On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2021 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings using the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey’s incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. Future Value of Ordinary Annuity of 1 Period 5% 6% 8% 10% 12% 1 1.00000 1.00000 1.00000 1.00000 1.00000 2 2.05000 2.06000 2.08000 2.10000 2.12000 3 3.15250 3.18360 3.24640 3.31000 3.37440 4 4.31013 4.37462 4.50611 4.64100 4.77933 5 5.52563 5.63709 5.86660 6.10510 6.35285 6 6.80191 6.97532 7.33592 7.71561 8.11519 7 8.14201 8.39384 8.92280 9.48717 10.08901 8 9.54911 9.89747 10.63663 11.43589 12.29969 9 11.02656 11.49132 12.48756 13.57948 14.77566 10 12.57789 13.18079 14.48656 15.93743 17.54874 Present Value of an Annuity Due of 1 Period 5% 6% 8% 10% 12% 1 1.00000 1.00000 1.00000 1.00000 1.00000 2 1.95238 1.94340 1.92593 1.90909 1.89286 3 2.85941 2.83339 2.78326 2.73554 2.69005 4 3.72325 3.67301 3.57710 3.48685 3.40183 5 4.54595 4.46511 4.31213 4.16986 4.03735 6 5.32948 5.21236 4.99271 4.79079 4.60478 7 6.07569 5.91732 5.62288 5.35526 5.11141 8 6.78637 6.58238 6.20637 5.86842 5.56376 9 7.46321 7.20979 6.74664 6.33493 5.96764 10 8.10782 7.80169 7.24689 6.75902 6.32825 From the lessee’s viewpoint, what type of lease in this? Sales-type lease Finance lease Operating lease Sale-leaseback
On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2021 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings using the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey’s incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. Future Value of Ordinary Annuity of 1 Period 5% 6% 8% 10% 12% 1 1.00000 1.00000 1.00000 1.00000 1.00000 2 2.05000 2.06000 2.08000 2.10000 2.12000 3 3.15250 3.18360 3.24640 3.31000 3.37440 4 4.31013 4.37462 4.50611 4.64100 4.77933 5 5.52563 5.63709 5.86660 6.10510 6.35285 6 6.80191 6.97532 7.33592 7.71561 8.11519 7 8.14201 8.39384 8.92280 9.48717 10.08901 8 9.54911 9.89747 10.63663 11.43589 12.29969 9 11.02656 11.49132 12.48756 13.57948 14.77566 10 12.57789 13.18079 14.48656 15.93743 17.54874 Present Value of an Annuity Due of 1 Period 5% 6% 8% 10% 12% 1 1.00000 1.00000 1.00000 1.00000 1.00000 2 1.95238 1.94340 1.92593 1.90909 1.89286 3 2.85941 2.83339 2.78326 2.73554 2.69005 4 3.72325 3.67301 3.57710 3.48685 3.40183 5 4.54595 4.46511 4.31213 4.16986 4.03735 6 5.32948 5.21236 4.99271 4.79079 4.60478 7 6.07569 5.91732 5.62288 5.35526 5.11141 8 6.78637 6.58238 6.20637 5.86842 5.56376 9 7.46321 7.20979 6.74664 6.33493 5.96764 10 8.10782 7.80169 7.24689 6.75902 6.32825 From the lessee’s viewpoint, what type of lease in this? Sales-type lease Finance lease Operating lease Sale-leaseback
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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EP#5
On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the beginning each year.
(b) The fair value of the building on January 1, 2021 is $6,000,000; however, the book value to Holt is $4,950,000.
(c) The building has an estimated economic life of 10 years, with no residual value. Yancey
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey’s incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10%
(f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property.
| Future Value of Ordinary Annuity of 1 | |||||
| Period | 5% | 6% | 8% | 10% | 12% |
| 1 | 1.00000 | 1.00000 | 1.00000 | 1.00000 | 1.00000 |
| 2 | 2.05000 | 2.06000 | 2.08000 | 2.10000 | 2.12000 |
| 3 | 3.15250 | 3.18360 | 3.24640 | 3.31000 | 3.37440 |
| 4 | 4.31013 | 4.37462 | 4.50611 | 4.64100 | 4.77933 |
| 5 | 5.52563 | 5.63709 | 5.86660 | 6.10510 | 6.35285 |
| 6 | 6.80191 | 6.97532 | 7.33592 | 7.71561 | 8.11519 |
| 7 | 8.14201 | 8.39384 | 8.92280 | 9.48717 | 10.08901 |
| 8 | 9.54911 | 9.89747 | 10.63663 | 11.43589 | 12.29969 |
| 9 | 11.02656 | 11.49132 | 12.48756 | 13.57948 | 14.77566 |
| 10 | 12.57789 | 13.18079 | 14.48656 | 15.93743 | 17.54874 |
| Present Value of an Annuity Due of 1 | |||||||||||
| Period | 5% | 6% | 8% | 10% | 12% | ||||||
| 1 | 1.00000 | 1.00000 | 1.00000 | 1.00000 | 1.00000 | ||||||
| 2 | 1.95238 | 1.94340 | 1.92593 | 1.90909 | 1.89286 | ||||||
| 3 | 2.85941 | 2.83339 | 2.78326 | 2.73554 | 2.69005 | ||||||
| 4 | 3.72325 | 3.67301 | 3.57710 | 3.48685 | 3.40183 | ||||||
| 5 | 4.54595 | 4.46511 | 4.31213 | 4.16986 | 4.03735 | ||||||
| 6 | 5.32948 | 5.21236 | 4.99271 | 4.79079 | 4.60478 | ||||||
| 7 | 6.07569 | 5.91732 | 5.62288 | 5.35526 | 5.11141 | ||||||
| 8 | 6.78637 | 6.58238 | 6.20637 | 5.86842 | 5.56376 | ||||||
| 9 | 7.46321 | 7.20979 | 6.74664 | 6.33493 | 5.96764 | ||||||
| 10 | 8.10782 | 7.80169 | 7.24689 | 6.75902 | 6.32825 |
From the lessee’s viewpoint, what type of lease in this?
Sales-type lease
Finance lease
Operating lease
Sale-leaseback
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