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. Carmonaâsincremental 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.
Gowdyâs incremental borrowing rate is 10% and Reyesâs implicitborrowing rate is 8%. Gowdy is unaware of Reyesâs 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 lesseeâs 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.
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. Carmonaâsincremental 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.
Gowdyâs incremental borrowing rate is 10% and Reyesâs implicitborrowing rate is 8%. Gowdy is unaware of Reyesâs 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 lesseeâs 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.
Related questions
Kingbird Leasing Company agrees to lease machinery to OrioleCorporation on January 1, 2017. The following information relatesto the lease agreement.
| 1. | The term of the lease is 7 years with no renewal option, andthe machinery has an estimated economic life of 9 years. | |
| 2. | The cost of the machinery is $500,000, and the fair value ofthe asset on January 1, 2017, is $659,000. | |
| 3. | At the end of the lease term, the asset reverts to the lessorand has a guaranteed residual value of $103,000. Oriole depreciatesall of its equipment on a straight-line basis. | |
| 4. | The lease agreement requires equal annual rental payments,beginning on January 1, 2017. | |
| 5. | The collectibility of the lease payments is reasonablypredictable, and there are no important uncertainties surroundingthe amount of costs yet to be incurred by the lessor. | |
| 6. | Kingbird desires a 9% rate of return on its investments.Orioleâs incremental borrowing rate is 10%, and the lessorâsimplicit rate is unknown. |
(Assume the accounting period ends on December 31.)
a. Calculate the amount of the annual rental paymentrequired.
b. Compute the present value of the minimum lease payments.
c. Prepare the journal entries Oriole would make in 2017 and2018 related to the lease arrangement.
d. Prepare the journal entries Kingbird would make in 2017 and2018.
