EBK INTERMEDIATE ACCOUNTING: REPORTING
2nd Edition
ISBN: 9781337268998
Author: PAGACH
Publisher: YUZU
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Chapter 20, Problem 14C
To determine
Prepare a short memo to the Controller of Company C that summarizes how to classify the lease and cite the references and applicable paragraph numbers.
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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…
An owner of the Atrium Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corp. for 20,000 rentable square feet of space. ACME would like a base rent of $20 per square foot with step-ups of $1 per year beginning one year from now. Atrium would provide full service under the lease terms. The owner of Atrium Tower believes that the $20 lease is too low and is trying to negotiate $24 per square foot with the same step-ups. However, Atrium would provide ACME with a $50,000 move-in allowance and $100,000 in tenant improvements (TIs) if the lease at $24 PSF is signed.a. Assuming that Atrium’s owner believes that his required rate of return on investment should be 10 percent per year, is the $24 in rents per square foot combined with the move-in allowance and TIs justified?b. ACME informs Atrium that it has 1 year remaining on its existing 20,000-square-foot lease in an older building at $15 per square foot. ACME is willing to pay Atrium $23 per square…
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'?
Chapter 20 Solutions
EBK INTERMEDIATE ACCOUNTING: REPORTING
Ch. 20 - Prob. 1GICh. 20 - What is the difference between the lessee and...Ch. 20 - Prob. 3GICh. 20 - Prob. 4GICh. 20 - Prob. 5GICh. 20 - Prob. 6GICh. 20 - What are the two types of lease classifications...Ch. 20 - Prob. 8GICh. 20 - Prob. 9GICh. 20 - Prob. 10GI
Ch. 20 - Prob. 11GICh. 20 - Describe the difference between how a lessee would...Ch. 20 - Prob. 13GICh. 20 - Prob. 14GICh. 20 - Prob. 15GICh. 20 - Prob. 16GICh. 20 - Prob. 17GICh. 20 - Prob. 18GICh. 20 - Prob. 19GICh. 20 - Prob. 20GICh. 20 - Prob. 21GICh. 20 - Prob. 1MCCh. 20 - Prob. 2MCCh. 20 - Prob. 3MCCh. 20 - Prob. 4MCCh. 20 - Prob. 5MCCh. 20 - Prob. 6MCCh. 20 - Prob. 7MCCh. 20 - Prob. 8MCCh. 20 - Rent received in advance by the lessor for an...Ch. 20 - Prob. 10MCCh. 20 - Next Level Keller Corporation (the lessee) entered...Ch. 20 - Prob. 2RECh. 20 - Prob. 3RECh. 20 - Prob. 4RECh. 20 - Prob. 5RECh. 20 - Prob. 6RECh. 20 - Prob. 7RECh. 20 - Prob. 8RECh. 20 - Prob. 9RECh. 20 - Prob. 10RECh. 20 - Prob. 1ECh. 20 - Prob. 2ECh. 20 - Lessee Accounting Issues Sax Company signs a lease...Ch. 20 - Prob. 4ECh. 20 - Prob. 5ECh. 20 - Prob. 6ECh. 20 - Prob. 7ECh. 20 - Lessor Accounting with Receipts at Beginning of...Ch. 20 - Determining Type of Lease and Subsequent...Ch. 20 - Prob. 10ECh. 20 - Prob. 11ECh. 20 - Prob. 12ECh. 20 - Prob. 13ECh. 20 - Prob. 14ECh. 20 - Prob. 15ECh. 20 - Determining Type of Lease and Subsequent...Ch. 20 - Prob. 2PCh. 20 - Prob. 3PCh. 20 - Lessee Accounting Issues Timmer Company signs a...Ch. 20 - Prob. 5PCh. 20 - Prob. 6PCh. 20 - Sales-Type Lease with Receipts at End of Year...Ch. 20 - Prob. 8PCh. 20 - Prob. 9PCh. 20 - Prob. 10PCh. 20 - Prob. 11PCh. 20 - Prob. 12PCh. 20 - Prob. 13PCh. 20 - Prob. 14PCh. 20 - Prob. 15PCh. 20 - Prob. 1CCh. 20 - Prob. 2CCh. 20 - Prob. 3CCh. 20 - Classification of Leases Part a. Capital leases...Ch. 20 - Prob. 5CCh. 20 - Prob. 6CCh. 20 - Prob. 7CCh. 20 - Prob. 8CCh. 20 - Prob. 9CCh. 20 - Prob. 10CCh. 20 - Prob. 11CCh. 20 - Prob. 12CCh. 20 - Prob. 13CCh. 20 - Prob. 14CCh. 20 - Prob. 15C
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- Adams Storage and Appraisal leased equipment to OAC Corporation for an eight-year period, at which time possession of the leased asset will revert back to Adams. The equipment cost Adams $32 million and has an expected useful life of 11 years. Its normal sales price is $45 million. The present value of the minimum lease payments for both the lessor and lessee is $40 million. The first payment was made at the inception of the lease. How would OAC classify this lease if it prepares its financial statements using IFRS? Why?arrow_forwardMarin Company leases a building and land. The lease term is 7 years and the annual fixed payments are $880,000. The lease arrangement gives Marin the right to purchase the building and land for $13,750,000 at the end of the lease. Based on an economic analysis of the lease at the commencement date, Marin is reasonably certain that the fair value of the leased assets at the end of lease term will be much higher than $13,750,000.What are the total lease payments in this lease arrangement?arrow_forwardPart 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,…arrow_forward
- Need answer the questionarrow_forwardCardinal Company is negotiating to lease a piece of equipment to MTBA, Inc. MTBA requests that the lease be for 9 years. The equipment has a useful life of 10 years. Cardinal wants a guarantee that the residual value of the equipment at the end of the lease is at least $5,000. MTBA agrees to guarantee a residual value of this amount though it expects the residual value of the equipment to be only $2,500 at the end of the lease term. If the fair value of the equipment at lease commencement is $70,000, what would be the amount of the annual rental payments Cardinal demands of MTBA, assuming each payment will be made at the beginning of each year and Cardinal wishes to earn a rate of return on the lease of 8%?arrow_forwardNeed helparrow_forward
- please show the solutionarrow_forward(Lease Capitalization, Bargain-Purchase Option) Baden Corporation entered into a lease agreement for 10 photocopy machines for its corporate headquarters. The lease agreement qualifies as an operating lease in all terms except there is a bargain-purchase option. After the 5-year lease term, the corporation can purchase each copier for $1,000, when the anticipated fair value is $2,500.Jerry Suffolk, the financial vice president, thinks the financial statements must recognize the lease agreement as a capital lease because of the bargain-purchase option. The controller, Diane Buchanan, disagrees: “Although I don’t know much about the copiers themselves, there is a way to avoid recording the lease liability.” She argues that the corporation might claim that copier technology advances rapidly and that by the end of the lease term the machines will most likely not be worth the $1,000bargain price.InstructionsAnswer the following questions.(a) What ethical issue is at stake?(b) Should the…arrow_forwardI ONLY NEED help with D. Krawczek Company will enter into a lease agreement with Heavy Equipment Co. where Krawczek will make lease payments over the next five years. The lease is cancelable and requires equal annual payments of $23,200 per year beginning on January 1 of the first year. The last payment will be January 1 of year 5, and Krawczek will continue to use the asset until December 31 of that year. Other important information includes the following: The fair value of the equipment is $160,000. The applicable discount rate is an 8 percent annual rate. The economic life of the asset is 10 years. Krawczek does not guarantee the residual value of the asset at the end of the lease, and it does not expect to keep the asset at the end of the term. The asset is a standard piece of equipment. a. Is the lease an operating lease or a financing lease? multiple choice Operating lease Financing lease b. What will be the lease expense shown on the income statement at the end…arrow_forward
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