Intermediate Accounting
3rd Edition
ISBN: 9780136912644
Author: Elizabeth A. Gordon; Jana S. Raedy; Alexander J. Sannella
Publisher: Pearson Education (US)
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Textbook Question
Chapter 18, Problem 1SSC
Surfing the Standards Case 1: Lease Contracts
Consider each of the following scenarios and determine whether a lease contract exists for each scenario Support your conclusions with Topic 842 in the Codification and provide appropriate citations to the Codification
- 1. Guitar World Company (GWC) sells musical instruments online It purchases acoustic guitars from several manufacturers in large volume and needs storage space for its distribution system To secure storage space, GWC enters into an agreement with Safe Storage Inc. to deliver 500 acoustic guitars per month to Safe Storage s primary location, which is the closest location to GWC. GWC can retrieve the guitars from the storage facility whenever it chooses. Safe Storage can move the guitars anywhere within the storage facility or move some of this inventory to a location in another city that it owns Safe Storage may want to move the inventory if it can obtain a higher rental rate from another customer for the primary location.
- 2. Guitar World Company (GWC) sells musical instruments online. It purchases acoustic guitars from several manufacturers in large volume and needs storage space for its distribution system. To secure storage space, GWC enters into an agreement with Safe Storage Inc to deliver 500 acoustic guitars per month to Safe Storage's primary location, which is the closest location to GWC. GWC can retrieve the guitars from the storage facility whenever it chooses. Because GWC has a policy that all of its acoustic guitars must be kept in a facility that maintains humidity at 48%. the agreement between GWC and Safe Storage required the guitars to be stored at 48% humidity. To accommodate this requirement. Safe Storage modified a section in its primary location to maintain the humidity level at 48%.
- 3. Johnston Power Company (JPC) recently entered into contract with Spin Move Wind Associates (SMWA) to utilize a particular power-generating facility. JPC is seeking to obtain a backup power source and believes that SMWA can provide the electricity when needed JPC will give SMWA advance notice as to when and how much additional power is needed up to SMWA facility's full capacity. Because SMWA agrees to provide electricity on demand, it runs the risk of having idle capacity during less-than-peak demand periods.
- 4. Johnston Power Company (JPC) recently entered into contract with Spin Move Wind Associates (SMWA) to utilize a particular power-generating facility. JPC is seeking to obtain a backup power source and believes that SMWA can provide the electricity needed JPC agrees to buy all of it power from SPWA on a full-time basis.
- 5. DataCo enters into an agreement with UtilityCo to use 40% of the capacity UtilityCo's fiber optic cable that runs from Chicago to an outlying suburb. This is the only cable that DataCo will use in this area. DataCo makes the decisions about the use of the fibers (in terms of determining what data and how much data will be transported). UtilityCo can substitute cables but only if the original cables become damaged.
- 6. Farms, Inc enters into a 10-year agreement with Land Lovers Company to farm 1.000 acres of Land Lovers' land. The exact plot of land is specified in the contract Farms will likely use the land to grow corn but may rotate to soybean production every few years. Land Lovers included a clause in the contract that allows Land Lovers to specify operating procedures each year around the fertilization of the soil, depending upon annual soil tests.
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To consider the financial statement effects of leasing versus purchasing an asset, review the following case of Hack Wellington Company
Hack Wellington Company needs equipment that will cost the company $560. Hack Wellington Company is considering to either purchase the
equipment by borrowing $560 from a local bank or leasing the equipment. Assume that the lease will be structured as an operating lease.
Some data from Hack Wellington Company's current balance sheet prior to the lease or purchase of the equipment are:
Balance Sheet Data
(Dollars)
Current assets
$2,940
Debt
$1,680
Net fixed assets
1,260
Equity
2,520
Total assets
$4,200
Total claims
$4,200
1. The company's current debt ratio is
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and the debt ratio will change to
3. If the company leases the equipment, the company's debt ratio will
because the lease is not capitalized.
under a lease agreement as compared to the finandial…
Part ILynbrook, Inc. is considering leasing a CAT Scan machine for its operations. As the Controller of Lynbrook, you have been asked to provide management with the lease information related to the CAT Scan. Lynbrook is considering leasing the machine from Capital Leasing, who in turn purchased the machine from the manufacturer, ScanHouse Corp. for $1,000,000.
Required:Round your answers to the nearest whole dollar amounts.1. How should this lease be classified by Lynbrook and by Capital Leasing?2. Prepare appropriate entries for both Lynbrook and Capital Leasing from the beginning of the lease through the second rental payment on April 1, 2020. Depreciation and amortization are recorded at the end of each fiscal year (December 31).3. Assume Lynbrook leased the machine directly from the manufacturer, ScanHouse Corp., which produced the machine at a cost of $800,000. Prepare appropriate entries for ScanHouse from the beginning of the lease through the second rental payment on April 1,…
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You and a colleague are reviewing a prospective lease transaction for your employer, Ma and Pa Kettle's (MPK). Having heard of the
new lease accounting standard update, your CFO has assigned you the task of assessing the impact of the lease transactions on the
company's financial statements. The terms are these: At the beginning of its fiscal year, MPK would lease restaurant space from Wilson
Corporation under a 10-year lease agreement. The contract calls for annual lease payments of $25,000 each at the end of each year.
The building was acquired last week by Wilson at a cost of $300,000 and is expected to have a useful life of 25 years with no residual
value for calculating straight-line depreciation. Wilson seeks a 10% return on its lease investments. (EV of $1, PV of $1. EVA of $1. PVA
of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required:
What will be the effect of the lease on MPK's earnings for the first year, and on…
Chapter 18 Solutions
Intermediate Accounting
Ch. 18 - Does the lessee become the owner of the equipment...Ch. 18 - Prob. 18.2QCh. 18 - Prob. 18.3QCh. 18 - What are typical terms and provisions in a lease...Ch. 18 - How does a lease offer business and financial...Ch. 18 - Prob. 18.6QCh. 18 - How is the right-of-use asset measured?Ch. 18 - What components are included in a lease contract?Ch. 18 - How does a lessee separate lease and nonlease...Ch. 18 - How does a lessor separate lease and nonlease...
Ch. 18 - Does a lessee have an option not to separate lease...Ch. 18 - What are the criteria for a lessee to report a...Ch. 18 - Prob. 18.13QCh. 18 - Can the lessor account for a lease either as an...Ch. 18 - What is the difference in the lessees lease...Ch. 18 - How does a guaranteed residual value affect the...Ch. 18 - Prob. 18.17QCh. 18 - What discount rate does the lessee use to...Ch. 18 - Does the choice of discount rate (i.e., the lessee...Ch. 18 - Prob. 18.20QCh. 18 - Prob. 18.21QCh. 18 - Prob. 18.22QCh. 18 - How does a lessee measure the lease liability?Ch. 18 - What is the lessees short-term lease policy...Ch. 18 - Prob. 18.25QCh. 18 - What are the lessee s accounting and reporting...Ch. 18 - Prob. 18.27QCh. 18 - Prob. 18.28QCh. 18 - Prob. 18.29QCh. 18 - How does the lessor measure the net investment in...Ch. 18 - Prob. 18.31QCh. 18 - Prob. 18.32QCh. 18 - Prob. 18.33QCh. 18 - Baxter Brothers, Inc. enters into a four-year...Ch. 18 - Zhou Systems signed a 5-year lease at the...Ch. 18 - Insight Corporation leases equipment for 5 years...Ch. 18 - Lowe Leasing Company recently leased machinery to...Ch. 18 - Prob. 18.5MCCh. 18 - Prob. 18.6MCCh. 18 - Prob. 18.7MCCh. 18 - Bischoff Enterprises leases office space from...Ch. 18 - Identifying Lease and Nonlease Components. Deane...Ch. 18 - Prob. 18.2BECh. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as a Finance or Operating Lease,...Ch. 18 - Prob. 18.7BECh. 18 - Prob. 18.8BECh. 18 - Prob. 18.9BECh. 18 - Classification of Lease, Lessor, IFRS. Repeat the...Ch. 18 - Prob. 18.11BECh. 18 - Finance Lease, Lessee, Lessor, Guaranteed Residual...Ch. 18 - Finance Lease, Lessee, Lessor, Unguaranteed...Ch. 18 - Composition of Lease Payments, Variable Payments....Ch. 18 - Composition of Lease Payments. Variable Payments....Ch. 18 - Determining the Implicit Rate In the Lease. Assume...Ch. 18 - Prob. 18.17BECh. 18 - Prob. 18.18BECh. 18 - Prob. 18.1ECh. 18 - Allocation of Total Payments to Lease and Nonlease...Ch. 18 - Operating Lease, Nonlease Components, Lessee....Ch. 18 - Operating Lease, Rate or Index, Effect of Variable...Ch. 18 - Prob. 18.5ECh. 18 - Prob. 18.6ECh. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Prob. 18.9ECh. 18 - Prob. 18.10ECh. 18 - Prob. 18.11ECh. 18 - Prob. 18.12ECh. 18 - Prob. 18.13ECh. 18 - Finance Lease, Purchase Option, Lessee,...Ch. 18 - Prob. 18.15ECh. 18 - Prob. 18.16ECh. 18 - Prob. 18.17ECh. 18 - Operating Lease, Lessor. True Image Copier Company...Ch. 18 - Operating Lease, Lessee, Amortization Schedules,...Ch. 18 - Prob. 18.20ECh. 18 - Prob. 18.21ECh. 18 - Classification as Finance or Operating Lease....Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance, Sales-Type, or...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Classification as Finance or Operating Lease,...Ch. 18 - Prob. 18.8PCh. 18 - Prob. 18.9PCh. 18 - Prob. 18.10PCh. 18 - Prob. 18.11PCh. 18 - Direct Financing Lease, Deferred Selling Profit,...Ch. 18 - Cases Judgment Cases Judgment Case 1: Comparison...Ch. 18 - Judgment Case 2: Lease Classification On January...Ch. 18 - Prob. 1FSCCh. 18 - Prob. 2FSCCh. 18 - Surfing the Standards Case 1: Lease Contracts...Ch. 18 - Prob. 2SSCCh. 18 - Prob. 3SSCCh. 18 - Basis for Conclusions Case 1: Operating Lease...Ch. 18 - Prob. 2BCCCh. 18 - Basis for Conclusions Case 3: Lease Classification...
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