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Classification as Finance or Operating Lease, Lessee. Iman Iron Works signed a lease on January 1 with Borko Bank for an iron-stamping machine. The equipment is not specialized in nature. The lease has a 12-year term with no purchase option or transfer of ownership Under the terms of the contract, Iman must pay $3,500 on January 1 of each year. Borko Bank's implicit rate is 12%. The iron-stamping machine has an economic life of 25 years and a fair value of $35,000. If Iman borrowed at Borko Bank, the loan would carry an interest rate of 14%. The lessee knows the implicit rate. Is this contract an operating or a finance lease for the lessee?
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- Zhang Company leased equipment from Mann Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $49,677 over a five-year lease term (also the asset's useful life), with the first payment on January 1, the beginning of the lease. The interest rate is 4%. The asset being leased cost Mann $180,000 to produce. Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Determine the price at which the lessor is "selling" the asset (present value of the lease payments). 2. What would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31 (ignore taxes)?. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Determine the price at which the lessor is "selling" the asset (present value of the lease payments). Note: Round your intermediate and final answers to the nearest whole…arrow_forwardZhang Company leased equipment from Mann Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $52,538 over a six-year lease term (also the asset's useful life), with the first payment on January 1, the beginning of the lease. The interest rate is 5%. The asset being leased cost Mann $230,000 to produce. Note: Use tables, Excel, or a financial calculator. (FV of $1. PV of $1. FVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) Required: 1. Determine the price at which the lessor is "selling" the asset (present-value of the lease payments). 2. What would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31 (ignore taxes)? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Determine the price at which the lessor is "selling" the asset (present value of the lease payments). Note: Round your intermediate and final answers to the nearest whole…arrow_forwardOn January 1, Dallas Corp. leases a truck they have manufactured to Valley Corp. Dallas has calculated the lease payments to Valley to be $40,000 per year for 4 years, and the sales price of the truck is $130,000. It cost Dallas $100,000 to manufacture the truck. Dallas follows IFRS. Instructions Prepare the journal entries to set up the lease on January 1 on the books of the lessor, Dallasarrow_forward
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- Atlanta Capital Leasing Company (ACLC) leases tractors to construction companies. The firm wants to set a three-year lease payment schedule for a tractor purchased at $53,000 from the equipment manufacturer. The asset is classified as a five-year MACRS property. The tractor is expected to have a salvage value of $22,000 at the end of three years of rental. ACLC will require the lessee to make a security deposit of $1,500 that is refundable at the end of the lease term. ACLC's marginal tax rate is 35%. If ACLC wants an after-tax return of 10%, what lease payment schedule should be set'?arrow_forwardEubank Company, a lessee, enters into a lease agreement on January 1, 2021, for equipment. The following data are relevant to the lease agreement: - The term of the noncancelable lease is 4 years. Payments of $978,446 are due on January 1 of each year. The first payment is January 2021. - The fair value of the equipment on January 1, 2021 is $3,500,000. The equipment has an economic life of 6 years with nosalvage value. - Eubank uses the straight-line method of depreciation. - Eubank’s implicit rate is 8%. - This will be treated as a finance lease (Lessee Perspective). Instructions: Prepare the journal entries on Eubank’s books (lessee) that relate to the lease agreement for the following dates, you do not need to create an amortization schedule. a. January 1, 2021. b. December 31, 2021.arrow_forwardAn entity is a manufacturer of machinery. It uses lease agreements to sell its product. On January 1, 2019, the entity leased a machine to another entity under the following terms: • The lease term is 5 years. • The annual rental is P500,000 payable every January 1, 2019. • The machine has a cost to the entity of P1,600,000. • Implicit interest rate in the lease, known to the lessee, is 8%. The machine reverts back to the entity at the end of 5 years with unguaranteed residual value of P400,000. The present value factors of 1 and annuity due at 8% for 5 periods are 0.68 and 4.21 respectively. What amount should be recognized as interest income for 2019? 194,160 154,160 172,400 128,000 What amount gross income should be recognized by the entity for 2019? 555,000 827,000 955,000 700,000arrow_forward
- Lessor CBA, Inc. leased a machine to lessee DF Co. The lease is noncancelable and requires DF to pay $6,000 per year, payable in advance, over a four-year period. CBA’s implicit interest rate (known to DF) is 6 percent. The lease term begins on January 1, 2020. The machine’s economic life is 7 years. The machine's book value is $26,000 and fair value $30,000, with a guaranteed residual value of $10,000. The collectability of the lease payments is probable for the lessor. (Note: Present value of an ordinary annuity of 1 for 4 periods at 6% is 3.46511, of an annuity due of 1 for 4 periods at 6% is 3.67301. Present value of 1 for 4 periods at 6% is 0.79209). Notes: Read carefully and follow strictly so that Bb can grade you correctly! 1. Use comma in numbers, one thousand is 1,000, not 1000. No $ sign. No positive or negative sign. 2. If no entry is required, write N/A. 3. Only use the following accounts: ROU asset, Lease liability, Depreciation expense, Interest expense, Cash, CGS,…arrow_forwardGrouper Dairy leases its milking equipment from Monty Finance Company under the following lease terms. 1. The lease term is 10 years, noncancelable, and requires equal rental payments of $32,700 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 $246,978 and a cost of $274,000 on Monty Finance’s books. It also has an estimated economic life of 15 years and an expected residual value of $13,800, though Grouper Dairy has guaranteed a residual value of $21,600 to Monty Finance. 3. The lease contains no renewal options, and the equipment reverts to Monty Finance upon termination of the lease. The equipment is not of a specialized use. 4. Grouper Dairy’s incremental borrowing rate is 8% per year. The implicit rate is also 8%. 5. Grouper Dairy depreciates similar equipment that it owns on a straight-line basis. 6. Collectibility of the payments is probable. Prepare the…arrow_forwardOn 1 March 20x4, Machine Manufacturing Co. leased a machine to Dry Goods through a three-year lease. The annual lease payments of $24,400 start on 1 March 20X4, and continue for three years. The interest rate implicit in the lease is 7% and the machine will remain with the lessee at the end of the lease. Machines of this type are usually sold for $68,516 with a cost to Machine Manufacturing Co. of $17,400 to build. Required: 1. Should this lease be accounted for as a financing-type lease or a sales-type lease? O Finance lease O Sales lease 2. What journal entries should be recorded on March 1, 20X4? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transacttion st Journal entry worksheetarrow_forward
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