Gerbil Leasing Company agrees to lease equipment to Playa Corporation on January 1, 2014. The following information relates to the lease agreement.
- The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
- The cost of the machinery is $525,000, and the fair value of the asset on January 1, 2014, is $700,000.
- At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $50,000. Joseph estimates that the expected residual value at the end of the lease term will be $50,000. Playa amortizes all of its leased equipment on a straight-line basis.
- The lease agreement requires equal annual rental payments, beginning on January 1, 2014.
- The collectibility of the lease payments is probable.
- The lessor's implicit rate is unknown.
REQUIRED: Please show the calculation(s)/discussion of the test you use to answer the following questions:
1) What type of lease is this for the lessee?
2) What type of lease is this for the lessor?
Gerbil Leasing Company agrees to lease equipment to Playa Corporation on January 1, 2014. The following information relates to the lease agreement.
- The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
- The cost of the machinery is $525,000, and the fair value of the asset on January 1, 2014, is $700,000.
- At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $50,000. Joseph estimates that the expected residual value at the end of the lease term will be $50,000. Playa amortizes all of its leased equipment on a straight-line basis.
- The lease agreement requires equal annual rental payments, beginning on January 1, 2014.
- The collectibility of the lease payments is probable.
- The lessor's implicit rate is unknown.
REQUIRED: Please show the calculation(s)/discussion of the test you use to answer the following questions:
1) What type of lease is this for the lessee?
2) What type of lease is this for the lessor?
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.
| Red Leasing Company agrees to lease machinery to Fisher Corporation on January 1, 2017. The following information relates to the lease agreement. | ||||||||||||||||||||
| The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. | ||||||||||||||||||||
| The cost of the machinery is $473,000, and the fair value of the asset on January 1, 2017, is $746,000. | ||||||||||||||||||||
| At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $91,000. Fisher depreciates all of its equipment on a straight-line basis. | ||||||||||||||||||||
| The lease agreement requires equal annual rental payments, beginning on January 1, 2017. | ||||||||||||||||||||
| The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. | ||||||||||||||||||||
| Red desires a 10% rate of return on its investments. Fisherâs incremental borrowing rate is 11%, and the lessorâs implicit rate is unknown. | ||||||||||||||||||||
| (Assume the accounting period ends on December 31.) | ||||||||||||||||||||
| 1. Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.) | ||||||||||||||||||||
| 2. Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.) | ||||||||||||||||||||
Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Bramble Company. The following information relates to this agreement.
| 1. | The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years. | |
| 2. | The fair value of the asset at January 1, 2017, is $55,000. | |
| 3. | The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $3,000, none of which is guaranteed. | |
| 4. | The agreement requires equal annual rental payments of $18,133 to the lessor, beginning on January 1, 2017. | |
| 5. | The lesseeâs incremental borrowing rate is 5%. The lessorâs implicit rate is 4% and is unknown to the lessee. | |
| 6. | Bramble uses the straight-line depreciation method for all equipment. |
Assume that the expected residual value at the end of the lease is $8,000, such that the payments are $16,593.
Prepare all of the journal entries for the lessee for 2017 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lesseeâs annual accounting period ends on December 31
