AC 302 WEEK 7 Willy Exercise Questions AND Problem

AC 302 WEEK 7 Exercise Questions AND Problems
Exercise 21 Question 4
 Your answer is partially correct
 	 
Castle Leasing Company signs a lease agreement on January 1, 2014, to lease electronic equipment to Jan Way Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:
1.		Jan Way has the option to purchase the equipment for $16,990 upon termination of the lease.
2.		The equipment has a cost and fair value of $153,400 to Castle Leasing Company. The useful economic life is 2 years, with a salvage value of $16,990.
3.		Jan Way Company is required to pay $4,560 each year to the lessor for executory costs.
4.		Castle Leasing Company desires to earn a return of 11% on its investment.
5.		Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.


(a) Prepare the journal entries on the books of Castle Leasing to reflect the payments received under the lease and to recognize income for the years 2014 and 2015. (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. 0.527552 and the final answers to 0 decimal places e.g. 5,275.)

(b) Assuming that Jan Way Company exercises its option to purchase the equipment on December 31, 2015, prepare the journal entry to reflect the sale on Castle- books. (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. 0.527552 and the final answers to 0 decimal places e.g. 5,275.)
 

Exercise 21-4
(a)		Computation of annual payments		
		Cost (fair value) of leased asset to lessor		$153,400
		Less: Present value of salvage value		
		        (residual value in this case)		
		         $16,990 x 0.81162 (Present value of 1 at 11% for 2 periods)		13,789
		Amount to be recovered through lease payments		$139,611
				
		Two periodic lease payments $139,611 ÷ 1.71252		$81,524

CASTLE LEASING COMPANY (Lessor)
Lease Amortization Schedule
Date		Annual Payment
Less Executory Costs		Interest on Lease
Receivable		Recovery of Lease
Receivable		Lease
Receivable
1/1/14								$153,400
12/31/14		$81,524		$16,874		$64,650		88,750
12/31/15		81,524		9,764		71,760		16,990
				$26,638				

12/31/14 Cash = ($81,524 + $4,560) = $86,084


Exercise 21-6
Crosley Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2014. The lease is for an 10-year period and requires equal annual payments of $32,308 at the beginning of each year. The first payment is received on January 1, 2014. Crosley had purchased the machine during 2013 for $161,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Crosley. Crosley set the annual rental to ensure an 9% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Crosley at the termination of the lease.
Your answer is correct. 
 	 
Compute the amount of the lease receivable. (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 amount of the lease receivable		$  



 	Your answer is correct. 
 	 
Prepare all necessary journal entries for Crosley for 2014. (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 the first lease payment.)		
12/31/14	  
  
  

	  
  
  

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Solution 
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Exercise 21-6
Interest Revenue = [($226,003 - $32,308) x 0.09] = $17,432


Exercise 21-10
Morgan Leasing Company signs an agreement on January 1, 2014, to lease equipment to Cole Company. The following information relates to this agreement.
1.		The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.
2.		The cost of the asset to the lessor is $241,500. The fair value of the asset at January 1, 2014, is $241,500.
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 $41,877, none of which is guaranteed.
4.		Cole Company assumes direct responsibility for all executory costs.
5.		The agreement requires equal annual rental payments, beginning on January 1, 2014.
6.		Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.

 	Your answer is correct. 
 	 
Assuming the lessor desires a 11% rate of return on its investment, 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.)
The amount of the annual rental payment		$  




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 	Your answer is correct. 
 	 
Prepare an amortization schedule that would be suitable for the lessor for the lease term. (Round answers to 0 decimal places e.g. 58,971.)
MORGAN LEASING COMPANY (Lessor)
Lease Amortization Schedule
Date		Annual Lease Payment Plus
URV		Interest on Lease
Receivable		Recovery of Lease
Receivable		Lease Receivable
1/1/14								$  

1/1/14		$  
	$  
	$  
	  

1/1/15		  
	  
	  
	  

1/1/16		  
	  
	  
	  

1/1/17		  
	  
	  
	  

1/1/18		  
	  
	  
	  

1/1/19		  
	  
	  
	  

12/31/19		  
	  
	  
	  

		$  
	$  
	$  
	



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 	Your answer is correct. 
 	 
Prepare all of the journal entries for the lessor for 2014 and 2015 to record the lease agreement, the receipt of lease payments, and the recognition of income. Assume the lessor- annual accounting period ends on December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date	Account Titles and Explanation	Debit	Credit
1/1/14	  
  
  

	  
  
  

	(To record the lease.)		
1/1/14	  
  
  

	  
  
  

	(To record lease payment.)		
12/31/14	  
  
  

	  
  
  

1/1/15	  
  
  

	  
  
  

	  
  
  

12/31/15	  
  
  

	  
  
  




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Problem 21-1
Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2014. The following information relates to the lease agreement.
1.		The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2.		The cost of the machinery is $508,000, and the fair value of the asset on January 1, 2014, is $781,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $133,000. Jensen depreciates all of its equipment on a straight-line basis.
4.		The lease agreement requires equal annual rental payments, beginning on January 1, 2014.
5.		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.
6.		Glaus desires a 11% rate of return on its investments. Jensen- incremental borrowing rate is 12%, and the lessor- implicit rate is unknown.

(Assume the accounting period ends on December 31.)

 	Your answer is correct. 
 	 
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.)
Annual rental payment		$  




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 	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.)
Present value of minimum lease payments		$  




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 	Your answer is partially correct. 
 	 
Prepare the journal entries Jensen would make in 2014 and 2015 related to the lease arrangement. (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 lease payment.)		
12/31/14	  
  
  

	  
  
  

	(To record depreciation.)		
	  
  
  

	  
  
  

	(To record interest.)		
1/1/15	  
  
  

	  
  
  

	  
  
  

12/31/15	  
  
  

	  
  
  

	(To record depreciation.)		
	  
  
  

	  
  
  

	(To record interest.)		



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 	Your answer is correct. 
 	 
Prepare the journal entries Glaus would make in 2014 and 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 lease payment.)		
12/31/14	  
  
  

	  
  
  

1/1/15	  
  
  

	  
  
  

	  
  
  

12/31/15	  
  
  

	  
  
  

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Problem 21-1
12/31/14		Accumulated Depreciation-Capital Leases	 = 	($760,774 - $133,000) ÷ 7	 = 	$89,682
		Interest Payable	 = 	($760,774 - $137,068) x 0.12	 = 	$74,845
 						
12/31/15		Interest Payable	 = 	[($760,774 - $137,068 - $62,223) x 0.12]	 = 	$67,378