Leases

In the last HW assignment, Mr.Speakers had issued bonds (borrowed money) in order to expand production capabilities by purchasing new equipment and a production facility. While they were busy with the bond issue, Mollena also decided that it was time for Mr.Speakers to obtain office and retail space. In addition to their other production equipment, Avelia has also requested state of the art computer equipment for her designs and a highly specialized piece of audio testing equipment - the Stanford Research Systems SR1 Audio Analyzer. As the CFO, you urge Mollena to consider leasing to meet these needs because your company has already incurred a large amount of debt and the bonds issued/to be issued contain limitations on additional bond offerings.Mr.Speakers uses straight-line depreciation for all depreciable assets and takes a full year of depreciation in the first year.

1. On 3/1/16, you enter into a lease for office space. The lease is a 5-year, non-cancellable lease with payments due on the first of each month beginning on 3/1/16. The rent is $2,000 per month. Ownership does not transfer to Mr.Speakers, there is no bargain purchase option, and no guaranteed residual value. The fair value of the office space is $600,000. All executory costs are paid by the lessor. Useful life is 30 years. Prepare all necessary entries for the lease for the year ended 12/31/2016.

2. On 3/15/2016, you received payment on account for the third, and final, pair of headphones sold to distributors in January.

3. On 6/1/16, Mr.Speakersenters into a lease for the Stanford Research SR1 Audio Analyzer. The retail price of the SR1 is $13,500, and the useful life is 10 years. The lease requires five annual payments of $3,023.44 beginning on 6/1/2016, and ownership of the SR1 transfers to Mr.Speakers at the end of the lease. There are no executory costs associated with the SR1. What is the interest rate implied in the lease?

Prepare ALL necessary journal entries for this lease for the year ending 12/31/16.

4. On 5/1/16, Mr.Speakers enters into a lease for computer equipment. Mr.Speakers leases five, 27" iMacs with 5k Retina displays, the 3.5ghz quad core chipset and advanced graphics capabilities. The iMacs retail for $2,300 apiece. The lease specifies monthly payments of $335 for two years. The lease is renewable after two years and includes a computer upgrade at that time. However, the renewal option is not considered a "bargain" nor is there a bargain purchase option. Ownership of the computers never transfers to Mr.Speakers. The lessor has an implicit interest rate of 2%, which is known to Mr.Speakers, and the computers have a useful life of five years. Mr.Speakers' incremental borrowing rate is 3%. Prepare ALL necessary journal entries for this lease for the year ending 12/31/16.

5. On 7/1/2016, Mr.Speakers enters into a lease for retail space. The leased building has a fair value of $500,000 and a useful life of 30 years. Mr.Speakers' incremental borrowing rate is 3%. The implicit rate used by the lessor is 4%. There is a bargain purchase option ($20,000) included in the lease, which is non-cancellable and ends after ten years. Lease payments occur quarterly beginning on 7/1/2016. Mr.Speakers is responsible for all executory costs, which include $1,200 of insurance and $1,500 of taxes. Insurance premiums are paid in advance on 7/1 each year. Taxes are paid on 12/31 each year.Calculate the required lease payment if the lessor wishes to recover 100% of the fair value of the building. Prepare ALL of Mr.Speakers' journal entries related to the lease for the year ended 12/31/2016.

6. Once the retail space is up and running, Mr.Speakers begins stocking and selling headphones. Using the new production facilities, Mr.Speakers spends $100,000 cash to produce 500 headphones. During the remainder of the year, they sell 492 headphones for $600 apiece, all for cash.Date both of these transactions 12/31/2016.

7. Using the information from your first homework assignment, record salaries paid to the five owners from 1/31/16 through 12/31/16. Hint: use only 1 entry dated 12/31/2016 and assume each owner worked all 52 weeks of the year.

8. On 12/30/16, Mr.Speakers declared a $10,000 dividend payable on 1/2/2017.

9. BRIEFLY describe how the asset and liability sections of Mr.Speakers' balance sheet would change if the FASB passed and implemented the exposure draft on lease accounting prior to 1/1/2016.