Question Details

ACCT 557
WEEK 4
(TCO D) With a capital lease, the cost of the asset to be recorded is equal to
Student Answer: the present value of the fair value of asset or minimum lease payments,
whichever is less.
the lessor- asset book carrying value.
the present value of minimum lease payments.
the present value of unguaranteed residual value and present value of
minimum lease payments.
Instructor Explanation: See Chapter 21.
Points Received: 5 of 5
Comments:
2. Question : (TCO D) Advantage(s) of leasing versus buying equipment is (are)
Student Answer: 100% financing at fixed rates.
off-balance-sheet financing.
less costly financing.
All of the above
Instructor Explanation: See Chapter 21.
Points Received: 5 of 5
Comments:
3. Question : (TCO D) Pirate, Inc. leased equipment from Shoreline Enterprises under a fouryear
lease requiring equal annual payments of $180,000, with the first payment
due at lease inception. The lease does not transfer ownership, nor is there a
bargain purchase option. The equipment has a 4-year useful life and no salvage
value. Pirate, Inc.- incremental borrowing rate is 10% and the rate implicit in the
lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly
classified as a capital lease, what is the amount of interest expense recorded by
Pirate, Inc. in the first year of the asset- life?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.5771 3.31213
10%, 4 periods 3.48685 3.16986
Student Answer: $37,110
$47,695
$0
$51,510
Instructor Explanation: See Chapter 21. ((180000 * 3.5771) - 180000) * 0.08
Points Received: 5 of 5
Comments:
4. Question : (TCO D) On January 2, 2013, Bentley Co. leases equipment from Harry's
Leasing Company with five equal annual payments of $240000 each, payable
beginning December 31, 2013. Bentley Co. agrees to guarantee the $20000
residual value of the asset at the end of the lease term. Bentley- incremental
borrowing rate is 10%, however it knows that Harry- implicit interest rate is 8%.
What journal entry would Harry's Leasing Company make at January 2, 2013
assuming this is a direct-financing lease?
PV Annuity Due PV Ordinary Annuity PV Single
Sum
8%, 5 periods 4.31213 3.99271
0.68508
10%, 5 periods 4.16986 3.79079
0.62092
Student Answer: Lease Receivable $971,952
Equipment $971,952
Lease Receivable $922,208
Equipment $922,208
Lease Receivable $1,220,000
Equipment $1,220,000
Lease Receivable $958,250
Loss $261,750
Equipment $1,220,000
Instructor Explanation: See Chapter 21. (240000 * 3.99271) + (20000 * 0.68508)
(TCO D) Lease A does not transfer ownership of the property to the lessee by
the end of the lease term, but the lease term is equal to 75% of the estimated
economic life of the leased property. Lease B does not contain a bargain
purchase option, but the lease term is equal to 90% of the estimated economic
life of the leased property. How should the lessee classify these leases?
Student Answer: (Lease A) Capital lease (Lease B) Capital lease
(Lease A) Operating lease (Lease B) Operating lease
(Lease A) Operating lease (Lease B) Capital lease
(Lease A) Capital lease (Lease B) Operating lease
(TCO D) Carl Leasing, Inc. agrees to lease medical equipment to Sally, Inc. on
January 1, 2012. They agree on the following terms.
1) The normal selling price of the medical equipment is $410,000 and the cost of
the asset to Carl Leasing, Inc. was $255,000.
2) Sally, Inc. will pay all maintenance, insurance, and tax costs directly and
annual payments of $55,000 on January 1 each year.
3) The lease begins on January 1, 2012 and payments will be in equal annual
installments.
4) The lease is noncancelable with no renewal option. The lease term is 10
years (the same as the estimated economic life).
5) At the end of the lease, the medical equipment will revert to Carl Leasing, Inc.
and have an unguaranteed residual value of $35,000. Their implicit interest rate
is 10%.
6) Carl Leasing, Inc. incurred costs of $4,600 in negotiating and closing the
lease. There are no uncertainties regarding additional costs yet to be incurred
and the collectability of the lease payments is reasonably predictable.
Required:
a) Determine what type of lease this would be for the lessee and calculate the
initial obligation.
b) Prepare Sally, Inc.'s amortization schedule for the lease terms.
c) Prepare all the journal