On January 1, 2021, ABC Company enters into a 4-year lease of a machinery. Annual rental is P200,000 payable at the beginning of each year. ABC does not know the lessor's implicit interest rate. ABC's incremental borrowing rate is 14%. Lessee incurs initial direct costs of P50,000 in negotiating the lease. The underlying asset's remaining useful life is 10 years. Required: 1. Prepare the journal entries for 01/01/2021, 12/31/2021, and 01/01/2022. 2. Compute the carrying amounts of the right of use asset and lease liability on December 31, 2021.

On January 1, 2021, ABC Company enters into a 4-year lease of a machinery. Annual rental is P200,000 payable at the beginning of each year. ABC does not know the lessor's implicit interest rate. ABC's incremental borrowing rate is 14%. Lessee incurs initial direct costs of P50,000 in negotiating the lease. The underlying asset's remaining useful life is 10 years. Required: 1. Prepare the journal entries for 01/01/2021, 12/31/2021, and 01/01/2022. 2. Compute the carrying amounts of the right of use asset and lease liability on December 31, 2021.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 9RE: Use the information in RE20-3. Prepare the journal entries that Richie Company (the lessor) would...

See similar textbooks

Similar questions

Use the information in RE20-3. Prepare the journal entries that Richie Company (the lessor) would make in the first year of the lease assuming the lease is classified as a sales-type lease. Assume that the lessee is required to make payments on December 31 each year. Also assume that Richie had purchased the equipment at a cost of 200,000.
Use the information in RE20-3. Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. However, assume that Garvey is now required to make the 65,949.37 payments on January 1 each year and that the fair value at the lease inception is now 275,000 (65,949:37 4:169865).
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, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions: The lease is noncancelable and has a term of 8 years. The annual rentals arc 35,000, payable at the beginning of each year. The interest rate implicit in the lease is 14%. Anderson agrees to pay all executory costs directly to a third party and is given an option to buy the equipment for 1 at the end of the lease term, December 31, 2026. The cost of the equipment to the lessee is 150,000, and the fair value is approximately 185,100. Ballieu incurs no material initial direct costs. It is probable that Ballieu will collect the lease payments. Ballieu estimates that the fair value is expected to be significantly greater than 1 at the end of the lease term. Ballieu calculates that the present value on January 1, 2019, of 8 annual payments in advance of 35,000 discounted at 14% is 185,090.68 (the 1 purchase option is ignored as immaterial). Required: 1. Next Level Identify the classification of the lease transaction from Ballices point of view. Give the reasons for your classification. 2. Prepare all the journal entries tor Ballieu for the years 2019 and 2020. 3. Discuss the disclosure requirements for the lease transaction in Ballices notes to the financial statements.
Owens Company leased equipment for 4 years at 50,000 a year with an option to renew the lease for 6 years at 2,000 per month or to purchase the equipment for 25,000 (a price considerably less than the expected fair value) after the initial lease term of 4 years. Why would this lease qualify as a finance lease?
Lessee Accounting Issues Timmer Company signs a lease agreement dated January 1, 2019, that provides for it to lease equipment from Landau Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows: The lease is noncancelable and has a term of 5 years. The annual rentals are 83,222.92, payable at the end of each year, and provide Landau with a 12% annual rate of return on its net investment. Timmer agrees to pay all executory costs directly to a third party on December 1 of each year. In 2019, these were insurance, 3,760; property taxes, 5,440. In 2020: insurance, 3,100; property taxes, 5,330. There is no renewal or bargain purchase option. Timmer estimates that the equipment has a fair value of 300,000, an economic life of 5 years, and a zero residual value. Timmers incremental borrowing rate is 16%, it knows the rate implicit in the lease, and it uses the straightline method to record depreciation on similar equipment. Required: 1. Calculate the amount of the asset and liability of Timmer at the inception of the lease. (Round to the nearest dollar.) 2. Prepare a table summarizing the lease payments and interest expense. 3. Prepare journal entries on the books of Timmer for 2019 and 2020. 4. Next Level Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2019. Use the present value of next years payment approach to classify the finance lease obligation between current and noncurrent. 5. Next Level Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2019. Use the change in present value approach to classify the finance lease obligation between current and noncurrent.
On January 1, 2021, Flackmon Company entered into a lease for a truck with a payment of S16,000 per year for 4 years. The expected life of the truck is 5 years, and the first payment will be made immediately. Flackmon could obtain a loan for a similar amount at a rate of 8% per year. Required: A. Record the lease liability and the first payment on January 1, 2021. B. Record the amortization on the leased asset for 2021. C. Record interest for 2021 on the lease. D. Record the lease payment on January 1, 2022. Your answers to this open-ended assignment should be placed in the space below this line. A Date Account Name Debit Credit Jan. 1, 2021 1-Jan-21 B Date Account Name Debit Credit Dec. 31, 2021 C Date Account Name Debit Credit Dec. 31, 2021 D Date Account Name Debit Credit Jan. 1, 2022
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. 1,400,000
On January 1, 2021, Company A (lessor) enters into a lease of equipment with Company B. Information on the lease is as follows: Cost of equipment - P320,183 Useful life of equipment - 5 years Lease term - 4 years Annual rental payable at the beginning of each year? Company A incurred initial direct costs of P20,000 in negotiating the lease. The implicit interest rate is 12%. How much is the annual rent?
On 1 January 2018, Venus Ltd leased a new machinery from Global Ltd for three years. Annual payments of $32,000 are payable in arrears, the first instalment being due on 31 December 2018. The machinery costs $88,900 and the estimated economic useful life of the asset is four years with nil residual value. The interest rate implicit in the lease is 5%. Complete the journal entries in the following table. Do not enter $ sign 2018 DR ($) CR ($) 1. To record the lease contract Right-of-use Asset - Machinery (B/S) Blank 16 Lease payable (B/S) Blank 17 2. To record the first lease payment Interest expense (P/L) Blank 18 Cash Blank 19 Lease payable (B/S) Blank 20 Cash Blank 21 3. To depreciation at the end of first year Blank 22 Depreciation expense (P/L) Blank 23 Accumulated depreciation (B/S)
Lagace Ltd. entered into a lease on June 1, 2020. The lease term is six years and requires annual rental payments of $30,000 at the beginning of each year. Lagace’s incremental borrowing rate is 8% and the rate implicit in the lease is 9%. (a) Calculate the capitalized amount of the right-to-use asset if Lagace follows IFRS 16. (b) Calculate the capitalized amount of the leased asset if Lagace follows ASPE. Show calculations using any of the following methods: (1) factor A.5, (2) a financial calculator, or (3) Excel function PV. Round final answers to the nearest cent.
On 1 July 2020, Andrew Ltd enters into a 5-year agreement to lease an item of machinery from Josh Ltd. Andrew Ltd incurred costs of $4 500 in setting up the lease agreement. The machinery has a fair value of $450 000 at the inception of the lease and it is expected to have an economic life of 6 years, after which time it will have a residual value of $35 000. The lease agreement details are as follows: Length of lease 5years Commencement date 1 July 2020 Annual lease payment, payable 30 June each year commencing 30 June 2021 $95,000 Residual value at the end of the lease term $80,000 Residual value guarantee by Andrew Ltd $50,000 Interest rate implicit in the lease 10% The lease is cancellable without any penalties All insurance and maintenance costs are paid by Josh Ltd and are expected to amount to $15 000 per year and will be reimbursed by Andrew Ltd by being included in the annual lease payment of $95 000. The machinery will be…