Question #2: Leases Malfoy Inc. has just leased a vanishing cabinet from Borgin and Burkes (B&B). The cabinet was manufactured by B&B at a cost of $650,000 and currently sells for $800,000. The three year lease begins Jan. 1, 2017 and requires payments at the beginning of every year. B&B has priced an 11% return into the lease. Malfoy Corporation has a 12% incremental borrowing rate and does not know the implicit rate on the lease. B&B expects the cabinet to be worth $350,000 at the end of the lease and Malfoy has guaranteed $280,000 of this value. Due to the heavy use Malfoy expects to put the cabinet through, it only expects the residual value to be $260,000. The cabinet has an expected useful life of 20 years and a salvage value of $50,000. Malfoy also incurred $5,000 in lease documentation costs. The lease has no purchase options, collectability of payments is probable, and the cabinet is not specialized in nature. Both companies have Dec. 31" year ends. 1. What annual payments will the B&B require for the lease? (2 points) 2. State the five classification criteria. What type of lease is this for the lessor (B&B)? (4 points) 3. What type of lease is this for the lessee (Malfoy)? (2 points) 4. Prepare the lessor's amortization table below. (5 points) Lessor Table Date Annual Payment Receivable Receivable Interest Reduction Balance 1/1/17 Sign 1/1/17 End 5. Write all the journal entries the lessor must make on Jan. 1st, 2017, the day of the lease inception. (6 points)
Question #2: Leases Malfoy Inc. has just leased a vanishing cabinet from Borgin and Burkes (B&B). The cabinet was manufactured by B&B at a cost of $650,000 and currently sells for $800,000. The three year lease begins Jan. 1, 2017 and requires payments at the beginning of every year. B&B has priced an 11% return into the lease. Malfoy Corporation has a 12% incremental borrowing rate and does not know the implicit rate on the lease. B&B expects the cabinet to be worth $350,000 at the end of the lease and Malfoy has guaranteed $280,000 of this value. Due to the heavy use Malfoy expects to put the cabinet through, it only expects the residual value to be $260,000. The cabinet has an expected useful life of 20 years and a salvage value of $50,000. Malfoy also incurred $5,000 in lease documentation costs. The lease has no purchase options, collectability of payments is probable, and the cabinet is not specialized in nature. Both companies have Dec. 31" year ends. 1. What annual payments will the B&B require for the lease? (2 points) 2. State the five classification criteria. What type of lease is this for the lessor (B&B)? (4 points) 3. What type of lease is this for the lessee (Malfoy)? (2 points) 4. Prepare the lessor's amortization table below. (5 points) Lessor Table Date Annual Payment Receivable Receivable Interest Reduction Balance 1/1/17 Sign 1/1/17 End 5. Write all the journal entries the lessor must make on Jan. 1st, 2017, the day of the lease inception. (6 points)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Question #2: Leases
Malfoy Inc. has just leased a vanishing cabinet from Borgin and Burkes (B&B). The cabinet was
manufactured by B&B at a cost of $650,000 and currently sells for $800,000. The three year lease begins
Jan. 1, 2017 and requires payments at the beginning of every year. B&B has priced an 11% return into
the lease. Malfoy Corporation has a 12% incremental borrowing rate and does not know the implicit rate
on the lease. B&B expects the cabinet to be worth $350,000 at the end of the lease and Malfoy has
guaranteed $280,000 of this value. Due to the heavy use Malfoy expects to put the cabinet through, it only
expects the residual value to be $260,000. The cabinet has an expected useful life of 20 years and a
salvage value of $50,000. Malfoy also incurred $5,000 in lease documentation costs. The lease has no
purchase options, collectability of payments is probable, and the cabinet is not specialized in nature. Both
companies have Dec. 31" year ends.
1. What annual payments will the B&B require for the lease? (2 points)
2. State the five classification criteria. What type of lease is this for the lessor (B&B)? (4 points)
3. What type of lease is this for the lessee (Malfoy)? (2 points)
4. Prepare the lessor's amortization table below. (5 points)
Lessor Table
Date
Annual
Payment
Receivable
Receivable
Interest
Reduction
Balance
1/1/17 Sign
1/1/17 End
5. Write all the journal entries the lessor must make on Jan. 1st, 2017, the day of the lease inception.
(6 points)
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