1. Uptown Inc, entered into an arrangement on January 1, 2017 to lease a machine
ID: 2545285 • Letter: 1
Question
1. Uptown Inc, entered into an arrangement on January 1, 2017 to lease a machine for four years with lease payments of $85,000 each year with the first payment due immediately and January 1 of each year thereafter. There are no options to extend, terminate, or renew the lease. The lessor requires a return on its leases of this type of 8%, which is the sam e as Uptown Inc.'s marginal borrowing rate and originally purchased the machine for $296,231.38. It is estimated that the lease will have a residual value at the end of the lease of $20,000. The journal entry for the lessor upon the inception of the lease is: a. Lease Receivable $296,231.38 Equipment S296,231.38 b. Lease Receivable 318,753.84 Equipment Gain on Sale $296,231.38 S.22.522.46 c. Lease Receivable S318,753.84 Sales Revenue S304,053.24 Cost of Goods Sold$296,231.38 Inventory S296,231.38 d. Lease Receivable S318,753.84 Sales Revenue $304,053 24 Cost of Goods Sold $281,530.78 Inventory S296,231.38 2. Which of the following provisions in a lease agreement does not help to distinguish a finance lease from an operating lease? a. The lease agreement allows for the lessee to purchase the leased asset for $2,000 at the end of the b. The lease term includes renewal options which last for the life of the leased asset, which the c. The lessee is a risky client who is unlikely to pay the annual lease payment, so the lessor has d. The asset which the lessee is leasing is highly specialized scientific equipment which has been lease. The value of the asset at the end of the lease is expected to be S15,000. lessee is reasonably expected to exercise. purchased insurance to hedge against the probability of the lessee defaulting. specifically crafted for the lessee's uses, and is unlikely to be useful to anyone else.Explanation / Answer
Correct option is "C"
Present value of lease payment :[PVAD 8%,4* Annual payment ] +[PVF 8%,4*Sale value]
=[3.57710*85000]+[.73503*20000]
= 304053.5+ 14700.6
= $ 318754.1 [approx to 318753.84]
entry :
lease receivable debit and sales revenue credit 318753.84 [to record sales]
Cost of goods sold debit inventory credit 296231.38 [To record cost of sales]
2)The correct option is "C"
The collectibility of lease payment must be reasonably predictable is not a criteria provided by GAPP to distinguish a capital lease from operating lease.
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