as an operating lease.
b.
Classify as a capital, sales type lease.
c.
Classify as a capital, direct finance type lease.
d.
Classify as a capital lease.
- The
journal entry prepared by Canada M. at the commencement of the lease contract excluding executory costs would be:
a.
Dr. Lease Receivable, $265,000; Dr. COGS, $98,052; Cr. Sales Revenue, $181,172; Cr. Inventory, $105,000; Cr. Unearned Interest Revenue $76,880
b.
Dr. Lease Receivable, $265,000; Dr. COGS, $105,000; Cr. Sales Revenue, $188,120; Cr. Inventory, $105,000; Cr. Unearned Interest Revenue $76,880
c.
Dr. Lease Receivable, $250,000; Dr. COGS, $105,000; Cr. Sales Revenue, $210,482; Cr. Inventory, $105,000; Cr. Unearned Interest Revenue $39,518
d.
Dr. Lease Receivable, $250,000; Dr. COGS, $98,052; Cr. Sales Revenue, $181,172; Cr. Inventory, $105,000; Cr. Unearned Interest Revenue $61,880
e.
None of the above
Clear my choice
- The journal entry prepared by Canada M. on December 31, 2021 would be
a.
Dr. Unearned interest income, $11,950; Cr. Interest income, $11,950.
b.
Dr. Unearned interest income, $9,950.40; Cr. Interest income, $9,950.40.
c.
Dr. Unearned interest income, $13,050; Cr. Interest income, $13,050.
d.
Dr. Unearned interest income, $15,049.60; Cr. Interest income, $15,049.60.
e.
None of the above.
Clear my choice
- Assuming for this question that the $15,000 residual value is guaranteed by Phranka, what is the journal entry prepared by Canada M. at the commencement of the lease contract excluding executory costs?
a.
Dr. Lease Receivable, $265,000; Dr. Cost of Goods Sold, $98,052; Cr. Sales Revenue, $181,172; Cr. Inventory, $105,000, Cr. Unearned Interest Revenue $76,880
b.
Dr. Lease Receivable, $265,000; Dr. Cost of Goods Sold, $105,000; Cr. Sales Revenue, $188,120; Cr. Inventory, $105,000; Cr. Unearned Interest Revenue $76,880
c.
Dr. Lease Receivable, $250,000; Dr. Cost of Goods Sold, $105,000; Cr. Sales Revenue, $210,482; Cr. Inventory, $105,000, Cr. Unearned Interest Revenue $39,518
d.
Dr. Lease Receivable, $250,000; Dr. Cost of Goods Sold, $98,052; Cr. Sales Revenue, $181,172; Cr. Inventory, $105,000, Cr. Unearned Interest Revenue $61,880
e.
None of the above
Clear my choice
- Assume for this question only, Canada M. would consider leasing the equipment for 11 years if it could recover a normal selling price of $210,482. How much would Canada M. charge the lessee annually for a 11-year lease? Assume the unguaranteed residual value at the end of 11 years would be $10,000, and that lease payments would be due at the start of each year.
a.
$25,861
b.
$27,856
c.
$27,300
d.
$26,743
e.
None of the above
Clear my choice
- How should Phranka classify this lease transaction?
a.
Classify as an operating lease
b.
Classify as a capital, sales type lease
c.
Classify as a capital, direct finance type lease
d.
Classify as a capital lease
e.
None of the above
Clear my choice
- What is the amount of the initial obligation for Phranka?
a.
$203,474
b.
$167,752
c.
$181,172
d.
$188,120
e.
None of the above
Clear my choice
- The journal entry prepared by Phranka at the commencement of the lease would be:
a.
Dr. Equipment under Lease, $188,120; Cr. Obligation Under Lease, $188,120
b.
Dr. Equipment under Lease, $167,752; Cr. Obligation Under Lease, $167,752
c.
Dr. Prepaid Equipment Rent, $181,172; Cr. Obligation Under Lease, $181,172
d.
Dr. Prepaid Equipment Rent, $25,000; Cr. Cash, $25,000
e.
None of the above
Clear my choice
- The
depreciation expense amount recorded by Phranka on December 31, 2021 is:
a.
$15,098
b.
$17,312
c.
$18,117
d.
$15,677
e.
None of these answers.
Clear my choice
- Assume for this question only, the residual value of $15,000 was guaranteed by Phranka. The depreciation expense amount on December 31, 2021 recorded by Phranka is:
a.
$15,098
b.
$17,312
c.
$18,117
d.
$15,677
e.
None of the above
Clear my choice
- Assume for this question only, the residual value of $15,000 is replaced with a bargain purchase option of $15,000. The depreciation expense amount recorded by Phranka on December 31, 2021 is:
a.
$15,312
b.
$17,312
c.
$18,117
d.
$15,677
e.
None of the above
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