Sliver Limited leases an equipment from Tesco Limited under the following lease terms.The lease term is 4 years, non-cancelable and requires equal annual rental payments at thebeginning of each calendar year starting 1 January 2021.Tesco Limited wants a guarantee that the residual value of the equipment at the end of the lease isat least $26,000. Sliver Limited agrees to guarantee a residual value of this amount though it expectsthe residual value of the equipment to be only $10,000 at the end of the lease term.The cost of an equipment is $230,000 and the fair value of the equipment is $350,000 on 1 January2021. The equipment has an economic life of 5 years.Both companies depreciate all their equipment on a straight-line basis.Tesco Limited wants to earn a return of 6% on the lease and collectability of the payment isprobable. Sliver Limited's incremental borrowing rate is 8%, and the implicit rate of the lessor isunknown.Required: (Round all amounts to the nearest dollar.)(a)Calculate the amount of annual lease payment required by the lessor.(b) Discuss the nature of this lease transaction from the viewpoint of the lessor.

Silver Limited leases an equipment from Tesco Limited. Lease term - 4 Years Fair value of the asset…

Required: (Round all amounts to the nearest dollar.) (a) Calculate the amount of annual lease payment required by the lessor. (b) Discuss the nature of this lease transaction from the viewpoint of the lessor.

Required: (Round all amounts to the nearest dollar.) (a) Calculate the amount of annual lease payment required by the lessor. (b) Discuss the nature of this lease transaction from the viewpoint of the lessor.

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 6P: Sales-Type Lease with Unguaranteed Residual Value Lessor Company and Lessee Company enter into a...

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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.
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.
Sales-Type Lease with Unguaranteed Residual Value Lessor Company and Lessee Company enter into a 5-year, noncancelable, sales-type lease on January 1, 2019, for equipment that cost Lessor 375,000 (useful life is 5 years). The fair value of the equipment is 400,000. Lessor expects a 12% return on the cost of the asset over the 5-year period of the lease. The equipment will have an estimated unguaranteed residual value of 20,000 at the end of the fifth year of the lease. The lease provisions require 5 equal annual amounts, payable each January 1, beginning with January 1, 2019. Lessee pays all executory costs directly to a third party. The equipment reverts to the lessor at the termination of the lease. Assume there are no initial direct costs, and the lessor expects to be able to collect all lease payments. Required: 1. Show how Lessor should compute the annual rental amounts. 2. Prepare a table summarizing the lease and interest receipts that would be suitable for Lessor. 3. Prepare a table showing the accretion of the unguaranteed residual asset. 4. Prepare the journal entries for Lessor for the years 2019, 2020, and 2021.
On 1 July 2019, Fisher Ltd decides to lease a cargo ship from XFinance Ltd. The term of the lease is 20years. The implicit interest rate in the lease is 10 per cent. The fair value of the cargo ship at thecommencement of the lease is $2,215,560. The lease is non-cancellable, and requires a lease paymentof $300,000 on inception of the lease (on 1 July 2019) and lease payments of $250,000 on 30 Juneeach year (starting 30 June 2020). Included within the $250,000 lease payments is an amount of$25,000 representing payment to the lessor for the insurance and maintenance of the cargo ship.There is no residual payment required. Annuity factor, n=20; r = 10% is 8.5136.Required:a) Prove that the interest rate implicit in the lease is 10 per cent.b) Provide the entries for the lease in the books of Fisher Ltd as at 1 July 2019, and 30 June 2020. c) Provide the entries for the lease in the books of XFinance Ltd as at 1 July 2019, and 30 June 2020.
On 1 July 2019, Fisher Ltd decides to lease a cargo ship from XFinance Ltd. The term of the lease is 20years. The implicit interest rate in the lease is 10 per cent. The fair value of the cargo ship at thecommencement of the lease is $2,215,560. The lease is non-cancellable, and requires a lease paymentof $300,000 on inception of the lease (on 1 July 2019) and lease payments of $250,000 on 30 Juneeach year (starting 30 June 2020). Included within the $250,000 lease payments is an amount of$25,000 representing payment to the lessor for the insurance and maintenance of the cargo ship.There is no residual payment required. Annuity factor, n=20; r = 10% is 8.5136.Required:a) Prove that the interest rate implicit in the lease is 10 per cent. (2 marks)b) Provide the entries for the lease in the books of Fisher Ltd as at 1 July 2019, and 30 June 2020. (4marks)c) Provide the entries for the lease in the books of XFinance Ltd as at 1 July 2019, and 30 June 2020.(4 marks)
Skysong Dairy leases its milking equipment from Concord Finance Company under the following lease terms. 1. The lease term is 10 years, noncancelable, and requires equal rental payments of $32,500 due at the beginning of each year starting January 1, 2020. 2. The equipment has a fair value at the commencement of the lease (January 1, 2020) of $244,649 and a cost of $267,000 on Concord Finance’s books. It also has an estimated economic life of 15 years and an expected residual value of $15,300, though Skysong Dairy has guaranteed a residual value of $19,700 to Concord Finance. 3. The lease contains no renewal options, and the equipment reverts to Concord Finance upon termination of the lease. The equipment is not of a specialized use. 4. Skysong Dairy’s incremental borrowing rate is 8% per year. The implicit rate is also 8%. 5. Skysong Dairy depreciates similar equipment that it owns on a straight-line basis. 6. Collectibility of the payments is probable. A)…
Berne Company (lessor) enters into a lease with Fox Company to lease equipment to Fox beginning January 1, 2019. The lease terms, provisions, and related events are as follows: 1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of $50,000 to be made at the end of each year. The equipment costs $130,000. The equipment has an estimated life of 4 years and an estimated residual value at the end of the lease term of zero. Fox agrees to pay all executory costs directly to a third party. 4. The interest rate implicit in the lease is 12%. 5. The initial direct costs are insignificant and assumed to be zero. 6. The collectability of the rentals is reasonably assured. Required: 2. 3. 1. Next Level Assuming that the lease is a sales-type lease from Berne's point of view, calculate the selling price and assume that this is also the fair value. 2. Prepare a table summarizing the lease receipts and interest income earned by Berne. 3. Prepare journal entries…
On 1 July 2020, Table Ltd leased equipment from Chair Ltd. The following are details of the equipment and the lease contract: On 1 July 2020 equipment has a fair value of $110,000 (at fair value in Chair Ltd’s accounts) Lease term is 5 years, useful life of the equipment is 6 years, and Table Ltd will return the equipment at the end of the lease term Lease payments are in advance and will be paid on 1 July of each year, starting 1 July 2020, with $24,000 as the annual payment Residual value of the equipment at the end of the lease term is $8,000, with Table Ltd guaranteeing 75% of the residual value The interest rate implicit in the lease arrangement is 6%. In setting up the lease arrangement Table Ltd incurred costs of $2,354, while Chair Ltd incurred costs of $3,141. Required: a) Prepare the necessary journal entries for Table Ltd on 1 July 2020. b) Calculate interest and depreciation expense incurred on 30 June…
On 1 July 2019, Fisher Ltd decides to lease a cargo ship from XFinance Ltd. The term of the lease is 20 years. The implicit interest rate in the lease is 10 per cent. The fair value of the cargo ship at the commencement of the lease is $2,215,560. The lease is non-cancellable, and requires a lease payment of $300,000 on inception of the lease (on 1 July 2019) and lease payments of $250,000 on 30 June each year (starting 30 June 2020). Included within the $250,000 lease payments is an amount of $25,000 representing payment to the lessor for the insurance and maintenance of the cargo ship. There is no residual payment required. Annuity factor, n=20; r = 10% is 8.5136. a) Prove that the interest rate implicit in the lease is 10 per cent.
Goring Dairy leases its milking equipment from King Finance Company under the following lease terms. 1. The lease term is 10 years, non-cancelable, and requires equal rental payments of $30,000 due at the beginning of each year starting January 1, 2022. 2. The equipment has a fair value at the commencement of the lease (January 1, 2022) of $222,039 and a cost of $180,000 on King Finance's books. It also has an estimated economic life of 15 years and an expected residual value of $5,000, though Goring Dairy has guaranteed a residual value of $10,000 to King Finance. 3. The lease contains no renewal options, and the equipment reverts to King Finance upon termination of the lease. The equipment is not of a specialized use. 4. Goring Dairy's incremental borrowing rate is 8% per year. The implicit rate is also 8%. 5. Goring Dairy depreciates similar equipment that it owns on a straight-line basis. 6. Collectibility of the payments is probable.Instructions (a) Evaluate the criteria for…
Goring Dairy leases its milking equipment from King Finance Company under the following lease terms. 1. The lease term is 10 years, non-cancelable, and requires equal rental payments of $30,000 due at the beginning of each year starting January 1, 2022. 2. The equipment has a fair value at the commencement of the lease (January 1, 2022) of $222,039 and a cost of $180,000 on King Finance's books. It also has an estimated economic life of 15 years and an expected residual value of $5,000, though Goring Dairy has guaranteed a residual value of $10,000 to King Finance. 3. The lease contains no renewal options, and the equipment reverts to King Finance upon termination of the lease. The equipment is not of a specialized use. 4. Goring Dairy's incremental borrowing rate is 8% per year. The implicit rate is also 8%. 5. Goring Dairy depreciates similar equipment that it owns on a straight-line basis. 6. Collectibility of the payments is probable.Instructions (a) Evaluate the criteria for…