Exercises

Exercise 15-1

Operating Lease

LO15-4

Text: E 15-1

On January 1, 2013, Gothic Corporation, an internet training firm, leased several computers from 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.

Required:

Prepare the appropriate entries for both (a) the lessee and (b) the lessor from the inception of the lease through the end of 2013. (Use straight-line depreciation.)

Exercise 15-2

Capital lease; lessee

LO15-5

Text: E 15-3

[Note: Exercises 2, 3, and 4 are three variations of the same basic situation.]

Manufacturers Eastern leased high-tech electronic equipment from Franklin Leasing on January 1, 2013. Franklin purchased the equipment from National Machines at a cost of $107,866.

Related information:

Lease term3 years (12 quarterly periods)

Quarterly rental payments$10,000 - beginning of each period

Economic life of asset3 years

Fair value of asset$107,866

Implicit interest rate8%

(Also lessee’s incremental borrowing rate)

Required:

Prepare a lease amortization schedule and appropriate entries for Manufacturers Eastern from the inception of the lease through January 1, 2012. Depreciation is recorded at the end of each fiscal year (December 31) on a straight-line basis.

Exercise 15-3

Direct financing lease; lessor

LO15-5

Text: E 15-4

[Note: Exercises 2, 3, and 4 are three variations of the same basic situation.]

Franklin Leasing leased high-tech electronic equipment to Manufacturers Eastern on January 1, 2013. Franklin purchased the equipment from National Machines at a cost of $107,866.

Related information:

Lease term3 years (12 quarterly periods)

Quarterly rental payments$10,000 - beginning of each period

Economic life of asset3 years

Fair value of asset$107,866

Implicit interest rate8%

(Also lessee’s incremental borrowing rate)

Required:

Prepare a lease amortization schedule and appropriate entries for Franklin Leasing from the inception of the lease through January 1, 2012. Franklin’s fiscal year ends December 31.

Exercise 15-4

Sales-type lease; lessor

LO15-6

Text: E 15-5

[Note: Exercises 2, 3, and 4 are three variations of the same basic situation.]

Manufacturers Eastern leased high-tech electronic equipment from National Machines on January 1, 2013. National Machines manufactured the equipment at a cost of $90,000.

Related information:

Lease term3 years (12 quarterly periods)

Quarterly rental payments$10,000 - beginning of each period

Economic life of asset3 years

Fair value of asset$107,866

Implicit interest rate8%

(Also lessee’s incremental borrowing rate)

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, 2013, and the second rental payment on April 1, 2013.

Exercise 15-5

Sale-leaseback; capital lease

LO15-10

Text: E 15-25

To raise operating funds, WSMM Broadcasting sold a helicopter used in news reports on January 1, 2013, to a finance company for $1,540,000. WSMM immediately leased the helicopter back for a 13-year period, at which time ownership of the helicopter will transfer to WSMM. The helicopter has a fair value of $1,600,000. Its cost and its carrying 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%.

Required:

Prepare the appropriate entries for WSMM on (a) January 1, 2013, to record the sale-leaseback and (b) December 31, 2013, to record necessary adjustments.

Problems

Problem 15-1

Direct financing and sales-type lease; lessee and lessor

LO15-3 LO15-5 LO15-6

Text: P 15-3

Tech-Knowledgies develops and manufactures voice recognition hardware. Star Leasing purchased a voice recognition hardware from Tech-Knowledgies for $500,000 and leased it to Pal Learning Systems on January 1, 2013.

Lease description:

Quarterly rental payments$32,629 - beginning of each period

Lease term5 years (20 quarters)

No residual value; no BPO

Economic life of lithotripter 5 years

Implicit interest rate and

lessee’s incremental

borrowing rate12%

Fair value of asset$500,000

Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred.

Required:

1.How should this lease be classified by Pal Learning Systems and by Star Leasing?

2.Prepare appropriate entries for both Pal Learning Systems and Star Leasing from the inception of the lease through the second rental payment on April 1, 2013. Depreciation is recorded at the end of each fiscal year (December 31).

  1. Assume Pal Learning Systems leased the hardware directly from the manufacturer, Tech-Knowledgies, which produced the machine at a cost of $450,000. Prepare appropriate entries for Tech-Knowledgies from the inception of the lease through the second rental payment on April 1, 2013.

Problem 15-2

Guaranteed residual value; direct financing lease

LO15-3 LO15-5 LO15-8

Text: P 15-8

On December 31, 2013, HHH Corp. leased equipment to Blair Co. for a 4-year period ending December 31, 2017, at which time possession of the leased asset will revert back to HHH Corp. The equipment cost HHH Corp. $1,097,280 and has an expected useful life of 6 years. Its normal sales price is $1,097,280. The lessee-guaranteed residual value at December 31, 2017, is $75,000. Equal payments under the lease are $300,000 and are due on December 31 of each year. The first payment was made on December 31, 2013. Collectibility of the remaining lease payments is reasonably assured, and HHH Corp. has no material cost uncertainties. Blair’s incremental borrowing rate is 12%. Blair knows the interest rate implicit in the lease payments is 10%. Both companies use straight-line depreciation.

Required:

1.Show how HHH Corp. calculated the $300,000 annual rental payments.

2.How should this lease be classified (a) by Blair Co. (the lessee) and (b) by HHH Corp. (the lessor)? Why?

3.Prepare the appropriate entries for both Blair Co. and HHH Corp. on December 31, 2013.

4.Prepare an amortization schedule(s) that describes the pattern of interest over the lease term for the lessee and the lessor.

5.Prepare all appropriate entries for both Blair and HHH Corp. on December 31, 2014 (the second rent payment and depreciation).

6.Prepare the appropriate entries for both Blair and HHH Corp. on December 31, 2017 (the end of the lease), assuming the equipment is returned to HHH Corp. and the actual residual value on that date is $4,500.

Respond to this problem with the presumption that the guidance provided by the new Accounting Standards Update is being applied.

Problem 15-3

Lessee and lessor

Addendum

Text: P 15-23

The Pastner Sporting Goods leased equipment from Walton Industries on January 1, 2013. Walton Industries had manufactured the equipment at a cost of $400,000. Its cash selling price and fair value is $500,000.

Other information:

Lease term 4 years

Annual payments $139,778 beginning Jan.1, 2013, and at Dec. 31, 2013, 2014, and 2015

Life of asset 4 years

Rate the lessor charges 8%

Required:

1.Prepare the appropriate entries for Pastner Sporting Goods (Lessee) on January 1, 2013 and December 31, 2013. Round to nearest dollar.

2.Prepare the appropriate entries for Walton Industries (Lessor) on January 1, 2013 and December 31, 2013. Round to nearest dollar.

© The McGraw-Hill Companies, Inc., 2013

Alternate Exercises and Problems15-1 13-1