Y2 On January 1, 2018, Lessor Able leased a machine to Lessee Baker on a six-year lease. The machine was purchased by Able immediately prior to the lease; the machine cost Able $400,000. The cash selling price of this machine is $400,000. The machine has a seven-year estimated useful life. The asset goes back to the lessor at the end of the lease term. The lessee guarantees that the residual value will be at least $30,000 when the asset is returned to the lessor at the end of year 6 and the lessee believes that the asset will be worth $20,000 at the end of the lease term. The lessor used a 4% percent target rate of return. The accounting period for each com¬pany ends on December 31 and lease payments will be made beginning on January 1, 2018 and each year thereafter. Collectability of the lease payments is not an issue. Assume a marginal tax rate of 20%. REQUIRED: 1. Is this an operating or finance lease? Why? (Hint: you should determine this is a finance lease) 2. Calculate the lease payments. 3. Prepare the journal entries for the lessee & lessor for the first two years including any deferred tax entries. Assume the leased asset is returned to the lessor at the end of the lease term and is worth $75,000. 4. Prepare the balance sheet and income statement for the lessee & lessor as of December 31 for 2018. 5. Prepare the SCF for the lessee and lessor for the year ended 12/31/18 and 12/31/19 (using the indirect method for CF from Operating Activities). 6. Prepare the SCF for the lessee and lessor for the year ended 12/31/18 and 12/31/19 (using the direct method for CF from Operating Activities).

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Y2 On January 1, 2018, Lessor Able leased a machine to Lessee Baker on a six-year lease. The machine was purchased by Able immediately prior to the lease; the machine cost Able $400,000. The cash selling price of this machine is $400,000. The machine has a seven-year estimated useful life. The asset goes back to the lessor at the end of the lease term. The lessee guarantees that the residual value will be at least $30,000 when the asset is returned to the lessor at the end of year 6 and the lessee believes that the asset will be worth $20,000 at the end of the lease term. The lessor used a 4% percent target rate of return. The accounting period for each com¬pany ends on December 31 and lease payments will be made beginning on January 1, 2018 and each year thereafter. Collectability of the lease payments is not an issue. Assume a marginal tax rate of 20%. REQUIRED: 1. Is this an operating or finance lease? Why? (Hint: you should determine this is a finance lease) 2. Calculate the lease payments. 3. Prepare the journal entries for the lessee & lessor for the first two years including any deferred tax entries. Assume the leased asset is returned to the lessor at the end of the lease term and is worth $75,000. 4. Prepare the balance sheet and income statement for the lessee & lessor as of December 31 for 2018. 5. Prepare the SCF for the lessee and lessor for the year ended 12/31/18 and 12/31/19 (using the indirect method for CF from Operating Activities). 6. Prepare the SCF for the lessee and lessor for the year ended 12/31/18 and 12/31/19 (using the direct method for CF from Operating Activities).

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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