Exercise 15-1 Operating Lease LO15-4 Text: E 15-1 On January 1, 2016, Gothic Cor
ID: 2601574 • Letter: E
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Exercise 15-1 Operating Lease LO15-4 Text: E 15-1 On January 1, 2016, Gothic Corporation, an internet training firm, leased several computers HardWhere Inc. under a 3-year operating lease agreement. The contract calls for four rent payments of $40,000 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by HardWhere at a cost of $350,000 and were expected to have a useful life of 5 years with no residual value. rom Required: Prepare the appropriate entries for both (a) the lessee and (b) the lessor from the inception of the lease through the end of 2016. (Use straight-line depreciation.) Exercise 15-4 Sales-type lease; lessor L015-6 Text: E 15-5 Manufacturers Eastern leased high-tech electronic equipment from National Machines on January 1 2016. National Machines manufactured the equipment at a cost of $90,000 Related information: Lease term 3 years (12 quarterly periods) Quarterly rental payments $10,000- beginning of each period Economic life of asset 3 years Fair value of asset $107,866 Implicit interest rate 8% (Also lessee's incremental borrowing rate) 10.7866 = present value of an annuity due of $1: n=12, i-2% Required: 1. Show how National Machines determined the $10,000 quarterly rental payments. 2. Prepare appropriate entries for National Machines to record the lease at its inception, January 1, 2016, and the second rental payment on April 1, 2016. Exercise 15-5 Sale-leaseback; capital lease LO15-10 Text: E 15- To raise operating funds, WSMM Broadcasting seld a helicopter used in news reports on January 1, 2016, to a finance company for $1,540,000. immediately leased the helicopter back for a 13- year period, at which time ownership of the heiropter will transfer to WSMM. The helicopter has a fair value of $1,600,000. Its cost and its book value were $1,240,000. Its useful life is estimated to be 20 years. The lease requires WSMM to make payments of $205,542 to the finance company each January 1. wsMM depreciates assets on a straight-line basis. The lease has an implicit rate of 11%. Note: 7.49236-present value of an annuity due of $1:n:13, i=11% Required: Prepare the appropriate entries for WSMM on (a) January 1, 2016, to record the sale- leaseback and (b) December 31, 2016, to record necessary adjustments.Explanation / Answer
Solution 15-1:
(a) Gothic Corporation (Lessee)
June 30, 2016
Rent expense............................... 40,000
Cash ........................................ 40,000
December 31, 2016
Rent expense............................... 40,000
Cash ........................................ 40,000
(b) HardWhere (Lessor)
June 30, 2016
Cash............................................ 40,000
Rent revenue............................ 40,000
December 31, 2016
Cash............................................ 40,000
Rent revenue............................ 40,000
Depreciation expense ($350,000 ÷ 5 years) 70,000
Accumulated depreciation....... 70,000
Solution 15-5:
Requirement 1
Lessor’s Calculation of Rental Payments
Amount to be recovered (fair market value) $107,866
__________________¯
Rent payments at the beginning ¯
of each of eight quarters: ($107,866 ÷ 10.7866**) $10,000
** present value of an annuity due of $1: n=12, i=2%
Requirement 2
January 1, 2016
Lease receivable ($10,000 x 12)................................ 120,000
Cost of goods sold (lessor’s cost)............................... 90,000
Sales revenue (fair market value)........................................ 107,866
Unearned interest revenue ($120,000 – 107,866) 12,134
Inventory of equipment (lessor’s cost)............................... 90,000
Cash (rental payment)................................................. 10,000
Lease receivable ............................................................ 10,000
April 1, 2016
Cash (rental payment)................................................. 10,000
Lease receivable ............................................................ 10,000
Unearned interest revenue ....................................... 1,957
Interest revenue (2% x [$107,866 – 10,000])....... .................. 1,957
Solution 15-5:
Present value of periodic rental payments*
($205,542 x 7.49236**) $1,540,000
** present value of an annuity due of $1: n=13, i=11%
The lease meets at least one (actually 3 of 4 in this case) criteria for classification as a capital lease.
January 1, 2016
Cash (given)................................................................ 1,540,000
Helicopter (carrying value)......................................... 1,240,000
Deferred gain on sale-leaseback (difference)............. 300,000
Leased helicopter (present value of lease payments)............... 1,540,000
Lease payable (present value of lease payments)............. 1,540,000
Lease payable ........................................................... 205,542
Cash...................................................................... 205,542
December 31, 2016
Interest expense (11% x [$1,540,000 – 205,542])................... 146,790
Interest payable .................................................... 146,790
Depreciation expense ($1,540,000 ÷ 15 years*)............... 102,267
Accumulated depreciation..................................... 102,267
Deferred gain on sale-leaseback ($300,000 ÷ 20 years)..... 15,000
Depreciation expense ........................................... 15,000
* The helicopter is depreciated over its remaining useful life rather than the lease term because title transfers to the lessee.
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