On January 1, 2020, Eduardo Company leased two automobiles for executive use. The leaserequires Eduardo Company to make five annual payments of P1,000,00 beginning January 1,2020. At the end of the lease term, December 31, 2024, Eduardo Company guaranteed theresidual value of the automobiles at P500,000. The lease is considered by the company as afinance lease. The interest rate implicit in the lease is 10%.What is the principal lease liability on December 31, 2021?

In finance lease the lessee has the option to buy the equipment at the end of lease period. The…

January 1, 2020, Eduardo Company leased two automobiles for executive equires Eduardo Company to make five annual payments of P1,000,00 beginn 2020. At the end of the lease term, December 31, 2024, Eduardo Company g esidual value of the automobiles at P500,000. The lease is considered by the inance lease. The interest rate implicit in the lease is 10%. What is the princinal lease liability on December 31 2021?

January 1, 2020, Eduardo Company leased two automobiles for executive equires Eduardo Company to make five annual payments of P1,000,00 beginn 2020. At the end of the lease term, December 31, 2024, Eduardo Company g esidual value of the automobiles at P500,000. The lease is considered by the inance lease. The interest rate implicit in the lease is 10%. What is the princinal lease liability on December 31 2021?

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 10GI: Owens Company leased equipment for 4 years at 50,000 a year with an option to renew the lease for 6...

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Concept explainers

Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.

Question

On January 1, 2020, Eduardo Company leased two automobiles for executive use. The lease
requires Eduardo Company to make five annual payments of P1,000,00 beginning January 1,
2020. At the end of the lease term, December 31, 2024, Eduardo Company guaranteed the
residual value of the automobiles at P500,000. The lease is considered by the company as a
finance lease. The interest rate implicit in the lease is 10%.
What is the principal lease liability on December 31, 2021?

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Owens Company leased equipment for 4 years at 50,000 a year with an option to renew the lease for 6 years at 2,000 per month or to purchase the equipment for 25,000 (a price considerably less than the expected fair value) after the initial lease term of 4 years. Why would this lease qualify as a finance lease?
Use the information in RE20-3. Prepare the journal entries that Richie Company (the lessor) would make in the first year of the lease assuming the lease is classified as a sales-type lease. Assume that the lessee is required to make payments on December 31 each year. Also assume that Richie had purchased the equipment at a cost of 200,000.
Use the information in RE20-3. Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. However, assume that Garvey is now required to make the 65,949.37 payments on January 1 each year and that the fair value at the lease inception is now 275,000 (65,949:37 4:169865).
Comprehensive Landlord Company and Tenant Company enter into a noncancelable, direct financing lease on January 1, 2019, for nonspecialized equipment that cost the Landlord 280,000 (useful life is 6 years with no residual value). The fair value of the equipment is 300,000. The interest rate implicit in the lease is 14%. The 6-year lease requires 6 equal annual amounts payable each January 1, beginning with January 1, 2019. Tenant pays all executory costs directly to a third party on December 1 of each year. The equipment reverts to the lessor at the termination of the lease. Assume that there are no initial direct costs. Landlord expects to collect all rental payments. Required: 1. Next Level (a) Show how landlord should compute the annual rental amounts, (b) Discuss how the Tenant Company should compute the present value of the lease payments. What additional information would be required to make this computation? 2. Next Level Prepare a table summarizing the lease and interest receipts that would be suitable for Landlord. Under what conditions would this table be suitable for Tenant? 3. Assuming that the table prepared in Requirement 2 is suitable for both the lessee and the lessor, prepare the journal entries for both firms for the years 2019 and 2020. Use the straight-line depreciation method for the leased equipment. The executory costs paid by the lessee are in 2019: insurance, 700 and property taxes, 800; in 2020: insurance, 600 and property taxes, 750. 4. Next Level Show the items and amounts that would be reported on the comparative 2019 and 2020 income statements and ending balance sheets for both the lessor and the lessee, using the change in present value approach.
Lessee Accounting Issues Timmer Company signs a lease agreement dated January 1, 2019, that provides for it to lease equipment from Landau Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows: The lease is noncancelable and has a term of 5 years. The annual rentals are 83,222.92, payable at the end of each year, and provide Landau with a 12% annual rate of return on its net investment. Timmer agrees to pay all executory costs directly to a third party on December 1 of each year. In 2019, these were insurance, 3,760; property taxes, 5,440. In 2020: insurance, 3,100; property taxes, 5,330. There is no renewal or bargain purchase option. Timmer estimates that the equipment has a fair value of 300,000, an economic life of 5 years, and a zero residual value. Timmers incremental borrowing rate is 16%, it knows the rate implicit in the lease, and it uses the straightline method to record depreciation on similar equipment. Required: 1. Calculate the amount of the asset and liability of Timmer at the inception of the lease. (Round to the nearest dollar.) 2. Prepare a table summarizing the lease payments and interest expense. 3. Prepare journal entries on the books of Timmer for 2019 and 2020. 4. Next Level Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2019. Use the present value of next years payment approach to classify the finance lease obligation between current and noncurrent. 5. Next Level Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2019. Use the change in present value approach to classify the finance lease obligation between current and noncurrent.
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What is the lease liability immediately after the first required payment?
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On January 1, 2019, Jix'N leased two automobiles for executive use. The lease requires Jix'N to make five annual payments of P1,300,000 beginning January 1, 2019. At the end of the lease term, December 31, 2023, the entity guaranteed the residual value of the automobiles at P1,000,000. The lease qualifies as finance lease. The interest rate implicit in the lease is 9%. Present value factors for the 9% rate implicit in the lease are as follows: For an annuity due with 5 payments (in advance) 4.240 For an ordinary annuity with 5 payments 3.890 Present value of 1 for 5 periods 0.650 What is the finance lease liability immediately after the first required payment?
On January 1, 2021, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a sales-type lease. Calloway paid $300,000 for the machine and is leasing it to Zone for $33,000 per year, an amount that will return 8% to Calloway. The present value of the lease payments is $300,000. The lease payments are due each January 1, beginning in 2021. What is the appropriate interest entry on December 31, 2021? Multiple Choice Cash Interest revenue. Cash Interest receivable Interest receivable Interest revenue. Interest receivable Interest revenue 24,000 21,360 21,360 24,000 24,000 21,360 21,360 24,000
Alicia Inc. leased a machinery to Hannah & Co. on January 1, 2020. Lease term is 8 years. Annual rental is P800,000 payable at the beginning of each year starting January 1, 2020. Carrying value of the underlying asset on Alicia’s books is 3,200,000. The lease contract is recorded appropriately as a sales-type lease and has an implicit interest rate of 12%. Alicia normally sells these machineries to customers at a selling price of 4,200,000. How much is Alicia’s gross profit on January 1, 2020? a. None b. 1,000,000 c. 1,251,005 d. 1,400,000
On December 31, 2019, an entity leased two automobiles for executive use. The lease required the entity to make five annual payments of P1,500,000 beginning December 31, 2019. At the end of the lease term, December 31, 2024, the entity had a residual value guarantee of the automobiles at P1,000,000. The interest rate implicit in the lease is 10% and present value factors at 10% for 5 periods are 4.17 for an annuity due, 3.79 for an ordinary annuity and 0.62 for present value of 1. What is the lease liability on December 31, 2020? What is the current portion of the lease liability on December 31, 2020? What is the interest expense for 2020?