Frontier Inc. enters into an eight-year lease contract to lease equipment with a useful life of eight years. Annual lease payments are due with the first payment made immediately on January 1, the commenceme of the lease. No residual value is expected or guaranteed for the underlying equipment. Lease payments consist of (a) fixed lease payment of $33,000, (b) insurance on the equipment of $1,000, and (c) maintenan on the equipment of $1,200. Frontier Inc. also paid legal fees of $850 related to the execution of the lease January 1. Prepare Frontier's three journal entries at the commencement of the finance lease to record (1) lease asset and liability, (2) lease payment, and (3) maintenance cost, assuming an implicit interest rate of 6%, known b Frontier. Note: Round your answers to the nearest whole dollar. Date Account Name 1) Jan. 1 Right-of-Use Asset Lease Liability Cash To record lease asset and liability 2) Jan. 1 Lease Liability Cash Dr. Cr. 238,940 0x 0 935 x 0 35,200 x v 34.000 0✔ v 0 34,000 ✔ To record cash lease payment 3) Jan. 1 Prepaid Maintenance Expense Cash To record cash maintenance payment 1,200 0✓ 0 1,200

Frontier Inc. enters into an eight-year lease contract to lease equipment with a useful life of eight years. Annual lease payments are due with the first payment made immediately on January 1, the commenceme of the lease. No residual value is expected or guaranteed for the underlying equipment. Lease payments consist of (a) fixed lease payment of $33,000, (b) insurance on the equipment of $1,000, and (c) maintenan on the equipment of $1,200. Frontier Inc. also paid legal fees of $850 related to the execution of the lease January 1. Prepare Frontier's three journal entries at the commencement of the finance lease to record (1) lease asset and liability, (2) lease payment, and (3) maintenance cost, assuming an implicit interest rate of 6%, known b Frontier. Note: Round your answers to the nearest whole dollar. Date Account Name 1) Jan. 1 Right-of-Use Asset Lease Liability Cash To record lease asset and liability 2) Jan. 1 Lease Liability Cash Dr. Cr. 238,940 0x 0 935 x 0 35,200 x v 34.000 0✔ v 0 34,000 ✔ To record cash lease payment 3) Jan. 1 Prepaid Maintenance Expense Cash To record cash maintenance payment 1,200 0✓ 0 1,200

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 2E: Lessee Accounting with Payments Made at Beginning of Year Adden Company signs a lease agreement...

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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).
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.
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.
Sales-Type Lease with Unguaranteed Residual Value Lessor Company and Lessee Company enter into a 5-year, noncancelable, sales-type lease on January 1, 2019, for equipment that cost Lessor 375,000 (useful life is 5 years). The fair value of the equipment is 400,000. Lessor expects a 12% return on the cost of the asset over the 5-year period of the lease. The equipment will have an estimated unguaranteed residual value of 20,000 at the end of the fifth year of the lease. The lease provisions require 5 equal annual amounts, payable each January 1, beginning with January 1, 2019. Lessee pays all executory costs directly to a third party. The equipment reverts to the lessor at the termination of the lease. Assume there are no initial direct costs, and the lessor expects to be able to collect all lease payments. Required: 1. Show how Lessor should compute the annual rental amounts. 2. Prepare a table summarizing the lease and interest receipts that would be suitable for Lessor. 3. Prepare a table showing the accretion of the unguaranteed residual asset. 4. Prepare the journal entries for Lessor for the years 2019, 2020, and 2021.
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. Assume that Garvey is required to make payments on December 31 each year.
Lessee Accounting with Payments Made at Beginning of Year Adden Company signs a lease agreement dated January 1, 2019, that provides for it to lease non-specialized heavy equipment from Scott Rental Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows: 1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of 20,000 to be paid in advance at the beginning of each year. 2. The cost, and also fair value, of the heavy equipment to Scott at the inception of the lease is 68,036.62. The equipment has an estimated life of 4 years and has a zero estimated residual value at the end of this time. 3. Adden agrees to pay all executory costs directly to a third party. 4. The lease contains no renewal or bargain purchase options. 5. Scotts interest rate implicit in the lease is 12%. Adden is aware of this rate, which is equal to its borrowing rate. 6. Adden uses the straight-line method to record depreciation on similar equipment. 7. Executory costs paid at the end of the year by Adden are: Required: 1. Next Level Determine what type of lease this is for Adden. 2. Prepare a table summarizing the lease payments and interest expense for Adden. 3. Prepare journal entries for Adden for the years 2019 and 2020.
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?
Use the information in RE20-1. Prepare the journal entry that Keller Corporation would make during the first year of the lease assuming that the lease is classified as an operating 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.
The following information relates to Wilson, Inc.’s equipment lease with an inception date of January 1: Fair value of equipment at lease inception, $91,200 Lease term, 4 years Economic life of property, 5 years Implicit interest rate, 6% Annual lease payment due on December 31, $25,600 Present value of the lease payments, $88,707 The equipment reverts back to the lessor at the end of the lease term. How much is interest expense on the lease for the first year? Select one: a. $5,472 b. $2,736 c. $5,322 d. $1,331
The following relate to an operating lease agreement: The lease term is 3 years, beginning January 1, 2021. The leased asset cost the lessor $950,000 and had a useful life of eight years with no residual value. The lessor uses straight-line depreciation for its depreciable assets. Annual lease payments at the beginning of each year were $138,500. Incremental costs of negotiating and consummating the completed lease transaction incurred by the lessor were $4,650. Required:Prepare the appropriate entries for the lessor from the beginning of the lease through the end of the lease term
The following information relates to Wilson, Inc.’s equipment lease with an inception date of January 1: Fair value of equipment at lease inception, $91,200 Lease term, 4 years Economic life of property, 5 years Implicit interest rate, 6% Annual lease payment due on December 31, $25,600 Present value of the lease payments, $88,707 The equipment reverts back to the lessor at the end of the lease term. By how much does the lease liability decrease during the first year? Select one: a. $20,128 b. $25,600 c. $20,278 d. $5,322 PreviousSave AnswersFinish attempt ...