(d) Appleland Computer Computer (a) Harmon, Inc. (b) Arden's Oven Co. (c) Mendota Truck Co. Type of property Yearly rental Cabinets Oven Truck $6,000 $15,000 $5,582.62 $3,557.25 3 years 7 years Lease term 20 years 10 years З years Estimated economic life 30 years 25 years 5 years Purchase option None $75,000 at end of None $3,000 at end of years $4,000 at end of 15 years 3 years, which approximates fair value 5-year renewal option at $15,000 per year 1 year at $1,500; no penalty for nonrenewal; standard renewal clause Renewal option None None Fair value at inception of lease $60,000 $120,000 $20,000 $10,000 Cost of asset to lessor $60,000 $120,000 $15,000 $10,000 Residual value Guaranteed -0- -0- $7,000 -0- Unguaranteed $5,000 -0- -0- $3,000 Incremental borrowing rate of lessee 12% 12% 12% 12% Executory costs paid by Lessee Lessee Lessee Lessor $300 per year $1,000 per year $500 per year Estimated to be $500 per year, included in lease раyment Present value of minimum lease payments Using incremental borrowing rate of lessee $50,194.68 $115,153.35 $20,000 $8,224.16 Not known Known by lessee, $8,027.48 Using implicit rate of lessor Not known Not known Estimated fair value at end of lease $5,000 $80,000 at end of Not available $3,000 years $60,000 at end of 15 years

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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Question

Morgan Bakeries is involved in four different lease situations. Each of these leases is noncancelable, and in no case does Morgan receive title to the properties leased during or at the end of the lease term. All leases start on January 1, 2017, with the first rental due at the beginning of the year.

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Instructions
For each lease arrangement, determine the correct classification of the lease and prepare the journal entry at its inception

(d) Appleland Computer
Computer
(a) Harmon, Inc.
(b) Arden's Oven Co.
(c) Mendota Truck Co.
Type of property
Yearly rental
Cabinets
Oven
Truck
$6,000
$15,000
$5,582.62
$3,557.25
3 years
7 years
Lease term
20 years
10 years
З years
Estimated economic life
30 years
25 years
5 years
Purchase option
None
$75,000 at end of
None
$3,000 at end of
years
$4,000 at end of
15 years
3 years, which
approximates fair
value
5-year renewal
option at $15,000
per year
1 year at $1,500;
no penalty for
nonrenewal; standard
renewal clause
Renewal option
None
None
Fair value at inception
of lease
$60,000
$120,000
$20,000
$10,000
Cost of asset to lessor
$60,000
$120,000
$15,000
$10,000
Residual value
Guaranteed
-0-
-0-
$7,000
-0-
Unguaranteed
$5,000
-0-
-0-
$3,000
Incremental borrowing
rate of lessee
12%
12%
12%
12%
Executory costs paid by
Lessee
Lessee
Lessee
Lessor
$300 per year
$1,000 per year
$500 per year
Estimated to be
$500 per year,
included in lease
раyment
Present value of minimum
lease payments
Using incremental
borrowing rate
of lessee
$50,194.68
$115,153.35
$20,000
$8,224.16
Not known
Known by lessee,
$8,027.48
Using implicit rate of lessor
Not known
Not known
Estimated fair value
at end of lease
$5,000
$80,000 at end of
Not available
$3,000
years
$60,000 at end of
15 years

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