Instructions: Prepare the journal entries for both the lessee and the lessor for 2019 to reflect the sale-leaseback agreement. No uncertainties exist, and collectability is reasonably certain.
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Assume that on January 1, 2019, JK Restaurants sells a computer system to High Finance Company for P510, 000 and immediately leases the computer system back. The relevant information is as follows:
- The computer was carried at JK’s books at a value of P450, 000.
- The term of the noncancelable lease is 10 years. Title will transfer to JK.
- The lease agreement requires equal rental payments of P83, 000.11 at the end of each year.
- The incremental borrowing rate for Elmer is at 12%. Elmer is aware that High Finance Co., set the annual rental to ensure a rate of return of 10%
- The computer has a fair value of P680, 000 on January 1, 2019, and an estimated economic life of 10 years.
- Elmer pays executory costs of P9, 000 a year.
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- 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.Determining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a 10-year cancelable (at the option of either party) agreement to lease a storage building from Wake Company. The following information pertains to this lease agreement: 1. The agreement requires rental payments of 100,000 at the beginning of each year. 2. The cost and fair value of the building on January 1, 2019, is 2 million. The storage building has not been specialized for Caswell. 3. The building has an estimated economic life of 50 years, with no residual value. Caswell depreciates similar buildings according to the straight-line method. 4. The lease does not contain a renewable option clause. At the termination of the lease, the building reverts to the lessor. 5. Caswells incremental borrowing rate is 14% per year. Wake set the annual rental to ensure a 16% rate of return (the loss in service value anticipated for the term of the lease). Caswell knows the implicit interest rate. 6. Executory costs of 7,000 annually, related to taxes on the property, are paid by Caswell directly to the taxing authority on Dec. 31 of each year. Required: 1. Determine what type of lease this is for the lessee. 2. Prepare appropriate journal entries on the lessees books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2019 and 2020.Assume that on January 1, 2019, JK Restaurants sells a computer system to High Finance Company for P510, 000 and immediately leases the computer system back. The relevant information is as follows:1. The computer was carried at JK’s books at a value of P450, 000.2. The term of the noncancelable lease is 10 years. Title will transfer to JK.3. The lease agreement requires equal rental payments of P83, 000.11 at the end of each year.4. The incremental borrowing rate for Elmer is at 12%. Elmer is aware that High Finance Co., set the annual rental to ensure a rate of return of 10%5. The computer has a fair value of P680, 000 on January 1, 2019, and an estimated economic life of 10 years.6. Elmer pays executory costs of P9, 000 a year.Instructions:Prepare the journal entries for both the lessee and the lessor for 2019 to reflect the sale-leaseback agreement. No uncertainties exist, and collectability is reasonably certain.
- An 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 an 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 of sales revenue should be recognized by the entity?An 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? 555,000 827,000 955,000 700,000On January 1, 2020, Morris Company sells land to Lopez Corporation for $10,000,000, and immediately leases the land back. The following information relates to this transaction: 1. The term of the noncancelable lease is 20 years and the title transfers to Morris Company at the end of the lease term. 2. The land has a cost basis of $8,400,000 to Morris. 3. The lease agreement calls for equal rental payments of $943,074 at the beginning of each year. 4. The land has a fair value of $10,000,000 on January 1, 2020. The incremental borrowing rate of Morris Company is 10%. Morris is aware that Lopez Corporation set the annual rentals to ensure a rate of return of 8%. 5. 6. Morris Company pays all executory costs which total $255,000 in 2020. 7. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Instructions Prepare the journal entries for the entire year 2020 on the books of Morris Company…
- Alicia Inc. leased a machinery to Hannah & Co. on January 1, 2020. Lease term is 8 years. Annual rental is P800,000 payable at the beginning of each year starting January 1, 2020. Carrying value of the underlying asset on Alicia’s books is 3,200,000. The lease contract is recorded appropriately as a sales-type lease and has an implicit interest rate of 12%. Alicia normally sells these machineries to customers at a selling price of 4,200,000. How much is Alicia’s gross profit on January 1, 2020? a. None b. 1,000,000 c. 1,251,005 d. 1,400,000An 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 of sales revenue should be recognized by the entity?Sunland Company leases equipment from Bridgeport Inc. for five years starting on January 1, 2025. The lease is properly classified as a finance/sales-type lease. The terms of the lease are as follows: a) Bridgeport will pay $2500 in legal fees to execute the lease. b) Bridgeport will incur $1500 of lease documentation costs after the execution of the lease. c) Sunland will pay commissions to the lease negotiator of $2500. d) Sunland must prepay the last month's rental payment of $12500. e) Sunland pays internal engineering costs of $6250 to identify any structural considerations when installing the equipment. f) The initial measurement of the liability for Sunland is $150000. What amount will be reported for Sunland's right-of-use asset at the commencement date? O $168750 O $150000 O $171250 O $169000
- On January 1, 2020, Pia Co. engages in a lease contract to rent a property from Iris, Inc for an annual rental of P80,000, payable in advance. The lease term is for a period of five years, and the first payment has been made on January 1, 2020. The property has a fair market value of P800,000 on date of inception. Under the contract, Pia has the option to buy the property at a price of P655,030. It is reasonably certain that Pia will exercise this option. Expected market price of the property at the end of the lease term is P600,000. Incremental borrowing rate of Pia is 8%. Underlying asset has a useful life of 20 years. How much should Pia recognize as annual depreciation expense in relation to the right of use asset? a. 17,248 b. 39,538 c. 158,154 d. 68,994Assume that on January 1, 2020, Elmer's Restaurants sells a computer system to Liquidity Finance Co. for $680,000 and immediately leases back the computer system. The relevant information is as follows. 1. The computer was carried on Elmer's books at a value of $600,000. 2. The term of the non-cancelable lease is 3 years; title will not transfer to Elmer's, and the expected residual value at the end of the lease is $450,000, all of which is unguaranteed. 3. The lease agreement requires equal rental payments of $115,970 at the beginning of each year. 4. The incremental borrowing rate for Elmer's is 8%. Elmer's is aware that Liquidity Finance set the annual rental to ensure a rate of return of 8%. 5. The computer has a fair value of $680,000 on January 1, 2020, and an estimated economic life of 10 years. Instructions Prepare the journal entries for both the lessee and the lessor for 2020 to reflect the sale and leaseback agreement.Assume that DBP Leasing Corp. and Minasugbo Inc. sign a lease contract effective on January 1, 2019 where DBP Leasing leases to Minasugbo a bulldozer. The terms and provisions of the lease contract and other pertinent date are as follows: The term of the lease is five years. The lease agreement is non-cancelable, requiring equal rental payments of P20,711.11 at the beginning of each year (annuity-due basis). The bulldozer has a fair value at the commencement of the lease of P100,000, an estimated economic life of five years, and a guaranteed residual value of P5,000. (Minasugbo expects that it is probable that the expected value of the residual value at the end of the lease will be greater than the guaranteed amount of P5,000.) The lease contains no renewal options. The bulldozer reverts to DBP Leasing at the termination of the lease. Minasugbo’s incremental borrowing rate is 5 percent per year. Minasugbo depreciates its equipment on a straight-line basis. DBP Leasing sets the…