Charles Corporation has just signed a 144-month lease on a new equipment with a 15 year life. The minimum lease payments are $5,800 per month and are to be discounted back to the present at a 7.0 percent annual discount rate (which you must convert to a monthly rate to do the calculations on your Texas Instruments BAII Plus calculator). The estimated fair value of the equipment is $575,000. The Lessee does not have a bargain purchase option or any stated transfer of ownership at the end of the lease period.
a. Calculate the lease period as a percentage to the estimated life of the leased equipment.
b. Calculate the present value of lease payments as a percentage to the fair value of the equipment.
c. Should the lease be recorded as a capital lease or an operating lease? Address all 4 criteria from the text on page 523 to answer this question.
Charles Corporation has just signed a 144-month lease on a new equipment with a 15 year life. The minimum lease payments are $5,800 per month and are to be discounted back to the present at a 7.0 percent annual discount rate (which you must convert to a monthly rate to do the calculations on your Texas Instruments BAII Plus calculator). The estimated fair value of the equipment is $575,000. The Lessee does not have a bargain purchase option or any stated transfer of ownership at the end of the lease period.
a. Calculate the lease period as a percentage to the estimated life of the leased equipment.
b. Calculate the present value of lease payments as a percentage to the fair value of the equipment.
c. Should the lease be recorded as a capital lease or an operating lease? Address all 4 criteria from the text on page 523 to answer this question.
Related questions
| The Deluxe Corporation has just signed a 168-month lease on an asset with a 19-year life. The minimum lease payments are $2,400 per month ($28,800 per year) and are to be discounted back to the present at a 10 percent annual discount rate. The estimated fair value of the property is $220,000. Use Appendix D http://lectures.mhhe.com/connect/0077861612/Appendix_D.jpg for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume the lease is set up as an annual lease. |
| a. | Calculate the lease period as a percentage to the estimated life of the leased property. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) |
| Lease period percentage | % |
| b. | Calculate the present value of lease payments as a percentage to the fair value of the property. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) |
| PV of lease payment percentage | % |
| c. | Should the lease be recorded as a capital lease or an operating lease? (Use criteria 3 and 4 for a capital lease.) | ||||
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| I will rate asap...Thank you in advance The Deluxe Corporation has just signed a 132-month lease on an asset with a 16-year life. The minimum lease payments are $3,200 per month ($38,400 per year) and are to be discounted back to the present at a 10 percent annual discount rate. The estimated fair value of the property is $260,000. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume the lease is set up as an annual lease. |
| a. | Calculate the lease period as a percentage to the estimated life of the leased property. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) |
| Lease period percentage | % |
| b. | Calculate the present value of lease payments as a percentage to the fair value of the property. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) |
| PV of lease payment percentage | % |
| c. | Should the lease be recorded as a capital lease or an operating lease? (Use criteria 3 and 4 for a capital lease.) | ||||
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Problem 15-16 Lessee-guaranteed residual value; third-party guaranteed residual value; unguaranteed residual value; executory costs; different interest rates for lessor and lessee [LO15-3, 15-5, 15-8, 15-9]
| On December 31, 2013, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid $35,000 for the truck. Its retail value is $59,816. |
| The lease agreement specified annual payments of $17,000 beginning December 31, 2013, the inception of the lease, and at each December 31 through 2016. Branch Motorsâ interest rate for determining payments was 10%. At the end of the four-year lease term (December 31, 2017) the truck was expected to be worth $11,000. The estimated useful life of the truck is five years with no salvage value. Both companies use straight-line depreciation. |
| Yard Art guaranteed a residual value of $4,000. Guarantor Assurance Corporation was engaged to guarantee a residual value of $7,000, but with a deductible equal to any amount paid by the lessee ($7,000 reduced by any amount paid by the lessee). Yard Artâs incremental borrowing rate is 9%. |
| A $2,000 per year maintenance agreement was arranged for the truck with an outside service firm. As an expediency, Branch Motors agreed to pay this fee. It is, however, reflected in the $17,000 lease payments. |
| Collectibility of the lease payments by Yard Art is reasonably predictable and there are no costs to the lessor that are yet to be incurred. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) |
| Required: |
| 1. | How should this lease be classified by Yard Art Landscaping (the lessee)? | ||||||||
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| 2. | Calculate the amount Yard Art Landscaping would record as a leased asset and a lease liability.(Round your intermediate calculations to the nearest dollar amount.) |
| 3. | How should this lease be classified by Branch Motors (the lessor)? |
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| 4. | Show how Branch Motors calculated the $17,000 annual lease payments. |
| 5. | Calculate the amount Branch Motors would record as sales revenue. (Round your intermediate calculations to the nearest dollar amount.) |
| 6. | Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) |
| 7. | Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Yard Art. |
| 8. | Prepare an amortization schedule that describes the pattern of interest revenue over the lease term for Branch Motors. |
| 9. | Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2014. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest dollar amount. Enter your answers in whole dollars.) |
| 10. | Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2016 (the final lease payment). (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest dollar amount. Enter your answers in whole dollars.) |
| 11. | Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2017 (the end of the lease term), assuming the truck is returned to the lessor and the actual residual value of the truck was $2,000 on that date. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest dollar amount. Enter your answers in whole dollars.) |
