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You are the new assistant controller for Supreme SportsPerformance and Training (SSPT), Inc. SSPT just leased a new copierfrom Zeros Corporation, and the terms of the lease are: •The leasewas signed on January 2 of the current year. •The lease cannot becancelled. •The cost and fair value of the copier is $30,325. •Thelease term is five years, which is also the useful life of thecopier, and payments of $8,000 are to be made at the end of eachyear. There is no renewal option or bargain purchase option. BothSSPT and Zeros use straight-line depreciation. •The interest rateused by Zeros to compute the payments is stated in the leaseagreement as 10%. •Residual value is unguaranteed and estimated at$2,000. •The lessee will pay executor costs of $200 per year. •Thelast time SSPT tried to get a loan, the company received a quotefor an interest rate of 18%. The company has been shaky financiallyfor the past two years and has missed some payments on loans. Therehave even been rumors that the company may not be around in acouple of years. •The copier will go back to Zeros at the end ofthe lease. As you finish looking over the copier lease, Mr. Kahn,your boss, stops by your office. "I see you're looking at thecopier lease. So, how do you think we should account for it?" heasks. "I just reviewed lease accounting before I took the CertifiedPublic Accountant (CPA) exam," you reply. "I'm sure it's a capitallease." "That can't be right!" your boss exclaims. "The agreementspecifically says that Zeros will account for the lease as anoperating lease. That means they will still show it as their asset.If we report it as a capital lease, we'll be showing it as anasset, too! You'd better go back and check. Write me a memo whenyou are sure about what we should do." Based on your analysis ofthe information provided, answer the following questions: •Howshould the lease be classified for SSPT? Why? •How will Zerosclassify the lease? Why? •Are there any journal entries needed forthe first two years for SSPT? Why or why not? If yes, what journalentries are needed? If not, why are they not needed? •How will thelease be reported in the financial statements for both SSPT andZeros?

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Bunny Greenfelder
Bunny GreenfelderLv2
28 Sep 2019

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3. (TCO D) Absolute Leasing, Inc. agrees tolease equipment to Allen, Inc. on January 1, 2012. They agree onthe followingterms:
1) The normal selling price of the equipment is $1,500,000 and thecost of the asset to Absolute Leasing, Inc. was$1,350,000.
2) At the end of the lease, the equipment will revert to AbsoluteLeasing, Inc. and have an unguaranteed residual value of $100,000.Their implicit interest rate is10%.
3) The lease is noncancelable with no renewal option. The leaseterm is 10 years (the same as the estimated economiclife).
4) Absolute Leasing, Inc. incurred costs of $9,000 in negotiatingand closing the lease. There are no uncertainties regardingadditional costs yet to be incurred and the collectability of thelease payments is reasonablypredictable.
5) The lease begins on January 1, 2012 and payments will be inequal annualinstallments.
6) Allen will pay all maintenance, insurance, and tax costsdirectly and annual payments of $140,000 on January 1 of eachyear.

Required:
a) Determine what type of lease this would be for the lessee andcalculate the initial obligation.
b) Prepare Allen, Inc.'s amortization schedule for the leaseterms.
c) Prepare all the journal entries for Allen, Inc. for 2012. Assumea calendar year fiscal year.

# Warren Co. recorded a right-of-use asset of $800,000 in a10-year Type A lease. The interest rate charged by the lessor was8%. Under the new ASU, the balance in the right-of-use asset aftertwo years will be:

#Refer to the following lease amortization schedule. The 10payments are made annually starting with the inception of thelease. Title does not transfer to the lessee and there is nobargain purchase option or guaranteed residual value. The asset hasan expected economic life of 12 years. The lease isnoncancelable.


Payment 		Cash
Payment		 Effective
Interest		 Decrease
in balance
Balance
63,282
1 10,000 10,000 53,282
2 10,000 6,394 3,606 49,676
3 10,000 5,961 4,039 45,638
4 10,000 5,477 4,523 41,114
5 10,000 4,934 5,066 36,048
6 10,000 4,326 5,674 30,373
7 10,000 3,645 6,355 24,018
8 10,000 2,882 7,118 16,901
9 10,000 ? ? ?
10 10,000 ? ? ?


What would the lessee record as annual depreciation on the assetusing the straight-line method?

#XYZ Company leased equipment to West Corporation under a leaseagreement that qualifies as a capital lease to West but not as aresult of a bargain purchase option or a title transfer. Thepresent value of the asset is $600,000. The expected economic lifeof the asset is 10 years. The lease term is five years. Using thestraight-line method, what would West record as annualdepreciation?

# If the lessee and lessor use different interest rates toaccount for a capital lease, then:

Total expenses for the lessee will be different from thelessor's total revenues.

Total expenses for the lessee will equal the lessor's totalrevenues.

GAAP has been violated by at least one party.

The lessee will report more net income for the year.

##

Technoid Inc. sells computer systems. Technoid leases computersto Lone Star Company on January 1, 2016. The manufacturing cost ofthe computers was $12 million.

This noncancelable lease had the following terms:

• Lease payments: $2,466,754 semiannually; first payment at January1, 2016; remaining payments at June 30 and December 31 each yearthrough June 30, 2020.
• Lease term: five years (10 semiannual payments).
• No residual value; no bargain purchase option.
• Economic life of equipment: five years.
• Implicit interest rate and lessee's incremental borrowing rate:5% semiannually.
• Fair value of the computers at January 1, 2016: $20million.

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

Lone Star Company would account for this as:

A capital lease.

A direct financing lease.

A sales type lease.

An operating lease.

##

Refer to the following lease amortization schedule. The 10payments are made annually starting with the inception of thelease. Title does not transfer to the lessee and there is nobargain purchase option or guaranteed residual value. The asset hasan expected economic life of 12 years. The lease isnoncancelable.


Payment 		Cash
Payment		 Effective
Interest		 Decrease
in balance
Balance
63,282
1 10,000 10,000 53,282
2 10,000 6,394 3,606 49,676
3 10,000 5,961 4,039 45,638
4 10,000 5,477 4,523 41,114
5 10,000 4,934 5,066 36,048
6 10,000 4,326 5,674 30,373
7 10,000 3,645 6,355 24,018
8 10,000 2,882 7,118 16,901
9 10,000 ? ? ?
10 10,000 ? ? ?


What would be the outstanding balance after payment 10?

## Cady Salons leased equipment from Smith Co. on January 1,2016, in a Type B lease. The present value of the lease paymentsdiscounted at 10% was $80,000. Ten annual lease payments of $12,000are due at each January 1 beginning January 1, 2016. Following theguidance of the new ASU, the amortization of the right-of-use assetfor the reporting year ending December 31, 2016, would be:

## Karla Salons leased equipment from Smith Co. on July 1, 2016,in a Type A lease. The present value of the lease paymentsdiscounted at 10% was $80,000. Ten annual lease payments of $12,000are due each year beginning July 1, 2016. Smith Co. had constructedthe equipment recently for $66,000, and its retail fair value was$80,000.

Under the new ASU, what amount of interest revenue from the leaseshould Smith Co. report in its December 31, 2016, incomestatement?

### If the leaseback portion of a sale-leaseback transaction isclassified as an operating lease:

Any gain is deferred and recognized as a reduction of rentexpense.

Any gain is deferred and recognized as a reduction ofdepreciation.

Any gain is recognized at the lease's inception.

There can be no gain.

CA21-5.

(Lessee Capitalization of Bargain-Purchase Option)

Albertsen Corporation is considering proposals for eitherleasing or purchasing aircraft. The proposed lease agreementinvolves a twin-engine turboprop Viking that has a fair value of$1,000,000. This plane would be leased for a period of 10 yearsbeginning January 1, 2017. The lease agreement is cancelable onlyupon accidental destruction of the plane. An annual lease paymentof $141,780 is due on January 1 of each year; the first payment isto be made on January 1, 2017. Maintenance operations are strictlyscheduled by the lessor, and Albertsen Corporation will pay forthese services as they are performed. Estimated annual maintenancecosts are $6,900. The lessor will pay all insurance premiums andlocal property taxes, which amount to a combined total of $4,000annually and are included in the annual lease payment of $141,780.Upon expiration of the 10-year lease, Albertsen Corporation canpurchase the Viking for $44,440. The estimated useful life of theplane is 15 years, and its salvage value in the used plane marketis estimated to be $100,000 after 10 years. The salvage valueprobably will never be less than $75,000 if the engines areoverhauled and maintained as prescribed by the manufacturer. If thepurchase option is not exercised, possession of the plane willrevert to the lessor, and there is no provision for renewing thelease agreement beyond its termination on December 31, 2026.

Albertsen Corporation can borrow $1,000,000 under a 10-year termloan agreement at an annual interest rate of 12%. The lessor'simplicit interest rate is not expressly stated in the leaseagreement, but this rate appears to be approximately 8% based on 10net rental payments of $137,780 per year and the initial fair valueof $1,000,000 for the plane. On January 1, 2017, the present valueof all net rental payments and the purchase option of $44,440 is$888,890 using the 12% interest rate. The present value of all netrental payments and the $44,440 purchase option on January 1, 2017,is $1,022,226 using the 8% interest rate implicit in the leaseagreement. The financial vice president of Albertsen Corporationhas established that this lease agreement is a capital lease asdefined in GAAP.

Instructions

(a)

What is the appropriate amount that Albertsen Corporation shouldrecognize for the leased aircraft on its balance sheet after thelease is signed?

(b)

Without prejudice to your answer in part (a), assume that theannual lease payment is $141,780 as stated in the question, thatthe appropriate capitalized amount for the leased aircraft is$1,000,000 on January 1, 2017, and that the interest rate is 9%.How will the lease be reported in the December 31, 2017, balancesheet and related income statement? (Ignore any income taximplications.)

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