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BE21-1

Your answer is correct. Callaway Golf Co. leases telecommunication equipment. Assume the following data for equipment leased from Photon Company. The lease term is 5 years and requires equal rental payments of $31,000 at the beginning of each year. The equipment has a fair value at the inception of the lease of $138,000, an estimated useful life of 8 years, and no residual value. Callaway pays all executory costs directly to third parties. Photon set the annual rental to earn a rate of return of 10%, and this fact is known to Callaway. The lease does not transfer title or contain a bargain purchase option. How should Callaway classify this lease? Capital lease

BE21-2

Your answer is correct. Waterworld Company leased equipment from Costner Company. The lease term is 4 years and requires equal rental payments of $43,019 at the beginning of each year. The equipment has a fair value at the inception of the lease of $150,000, an estimated useful life of 4 years, and no salvage value. Water-world pays all executory costs directly to third parties. The appropriate interest rate is 10%. Prepare Waterworld's January 1, 2012, journal entries at the inception of the lease. Description Leased Equipment Lease Liability (To record the lease) Lease Liability Cash (To record first lease payment)

Debit $ 150000

Credit $ 150000

$ 43019 $ 43019

BE21-3

Your answer is correct. Rick Kleckner Corporation recorded a capital lease at $300,000 on January 1, 2012. The interest rate is 12%. Kleckner Corporation made the first lease payment of $53,920 on January 1, 2012. The lease requires eight annual payments. The equipment has a useful life of 8 years with no salvage value. Prepare Kleckner Corporation's December 31, 2012, adjusting entries.(Round your answer to the nearest dollar eg 58,591). Description Interest Expense Interest Payable (To record interest expense) Depreciation Expense Accumulated Depreciation (To record depreciation)

Debit $ 29529.6

Credit $ 29529.6

$ 37500 $ 37500

BE21-4 Your answer is correct. Rick Kleckner Corporation recorded a capital lease at $300,000 on January 1, 2012. The interest rate is 12%. Kleckner Corporation made the first lease payment of $53,920 on January 1, 2012. The lease requires eight annual payments. The equipment has a useful life of 8 years with no salvage value. Assume that at December 31, 2012, Kleckner made an adjusting entry to accrue interest expense of $29,530 on the lease. Prepare Kleckner's January 1, 2013 journal entry to record the second lease payment of $53,920. (For multiple debit/credit entries, list amounts from largest to smallest eg 10, 5, 3, 2. Round your answer to the nearest dollar eg 58,591.) Description Interest Payable

Debit

Credit $ 29530

Lease Liability Cash

$ 24390 $ 53920

BE21-5 Your answer is correct. Jana Kingston Corporation enters into a lease on January 1, 2012, that does not transfer ownership or contain a bargain purchase option. It covers 3 years of the equipment's 8-year useful life, and the present value of the minimum lease payments is less than 90% of the fair market value of the asset leased. Prepare Jana Kingston's journal entry to record its January 1, 2012, annual lease payment of $35,000. Description Rent Expense

Credi t

Debit $ 35000

Cash BE21-6 Your answer is correct. Assume that IBM leased equipment that was carried at a cost of $150,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2011, with equal rental payments of $30,044 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is $150,000. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred

$ 35000

by IBM. Prepare IBM's January 1, 2011, journal entries at the inception of the lease. Description Lease Receivable Equipment (To record the lease) Cash Lease Receivable (To record the first lease payment)

Debit $ 150000

Credit $ 150000

$ 30044 $

BE21-7

Your answer is correct. Assume that IBM leased equipment that was carried at a cost of $150,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2011, with equal rental payments of $30,044 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is $150,000. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM. Assume the direct-financing lease was recorded at a present value of $150,000. Prepare IBM's December 31, 2011, entry to record interest. (Round your answer to the nearest dollar eg 58,591). Description Interest Receivable Interest Revenue

Credi t

Debit $ 9596

$ 9596

BE21-8 Your answer is correct. Jennifer Brent Corporation owns equipment that cost $80,000 and has a useful life of 8 years with no salvage value. On January 1, 2012, Jennifer Brent leases the equipment to Donna Havaci Inc. for one year with one rental payment of $15,000 on January 1. Prepare Jennifer Brent Corporation's 2012 journal entries. Description Cash Rent Revenue (To record lease payment) Depreciation Expense Accumulated Depreciation (To record depreciation)

Debit

Credit $ 15000 $ $ 10000 $

BE21-9 Your answer is correct. Indiana Jones Corporation enters into a 6-year lease of equipment on January 1, 2012, which requires 6 annual payments of $40,000 each, beginning January 1, 2012. In addition, Indiana Jones guarantees the lessor a residual value of $20,000 at lease-end. The equipment has a useful life of 6 years. Prepare Indiana Jones' January 1, 2012, journal entries assuming an interest rate of 10%. (Round your answer to the nearest dollar eg 58,591). Description Leased Equipment Lease Liability

Debit $ 202921

Credit $ 202921

(To record the lease) Lease Liability Cash (To record first lease payment)

$ 40000 $ 40000

BE21-10

Your answer is correct. Indiana Jones Company enters into a 6-year lease of equipment on January 1, 2012, which requires 6 annual payments of $40,000 each, beginning January 1, 2012. In addition, the lessee guarantees a residual value of $20,000 at lease-end. The equipment has a useful life of 6 years. Assume that for Lost Ark Company, the lessor, collectibility is reasonably predictable, there are no important uncertainties concerning costs, and the carrying amount of the machinery is $202,921. Prepare Lost Ark's January 1, 2012, journal entries. Description Lease Receivable Machinery (To record the lease) Cash Lease Receivable (To record first lease payment)

Debit $ 202921

Credit $ 202921

$ 40000 $ 40000

BE21-11 Your answer is correct. Geiberger Corporation manufactures replicators. On January 1, 2012, it leased to Althaus Company a replicator that had cost $110,000 to manufacture. The lease agreement covers the 5-year useful life of the replicator and requires 5 equal annual rentals of

$40,800 each. An interest rate of 12% is implicit in the lease agreement. Collectibility of the rentals is reasonably assured, and there are no important uncertainties concerning costs. Prepare Geiberger's January 1, 2012, journal entries. (Round your answer to the nearest dollar eg 58,591). Description Lease Receivable Sales (To record the lease) Cost of Goods Sold Inventory (To record cost) Cash Lease Receivable (To record first lease payment)

Debit $ 164724

Credit $ 164724

$ 110000 $ 110000 $ 40800 $ 40800

BE21-12 Your answer is correct. On January 1, 2012, Irwin Animation sold a truck to Peete Finance for $33,000 and immediately leased it back. The truck was carried on Irwin's books at $28,000. The term of the lease is 5 years, and title transfers to Irwin at lease-end. The lease requires five equal rental payments of $8,705 at the end of each year. The appropriate rate of interest is 10%, and the truck has a useful life of 5 years with no salvage value. Prepare Irwin's 2012 journal entries. (Round your answer to the nearest dollar eg 58,591. For multiple debit/credit entries, list amounts from largest to smallest eg 10, 5, 3, 2.) Date Description Jan. 1 Cash Truck

Debit

Credit $ 33000 $ 28000

Unearned Profit on Sale-Leaseback (To record the sale ) Jan. 1 Leased Equipment Lease Liability (To record the leaseback) Dec. 31Depreciation Expense Accumulated Depreciation (To record depreciation) Dec. 31Unearned Profit on Sale-Leaseback Depreciation Expense Dec. 31Lease Liability Interest Expense Cash (To record first lease payment)

$ 5000 $ 33000 $ 33000 $ 6600 $ 6600 $ 1000 $ 1000 $ 5405 $ 3300 $ 8705

E21-8 Your answer is correct. (Lessee Entries with Bargain Purchase Option) The following facts pertain to a noncancelable lease agreement between Lennox Leasing Company and Gill Company, a lessee. Inception date: Annual lease payment due at the beginning of each year, beginning with May 1, 2012 Bargain purchase option price at end of lease term Lease term Economic life of Leased Equipment under Capital Leases Lessor's cost Fair value of asset at May 1, 2012 Lessor's implicit rate Lessee's incremental borrowing rate

May 1, 2012 $18,829.49 $4,000.00 5 years 10 years $65,000.00 $81,000.00 10% 10%

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. Instructions (a) Analyze the nature of this lease for Fill Company. Capital Lease (b) Analyze the nature of this lease for Lennox Company. Capital Lease (c) Complete lease amortization schedule for Gill Company for the 5-year lease term. (Round your answer to the nearest cent

eg 8,751.25) GILL COMPANY (Lessee) Lease Amortization Schedule Date

Annual Lease Payment Plus BPO

Interest on Liability

Reduction of Lease Liability

5/1/12

Lease Liability

$ 81000

5/1/12

$ 18829.49

$ 18829.49

62170.51

5/1/13

18829.49

$ 6217.05

12612.44

49558.07

5/1/14

18829.49

4955.81

13873.68

35684.39

5/1/15

18829.49

3568.44

15261.05

20423.34

5/1/16

18829.49

2042.33

16787.16

3636.18

4/30/17

4000

363.62

3636.38

0

$ 98147.45

$ 17147.25

$ 81000.20

(d) Prepare the journal entries on the lessee's books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2012 and 2013. Gill's annual accounting period ends on December 31. Reversing entries are used by Gill. (For multiple debit/credit entries, list amounts from largest to smallest eg 10, 5, 3, 2. Round your answer to the nearest cent eg 8,751.25) Date 5/1/12

Description Leased Equipment Lease Liability (To record lease) Lease Liability Cash (To record first payment) 12/31/12 Interest Expense Interest Payable (To record interest) Depreciation Expense Accumulated Depreciation-Capital Leases (To record depreciation) 1/1/13 Interest Payable Interest Expense (To reverse interest) 5/1/13 Lease Liability Interest Expense Cash

Debit

Credit $ 81000 $ 81000

$ 18829.49 $ 18829.49 $ 4144.70 $ 4144.70 $ 5400 $ 5400 $ 4144.70 $ 4144.70 $ 12612.44 $ 6217.05 $ 18829.49

(To record second payment) 12/31/13 Interest Expense Interest Payable (To record interest) Depreciation Expense Accumulated Depreciation-Capital Leases (To record depreciation)

$ 3303.87 $ 3303.87 $ 8100 $ 8100

E21-9 Your answer is correct. (Lessor Entries with Bargain Purchase Option) A lease agreement between Lennox Leasing Company and Gill Company is as follows: Inception date: Annual lease payment due at the beginning of each year, beginning with May 1, 2012 Bargain purchase option at end of lease term Lease term Economic life of leased equipment Lessor's cost Fair value of asset at May 1, 2012 Lessor's implicit rate Lessee's incremental borrowing rate

May 1, 2012 $18,829.49 $4,000.00 5 years 10 years $65,000.00 $81,000.00 10% 10%

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.

Instructions (Round your answer to the nearest cent eg 8,751.25) (a) Compute the amount of the lease receivable at the inception of the lease. $ 81000 (b) Complete the lease amortization schedule for Lennox Leasing Company for the 5-year lease term. (Round your answer to the nearest cent eg 8,751.25) LENNOX LEASING COMPANY (Lessor) Lease Amortization Schedule

Date

Annual Lease Payment Plus BPO

Interest on Lease Receivable

Recovery of Lease Receivable

Lease Receivable

5/1/12 $ 81000 5/1/12 $ 18829.49

$ 18829.49

62170.51

5/1/13 18829.49

$ 6217.05

12612.44

49558.07

18829.49

4955.81

13873.68

35684.39

18829.49

3568.44

15261.05

20423.34

5/1/14

5/1/15

5/1/16 18829.49

2042.33

16781.16

3636.18

4000

363.82

3636.18

0

$ 98147.45

$ 17147.45

$ 81000

4/30/17

*Rounding Difference (c) Prepare the journal entries to reflect the signing of the lease agreement and to record the receipts and income related to this lease for the years 2012, 2013, and 2014. The lessor's accounting period ends on December 31. Reversing entries are not used by Lennox. (For multiple debit/credit entries, list amounts from largest to smallest eg 10, 5, 3, 2. Round your answer to the nearest cent eg 8,751.25) Date 5/1/12

Description Lease Receivable Cost of Goods Sold Sales Inventory (To record the lease) Cash

Debit

Credit $ 81000 $ 65000 $ 81000 $ 65000 $ 18829.49 $ 18829.4 9

Lease Receivable

12/31/12

(To record lease payment) Interest Receivable Interest Revenue

$ 4144.70 $ 4144.70

5/1/13

Cash

$ 18829.49 $ 12612.4 4 $ 4144.70 $ 2072.35

Lease Receivable Interest Receivable Interest Revenue 12/31/13

Interest Receivable

$ 3303.87 $ 3303.87

Interest Revenue 5/1/14

Cash

$ 18829.49 $ 13873.6 8 $ 3303.87 $ 1651.94

Lease Receivable Interest Receivable Interest Revenue 12/31/14

Interest Receivable

$ 2378.96

Interest Revenue E21-10 Your answer is correct. (Computation of Rental; Journal Entries for Lessor) Fieval Leasing Company signs an agreement on January 1, 2012, to lease equipment to Reid

$ 2378.96

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 $343,000. The fair value of the asset at January 1, 2012, is $343,000. 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 $61,071, none of which is guaranteed. 4. Reid Company assumes direct responsibility for all executory costs. 5. The agreement requires equal annual rental payments, beginning on January 1, 2012. 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. Instructions (a) Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the annual rental payment required. (Round your answer to the nearest dollar eg 58,971.) $ 64400 (b) Complete the amortization schedule that would be suitable for the lessor for the lease term. (Round your answer to the nearest dollar eg 58,971.)

FIEVALLEASING COMPANY (Lessor)

Lease Amortization Schedule

Date

Annual Lease Payment Plus URV

Interest on Lease Receivable

Recovery of Lease Receivable

1/1/12

1/1/12 $ 64400

$ 64400

1/1/13 64400

$ 27860

36540

64400

24206

40194

64400

20186.60

44213.40

64400

15765.26

48634.74

64400

10901.79

53498.21

61071

5551

55520

$ 447471

$ 104471

$ 343000

1/1/14

1/1/15

1/1/16

1/1/17

12/31/17

Lease Receivable

(c) Prepare all of the journal entries for the lessor for 2012 and 2013 to record the lease agreement, the receipt of lease payments, and the recognition of income. Assume the lessor's annual accounting period ends on December 31. (For multiple debit/credit entries, list amounts from largest to smallest eg 10, 5, 3, 2. Round your answer to the nearest dollar eg 58,971.) Date 1/1/12

Description Lease Receivable Equipment (To record the lease) 1/1/12 Cash Lease Receivable (To record lease payment) 12/31/12 Interest Receivable Interest Revenue 1/1/13 Cash Lease Receivable Interest Receivable 12/31/13 Interest Receivable Interest Revenue

E21-11 Your answer is correct.

Debit $ 343000

$ 64400

$ 27860 $ 64400

$ 24206

Credit

(Amortization Schedule and Journal Entries for Lessee) Grady Leasing Company signs an agreement on January 1, 2012, to lease equipment to Azure Company. The following information relates to this agreement. 1. The term of the noncancelable lease is 5 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, 2012, is $90,000. 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 $7,000, none of which is guaranteed. 4. Azure Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $900 to Frontier Insurance Company for insurance and (2) $1,600 to Crawford County for property taxes. 5. The agreement requires equal annual rental payments of $20,541.11 to the lessor, beginning on January 1, 2012. 6. The lessee's incremental borrowing rate is 12%. The lessor's implicit rate is 10% and is known to the lessee. 7. Azure Company uses the straight-line depreciation method for all equipment. 8. Axure uses reversing entries when appropriate. Instruction...