AC 302 WEEK 6 Willy Exercise Questions
Brief Exercise 21 Question 9
Indiana Jones Corporation enters into a 5-year lease of equipment on January 1, 2014, which requires 5 annual payments of $35,070 each, beginning January 1, 2014. In addition, Indiana Jones guarantees the lessor a residual value of $20,770 at lease-end. The equipment has a useful life of 5 years.
Prepare Indiana Jones’ January 1, 2014, journal entries assuming an interest rate of 11%. (Credit account titles are automatically indented when amount is entered. Do not indent manually. 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.)
Date Account Titles and Explanation Debit Credit
January 1, 2014
(To record the lease.)
January 1, 2014
(To record first lease payment.)
Exercise 21-1
On January 1, 2014, Burke Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Burke to make annual payments of $9,938 at the beginning of each year, starting January 1, 2014. The machine has an estimated useful life of 6 years and a $5,220 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Burke uses the straight-line method of depreciation for all of its plant assets. Burke- incremental borrowing rate is 10%, and the lessor- implicit rate is unknown.
Your answer is correct.
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.)
The present value of the minimum lease payments $
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Your answer is correct.
Prepare all necessary journal entries for Burke for this lease through January 1, 2015. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 58,971.)
Date Account Titles and Explanation Debit Credit
1/1/14
(To record the lease.)
(To record first payment.)
12/31/14
(To record depreciation.)
(To record interest.)
1/1/15
(To record second payament.)
Exercise 21-1
12/31/14 Accumulated Depreciation-Capital Leases = ($41,440 ÷ 5) = $8,288
Interest Payable = [($41,440 - $9,938) x 0.10] = $3,150
Exercise 21-3
Your answer is correct.
Assume that on January 1, 2014, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement.
1. The agreement requires equal rental payments of $72,000 beginning on January 1, 2014.
2. The fair value of the building on January 1, 2014 is $440,000.
3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of $10,000. Kimberly-Clark depreciates similar buildings on the straight-line method.
4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
5. Kimberly-Clark- incremental borrowing rate is 12% per year. The lessor- implicit rate is not known by Kimberly-Clark.
6. The yearly rental payment includes $2,471 of executory costs related to taxes on the property.
Prepare the journal entries on the lessee- books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2014 and 2015. Kimberly-Clark- corporate year-end is December 31. (Hint: Do the table for ten periods based on present value of minimum lease payments.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. 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.)
Date Account Titles and Explanation Debit Credit
1/1/14
(To record the lease.)
(To record first payment.)
12/31/14
(To record depreciation.)
(To record interest.)
1/1/15
(To record second payament.)
12/31/15
(To record depreciation.)
(To record interest.)
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Exercise 21-3
Capitalized amount of the lease:
Yearly payment $72,000
Executory costs (2,471 )
Minimum annual lease payment $69,529
Exercise 21-8
The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee.
Inception date: May 1, 2014
Annual lease payment due at the beginning of
each year, beginning with May 1, 2014 $18,945.06
Bargain-purchase option price at end of lease term $3,840.00
Lease term 5 years
Economic life of leased equipment 10 years
Lessor- cost $65,000.00
Fair value of asset at May 1, 2014 $80,000.00
Lessor- implicit rate 11 %
Lessee- incremental borrowing rate 11 %
The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.
present value factor calculations to 5 decimal places, e.g. 1.25125 and Round answers to 2 decimal places, e.g. 15.25.)
RODE COMPANY (Lessee)
Lease Amortization Schedule
Date Annual Lease Payment Plus
BPO Interest on
Liability Reduction of Lease
Liability Lease Liability
5/1/14 $
5/1/14 $
$
$
5/1/15
5/1/16
5/1/17
5/1/18
4/30/19
$
$
$
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