This document contains 3 questions regarding accounting for leases. Question 1 involves a 4-year lease between Nano Leasing and Rock Company with a bargain purchase option. Question 2 involves a 5-year lease between Winning Leasing and B&J Furniture with a guaranteed residual value. Question 3 involves a 5-year lease between No. 1 Leasing and Maria Corporation where No. 1 incurred initial direct costs and must record the lease from the lessor's perspective. The questions require calculating lease payments, recording initial journal entries for the leases, and determining income amounts.
This document contains 3 questions regarding accounting for leases. Question 1 involves a 4-year lease between Nano Leasing and Rock Company with a bargain purchase option. Question 2 involves a 5-year lease between Winning Leasing and B&J Furniture with a guaranteed residual value. Question 3 involves a 5-year lease between No. 1 Leasing and Maria Corporation where No. 1 incurred initial direct costs and must record the lease from the lessor's perspective. The questions require calculating lease payments, recording initial journal entries for the leases, and determining income amounts.
This document contains 3 questions regarding accounting for leases. Question 1 involves a 4-year lease between Nano Leasing and Rock Company with a bargain purchase option. Question 2 involves a 5-year lease between Winning Leasing and B&J Furniture with a guaranteed residual value. Question 3 involves a 5-year lease between No. 1 Leasing and Maria Corporation where No. 1 incurred initial direct costs and must record the lease from the lessor's perspective. The questions require calculating lease payments, recording initial journal entries for the leases, and determining income amounts.
This document contains 3 questions regarding accounting for leases. Question 1 involves a 4-year lease between Nano Leasing and Rock Company with a bargain purchase option. Question 2 involves a 5-year lease between Winning Leasing and B&J Furniture with a guaranteed residual value. Question 3 involves a 5-year lease between No. 1 Leasing and Maria Corporation where No. 1 incurred initial direct costs and must record the lease from the lessor's perspective. The questions require calculating lease payments, recording initial journal entries for the leases, and determining income amounts.
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ACCT3103 - Intermediate Financial Accounting II
Assignment 3
Question 1 (Lease with bargain purchase option; lessee):
The following facts pertain to a non-cancelable lease agreement between Nano Leasing Company and Rock Company, a lessee. Inception date: January 1, 2021 The payments are to be made in advance on December 31 of each year except for the first one $7,500 Bargain-purchase option price at the end of lease term $20,000 Lease term 4 years Economic life of leased equipment 6 years Lessee’s incremental borrowing rate 6% Lessor’s implicit rate Unknown Residual value at the end of lease term $0
Required: 1. Prepare the journal entries to record the lease at the beginning of the lease term for the lessee. 2. Prepare all entries required on the books of Rock Company to record the lease on December 31, 2021, assuming Rock Company uses straight-line depreciation for all long-term assets. Question 2 (Lease with a guaranteed residual value): Winning Leasing agrees to lease equipment to B&J Furniture on January 1, 2021. The following information relates to the lease agreement.
1. The term of the lease is 5 years with no renewal option, and the machinery has an estimated economic life of 5 years. 2. The cost of the machinery is $880,000. The fair value of the asset on January 1, 2021 is $880,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $90,000. The expected residual value would be $35,000 at the end of the lease term. Jarjar uses straight-line depreciation for all long-term assets. 4. Winning’s implicit rate is 4%, and B&J’s incremental borrowing rate is 4%.
Required: 1. Calculate the amount of the annual rental payment required (assuming payments are to be made in advance). 2. Prepare the journal entries to record the lease for B&J (the lessee) for the year 2021. 3. Prepare the journal entries to record the lease for Winning (the lessor) for the year 2021. . Question 3 (Lease with initial direct costs – from lessor’s perspective) On January 1, 2020, No. 1 Leasing Company leased equipment to Maria Corporation for a 5- year period ending December 31, 2024, at which time possession of the leased equipment will revert back to No. 1 Leasing Company. The lease is noncancelable. The lease terms do not provide for transfer of legal title, do not contain a bargain purchase option, and do not require the lessee to guarantee a residual value. Initial direct costs of negotiating and consummating the completed lease transaction incurred by No. 1 Leasing Company on January 1, 2020 were $10,000. The equipment, which has expected useful life of 5 years and expected residual value of $20,000, cost No. 1 Leasing Company $250,000 to manufacture. Its normal sales price was $320,000 on January 1, 2020. Equal payments under the lease are $69,689 and are due on January 1 of each year. The first payment was made on January 1, 2020. Collectibility of the remaining lease payments is reasonably assured, and No. 1 Leasing Company has no material cost uncertainties. Maria’s incremental borrowing rate is 8%. Maria knows that the interest rate implicit in the leasing payments is 7%. Both companies use straight-line depreciation.
Required: 1. What is the nature of this lease to No. 1 Leasing Company (the lessor)? Explain. 2. Prepare the appropriate entries for No. 1 Leasing Company (the lessor) to record the lease and the lease payment at its inception. Show calculations. 3. Determine the total amount of lease-related income No. 1 Leasing Company (the lessor) will report for the year 2020.
