Debbink Co. leased machinery from Young, Inc. on January 1, 2020. The lease term was for 8 years, with equal annual rental payments of $5,300 at the beginning of each year. In addition, the lease provides an option to purchase the machinery at the end of the lease term for $2,000, which Debbink is reasonably certain it will exercise as it believes the fair value of the machinery will be at least $6,000. The machinery has a useful life of 10 years and a fair value of $36,000. The implicit rate of the lease is not known to Debbink. Debbink's incremental borrowing rate is 8%. Prepare Debbink's 2020 journal entries.

Debbink Co. leased machinery from Young, Inc. on January 1, 2020. The lease term was for 8 years, with equal annual rental payments of $5,300 at the beginning of each year. In addition, the lease provides an option to purchase the machinery at the end of the lease term for $2,000, which Debbink is reasonably certain it will exercise as it believes the fair value of the machinery will be at least $6,000. The machinery has a useful life of 10 years and a fair value of $36,000. The implicit rate of the lease is not known to Debbink. Debbink's incremental borrowing rate is 8%. Prepare Debbink's 2020 journal entries.

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 13E: Lessee and Lessor Accounting Issues Diego Leasing Company agrees to provide La Jolla Company with...

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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.
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.
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Drew Company leased equipment from Biggs Leasing on January 1, 2021. The lease term is for ten (10) years with equal annual rental payments of $8,000 at the beginning of each year. In addition, Drew has the option to purchase the equipment at the end of the lease term for $5,000. It is reasonably certain that Drew will exercise this purchase option. At the outset of the lease term the equipment has a useful ife of twelve (12) years and a fair value of $56,000. The implicit rate of the lease is not known to Drew Drew's incremental borrowing rate is 12% A. Calculate the amount that Drew should record for the right-of-use asset and the lease liability. (Round to the nearest dollar. To get partial credit, show your calculations.) B. Prepare the journal entries that Drew should make on January 1, 2021 to 1) record the lease and to 2) record the first lease payment For the togibi
Amsterdam Leasing Company agrees to lease machinery to Harrisburg Corporation on January 1, 2019.The following information relates to the lease agreement. The term of the lease is 7 years with norenewal option, and the machinery has an estimated economic life of 9 years. The asset is not of aspecialized nature. The machinery cost is $525,000 and the fair value of the asset on January 1, 2019 is$700,000. At the end of the lease term, the asset reverts to lessor and has a guaranteed residual valueof $50,000 and Harrisburg estimates the expected residual value at the end of the lease term will be$50,000. Harrisburg amortizes all of its leased equipment on the straight-line basis. The leaseagreement requires equal of $109,365, beginning on January 1, 2019. The lessor believes thecollectability of the lease payments is probable. Amsterdam desires a rate of return of 5% on itsinvestments. Harrisburg’s incremental borrowing rate is 6%, and the lessor’s incremental implicit rate…
Sheridan Co. leased machinery from Young, Inc. on January 1, 2025. The lease term was for 8 years, with equal annual rental payments of $5,500 at the beginning of each year. In addition, the lease provides an option to purchase the machinery at the end of the lease term for $2,500, which Sheridan is reasonably certain it will exercise as it believes the fair value of the machinery will be at least $5,000. The machinery has a useful life of 10 years and a fair value of $39,000. The implicit rate of the lease is not known to Sheridan. Sheridan's incremental borrowing rate is 10%. Prepare Sheridan's 2025 journal entries. (List all debit entries before credit entries. Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to O decimal places, e.g. 5,275. If no entry is required, select "No Entry" for the account titles and enter O…
Cullumber Co. leased machinery from Young, Inc. on January 1, 2020. The lease term was for 8 years, with equal annual rental payments of $5,300 at the beginning of each year. In addition, the lease provides an option to purchase the machinery at the end of the lease term for $3,000, which Cullumber is reasonably certain it will exercise as it believes the fair value of the machinery will be at least $4,000. The machinery has a useful life of 10 years and a fair value of $35,000. The implicit rate of the lease is not known to Cullumber. Cullumber’s incremental borrowing rate is 7%. Prepare Cullumber's 2020 journal entries: 1) To record lease liability 2) To record lease payment 3) To record interest expense 4) To record amortization of the right of use asset.
Federated Fabrications leased a tooling machine on January 1, 2021, for a three-year period ending December 31, 2023. The lease agreement specified annual payments of $32,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2022. The company had the option to purchase the machine on December 30, 2023, for $41,000 when its fair value was expected to be $56,000, a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor’s implicit rate of return was 10%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Prepare the appropriate general journal entries for Federated from the beginning of the lease through the end of the lease term.
Federated Fabrications leased a tooling machine on January 1, 2021, for a three-year period ending December 31, 2023. The lease agreement specified annual payments of $32,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2022. The company had the option to purchase the machine on December 30, 2023, for $41,000 when its fair value was expected to be $56,000, a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor’s implicit rate of return was 10%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
Federated Fabrications leased a tooling machine on January 1, 2021, for a three-year period ending December 31, 2023. The lease agreement specified annual payments of $32,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2022. The company had the option to purchase the machine on December 30, 2023, for $41,000 when its fair value was expected to be $56,000, a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor’s implicit rate of return was 10%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Prepare an amortization schedule that describes the pattern of interest expense for Federated over the lease term.
Teal Leasing Company agrees to lease equipment to Flint Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $510,000, and the fair value of the asset on January 1, 2020, is $717,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Flint estimates that the expected residual value at the end of the lease term will be 60,000. Flint amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Teal desires a 11% rate of return on its investments. Flint’s incremental borrowing rate is 12%, and the lessor’s implicit rate is unknown. (Assume the accounting…