On January 1, 2013, Boss Limited signed off on a leasing contract with MR Stationery to lease a specialized, state-of-the-art photocopier. The following information relates to the lease contract. 1. The cost of the photocopier is $525,000 and the fair value of the equipment on January 1 2013 is $700,000. 2. The term of the lease is 7 years with no option to renew and the photocopier has an estimated useful life of 9 years 3. At the end of the lease term, the photocopier must be returned to the Boss Limited. It has a guaranteed residual value of $50,000. MR Stationery uses the straight line method of depreciation (when applicable) 4. The lease agreement requires annual rental payments beginning January 1 2013 5. Boss Limited desires a 5% rate of return which is known to MR. MR Stationery's incremental borrowing rate is 7%. Requirements: (Assume the financial year ends on December 31) a) Discuss the nature of the lease for the lessee using the 5 tests criteria b) Prepare the lease schedule for the lessee c) Prepare the necessary journal entries for January 1 2013 and Dec 31 2013

On January 1, 2013, Boss Limited signed off on a leasing contract with MR Stationery to lease a specialized, state-of-the-art photocopier. The following information relates to the lease contract. 1. The cost of the photocopier is $525,000 and the fair value of the equipment on January 1 2013 is $700,000. 2. The term of the lease is 7 years with no option to renew and the photocopier has an estimated useful life of 9 years 3. At the end of the lease term, the photocopier must be returned to the Boss Limited. It has a guaranteed residual value of $50,000. MR Stationery uses the straight line method of depreciation (when applicable) 4. The lease agreement requires annual rental payments beginning January 1 2013 5. Boss Limited desires a 5% rate of return which is known to MR. MR Stationery's incremental borrowing rate is 7%. Requirements: (Assume the financial year ends on December 31) a) Discuss the nature of the lease for the lessee using the 5 tests criteria b) Prepare the lease schedule for the lessee c) Prepare the necessary journal entries for January 1 2013 and Dec 31 2013

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

Palladium Enterprises Ltd leased a machine on January 1, 2018. At the date of the lease agreement, the asset has an estimated useful life of five years. However, the agreement is expected to expire on December 31, 2019, and there are no plans to purchase the asset. Palladium depreciates similar assets over five years using a straight line basis. The annual lease payments are made on December 31st of each year. The lease payments are $2,500,000 per year, which includes insurance expense of $100,000 per year, as Palladium is required to insure the asset based on the agreement. The entity has incremental borrowing rate of 16%, but the rate implied in the lease is only 12% per annum. To assist with initiating the lease, the lessee incurred legal fees of $500,000 which was paid to its attorneys on January 1, 2018. Required: a. Prepare all relevant journal entries over the life of the lease. b. How are lease incentives treated as it relates to right of use assets?
A transport Company leased 4 buses for a period of 5 years from a leasing company. The fair value of each bus is OMR 15,000 at the beginning of the lease period. The Trucks have a life time of 5 years and no residual value. As per the lease agreement, the title of the buses are to be transferred to the transport company by the end of the lease period. The annual lease payment is OMR 15,000 payable at the beginning of each year. An interest rate of 10% and straight line method of depreciation is applicable. a. Determine the type of lease b. Determine the PV of minimum lease payments? c. Prepare amortization table. d. Record journal entries in the books of transport company
Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $78,000 under a 5-year lease on December 20, 2022. The lease commences on January 1, 2023, and Leewin will return the automobile to Bumble on December 31, 2027. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,700 on December 20, 2022. In addition, the lease agreement stipulates annual payments of $10,700, due on January 1 of 2023, 2024, 2025, 2026, and 2027. The implicit rate of the lease is 4% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $2000.Assuming that this is classified as an operating lease, how much interest expense is recorded in 2023? Group of answer choices $1554 $2140 $0 $1982
On January 1, 2017, Pina Corporation signed a 3-year noncancelable lease for several computers. The terms of the lease called for Pina to make annual payments of $3,200 at the beginning of each year, starting January 1, 2017. The computers have an estimated useful life of 3 years and a $590 unguaranteed residual value. The computers revert back to the lessor at the end of the lease term. Pina uses the straight-line method of depreciation for all of its property, plant, and equipment. Pina’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown. Compute the present value of the minimum lease payments
Manji
Plessings Company leased a piece of machinery to Banana, Inc. on January 1, 2023. The lease is correctly classified as a sales-type lease. Plessings will receive three annual lease payments of $20,900, with the first one received on January 1, 2023. There is no guaranteed or unguaranteed residual value. The fair value of the machine is $50,000 and Plessings incurs initial direct costs of $5,000. What is the implicit rate assuming the initial direct costs are expensed? Group of answer choices 27.95% 14.72% 6.85% 12.23%
On January 1, 2016, Cook Textiles leased a building with two acres of land from Peck Development. The lease is for 10 years. No purchase option exists and the property will revert to Peck at the end of the lease. The building and land combined have a fair market value on January 1, 2016, of $1,450,000 and the building has an estimated life of 20 years with a residual value of $150,000. The lease calls for Cook to assume all costs of ownership and to make annual payments of $200,000 due at the beginning of each year. On January 1, 2016, the estimated value of the land was $400,000. Cook uses the straight-line method of depreciation and pays 10% interest on borrowed money. Peck’s implicit rate is unknown. Required: 1. Prepare journal entries for Cook Textiles for 2016. Assume the land could be leased without the building for $59,000 each year. 2. Assuming the land had a fair value on January 1, 2016, of $200,000 and could be leased alone for $30,000, prepare journal entries for Cook…
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…
On January 1, 2013, Gloss Limited signed off on a leasing contract with MR Stationery to lease a photocopier. These detail relate to the lease contract.The cost of the photocopier is $525,000 and the fair value of the equipment on January 1 2013 is $700,000.The term of the lease is 7 years with no option to renew and the photocopier has an estimated useful life of 9 yearsAt the end of the lease term, the photocopier must be returned to Gloss Limited. It has a guaranteed residual value of $50,000. MR Stationery uses the straight line method of depreciation The lease agreement is annual rental payments beginning January 1 2013Boss Limited desires a 5% rate of return, which is known to MR. MR Stationery’s incremental borrowing rate is 7%.Requirements: the financial year ends on December 31explain the nature of the lease for the lessee using the 5 criteria, prepare the lease schedule for the lessee, prepare the necessary journal entries for January 1 2013 and Dec 31 2013
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
(a) In accordance with HKFS 16, it requires lessee to recognize a right-of-use asset and a lease liability for all leases. Therefore, Cherry Ltd should recognize the initial measurement of a right-of-use asset and a lease liability as follows: Discount rate Unpaid lease payment -2nd - 5th payment $800,000 x 3.17 Initial measurement of a lease liability Initial measurement of lease liability Lease payment made at commencement date Initial direct cost – commission Initial direct cost – legal fee Initial measurement of a right-of-use asset (b) The lease liability from 2013 to 2017 are as follows: PV 10% 3.17 2,536,000 2,536,000 2,536,000 800,000 20,000 15,000 3,371,000 Lease liability Year Opening balance Lease Lease liability payment after lease Interest expenses 10% Closing balance 1 Jan (a) (b) payment (c) = (a) - (b) 31 Dec (d) = (c) x 10% |(e) = (c) +(d) 2013 2,536,000 2,536,000 253,600 2,789,600 2014 2,789,600 800,000 1,989,600 198,960 2,188,560 2015 2,188,560 800,000 1,388,560…
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