Log in
Accounting
1
answer
0
watching
165
views

Trost Leasing Company buys equipment for leasing to variousmanufacturing companies. On October 1, 2007, Trost leases a pressto Shumway Shoe Company. The cost of the machine to Trost was$196,110, which approximated its fair market value on the leasedate. The lease payments stipulated in the lease are $33,000 peryear in advance for the 10-year period of the lease. The paymentsinclude executory costs of $3,000 per year. The expected economiclife of the equipment is also 10 years. The title to the equipmentremains in the hands of Trost Leasing Company at the end of thelease term, although only nominal residual value is expected atthat time. Shumway’s incremental borrowing rate is 10%, and ituses the straight-line method of depreciation on all ownedequipment. Both Shumway and Trost have fiscal years endingSeptember 30, and lease payments are made on this date.Instructions: 1. Prepare the entries to record the lease and thefirst lease payment on the books of the lessor and lessee, assumingthe lease meets the criteria of a direct financing lease for thelessor and a capital lease for the lessee. 2. Compute the implicitrate of interest of the lessor. 3. Give all entries required toaccount for the lease on both the lessee and lessor's books for thefiscal years 2008, 2009, and 2010.

Watch
1
answer
0
watching
165
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Jarrod Robel
Jarrod RobelLv2
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

On January 1, 2016, Feldman Company enters into a noncancelable lease, with no renewal option, to lease a new piece of equipment from Cordova Leasing Company. The lease term is for three years and the lease payments are made on December 31 of each year.

The equipment cost Cordova $250,000, it has a fair value of $300,000 and a useful life of 10 years with no residual value. The equipment reverts to Cordova upon termination of the lease. Feldman guarantees a $100,000 residual value at the end of the lease term.

Feldman Company depreciates all machinery it owns on a straight-line basis. Feldman’s incremental borrowing rate is 8 percent per year and Feldman Company does not have knowledge of the 5 percent implicit rate used by Cordova.

Collectability of the future lease payments is reasonably predictable, and no additional costs related to the lease are expected.

Required:

1.Determine the annual lease payments, as set by the lessor.

2.Determine the amount of the minimum lease payments that will be capitalized by the lessee.

3.What type of lease is this to Feldman Company? Be specific in justifying your answer.

4.What type of lease is this to Cordova Company? Be specific in justifying your answer.

5.Prepare any necessary journal entries on January 1, 2016, for both parties.

6.Prepare any necessary journal entries on December 31, 2105 for both parties.

7.What is the amount of depreciation expense that will be recognized by the lessee? Be sure to show all calculations

Exercise 15-19 Executory costs; lessor and lessee [LO15-5, 15-6,15-8, 15-9]

On January 1, 2013, NRC Credit Corporation leased equipment toBrand Services under a direct financing lease designed to earn NRCa 12% rate of return for providing long-term financing. The leaseagreement specified:

a.

Ten annual payments of $55,000 (including executory costs)beginning January 1, 2013, the inception of the lease and eachDecember 31 thereafter through 2021.
b.

The estimated useful life of the leased equipment is 10 yearswith no residual value. Its cost to NRC was $316,412.
c.

The lease qualifies as a capital lease to Brand.
d.

A 10-year service agreement with Quality Maintenance Company wasnegotiated to provide maintenance of the equipment as required.Payments of $5,000 per year are specified, beginning January 1,2013. NRC was to pay this executory cost as incurred, but leasepayments reflect this expenditure.
e.

A partial amortization schedule, appropriate for both the lesseeand lessor, follows:
Payments Effective
Interest		 Decreasein
Balance		 Outstanding
Balance
(12% × Outstanding balance)
316,412
1/1/13 50,000 50,000 266,412
12/31/13 50,000 .12 (266,412)= 31,969 18,031 248,381
12/31/14 50,000 .12 (248,381)= 29,806 20,194 228,187

Required:

Prepare the appropriate entries for both the lessee and lessorto record:

1.

The lease at its inception. (If no entry is required fora particular transaction, select "No journal entry required" in thefirst account field. Enter your answers in wholedollars.)

1.

Record lease by lessee.

2.

Record the cash payment.

3.

Record lease by lessor.

4.

Record the cash received.

​2. the second lease payment and depreication straight line

1. record the cash payment
2. record depreciation
3. record cash received by lessor

Problem 1:

On January 1, 2016, Carmona Company enters into a noncancelablelease, with no renewal option, to lease a new piece of equipmentfrom Jackson Leasing Company. The lease term is for three years andthe lease payments are made on December 31 of each year.

The equipment cost Jackson $250,000, it has a fair value of$300,000 and a useful life of four years with no residual value.The equipment reverts to Jackson upon termination of the lease.Carmona guarantees a $100,000 residual value at the end of thelease term.

Both Carmona Company and Jackson Company depreciate allmachinery that they own on a straight-line basis. Carmona’sincremental borrowing rate is 8 percent per year and CarmonaCompany does not have knowledge of the 5 percent implicit rate usedby Jackson.

Collectability of the future lease payments is reasonablypredictable, and no additional costs related to the lease areexpected.

Required:

Determine the annual lease payments, as set by the lessor.

2.Determine the amount of the minimum lease paymentsthat will be capitalized by the lessee.

What type of lease is this to Carmona Company? Be specific injustifying your answer.

What type of lease is this to Jackson Company? Be specific injustifying your answer.

Prepare any necessary journal entries on January 1, 2016, forboth parties.

Prepare any necessary journal entries on December 31, 2106 forboth parties.

Which party will depreciate the asset? What is the amount ofdepreciation expense that will be recognized by that party? Be sureto show all calculations.

How would your answer change if the residual value wereunguaranteed? (You just need to provide a narrative explanation ofits impact on both parties. I am not looking forcalculations with the new assumptions).

Problem 2

On January 1, 2016, Gowdy Company entered into an agreement tolease a piece of machinery from Reyes Corporation for four years.The machinery had a cost and fair value of $800,000 and a usefullife of seven years. The lease called for annual rental payments onDecember 31 of each year, starting on December 31, 2016. At the endof the lease term, Gowdy has the option to purchase the equipmentfor $30,000, which is significantly less than what the fair marketvalue of the equipment will be at that time.

Gowdy’s incremental borrowing rate is 10% and Reyes’s implicitborrowing rate is 8%. Gowdy is unaware of Reyes’s implicitrate.

Collectability of the future lease payments is reasonablypredictable, and no additional costs related to the lease areexpected.

Required:

What type of lease is this for Reyes? (Be specific and providejustification)

What type of lease is this for Gowdy?

Determine the annual lease payments, as set by ReyesCorporation.

Determine the minimum lease payments, as calculated byGowdy.

Prepare the entry on the date of the lease inception for boththe lessee and lessor.

Prepare the lessee’s amortization schedule for the term of thelease.

Prepare the entry for the first interest payment for both thelessee and lessor.

Prepare the entry to record depreciation expense for the assetfor the year 2017, assuming that Gowdy uses the straight-linemethod.

Complete parts 3-6, assuming that the lease payments are madeeach January 1, starting on January 1, 2016 instead of on December31st of each year.

Weekly leaderboard

Home
Homework Help 3,900,000
Accounting 580,000
Start filling in the gaps now
Log in