Q1. Assume that IBM leased equipment that was carried at a cost of $182,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2017, with equal rental payments of $35,685 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 $182,000. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 7%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM.
Prepare IBM's January 1, 2017, journal entries at the inception of the lease.
Q2. The following facts pertain to a noncancelable lease agreement between Ayayai Leasing Company and Pina Company, a lessee.
Inception date: 1-May-2017
Annual lease payment due at the beginning of each year, beginning with May 1, 2017 - $19,199.45
Bargain-purchase option price at end of lease term - $4,000
Lease term - 5 years
Economic life of leased equipment - 10 years
Lessor's cost - $67,000
Fair value of asset at May 1, 2017 - $84,000
Lessor's implicit rate - 9%
Lessee's incremental borrowing rate - 9%
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.
Prepare a lease amortization schedule for Pina Company for the 5-year lease term. The expected residual value of the equipment at the end of 5 (10) years is $12,000 ($0).
Q3. Splish Company leases an automobile with a fair value of $11,341 from John Simon Motors, Inc., on the following terms:
1. Noncancelable term of 50 months.
2. Rental of $270 per month (at end of each month). (The present value at 1% per month is $10,583.)
3. Estimated residual value after 50 months is $1,060. (The present value at 1% per month is $645.) Splish Company guarantees the residual value of $1,060.
4. Estimated economic life of the automobile is 60 months.
5. Splish Company's incremental borrowing rate is 12% a year (1% a month). Simon's implicit rate is unknown.
What is the present value of the minimum lease payments?
Record the lease on Splish Company's books at the date of inception.
Record the first month's depreciation on Splish Company's books (assume straight-line).
Record the first month's lease payment.
Q3. On January 1, 2017, Windsor Co. leased a building to Sheridan Inc. The relevant information related to the lease is as follows.
1. The lease arrangement is for 10 years.
2. The leased building cost $4,570,000 and was purchased for cash on January 1, 2017.
3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value.
4. Lease payments are $254,500 per year and are made at the end of the year.
5. Property tax expense of $85,100 and insurance expense of $10,900 on the building were incurred by Windsor in the first year. Payment on these two items was made at the end of the year.
6. Both the lessor and the lessee are on a calendar-year basis.
(a) Prepare the journal entries that Windsor Co. should make in 2017.
(b) Prepare the journal entries that Sheridan Inc. should make in 2017.
(c) If Windsor paid $30,800 to a real estate broker on January 1, 2017, as a fee for finding the lessee, how much should Windsor Co. report as an expense for this item in 2017?
Q4. On February 20, 2017, Crane Inc. purchased a machine for $1,359,600 for the purpose of leasing it. The machine is expected to have a 10-year life, no residual value, and will be depreciated on the straight-line basis. The machine was leased to Cheyenne Company on March 1, 2017, for a 4-year period at a monthly rental of $18,800. There is no provision for the renewal of the lease or purchase of the machine by the lessee at the expiration of the lease term. Crane paid $31,200 of commissions associated with negotiating the lease in February 2017.
(a) What expense should Cheyenne Company record as a result of the facts above for the year ended December 31, 2017?
(b) What income or loss before income taxes should Crane record as a result of the facts above for the year ended December 31, 2017?
Q5. Presented below are four independent situations.
(a) On December 31, 2017, Novak Inc. sold computer equipment to Daniell Co. and immediately leased it back for 10 years. The sales price of the equipment was $521,600, its carrying amount is $398,800, and its estimated remaining economic life is 12 years. Determine the amount of deferred revenue to be reported from the sale of the computer equipment on December 31, 2017.
(b) On December 31, 2017, Splish Co. sold a machine to Cross Co. and simultaneously leased it back for one year. The sales price of the machine was $481,600, the carrying amount is $422,000, and it had an estimated remaining useful life of 14 years. The present value of the rental payments for the one year is $34,900. At December 31, 2017, how much should Splish report as deferred revenue from the sale of the machine?
(c) On January 1, 2017, Blossom Corp. sold an airplane with an estimated useful life of 10 years. At the same time, Blossom leased back the plane for 10 years. The sales price of the airplane was $499,400, the carrying amount $376,200, and the annual rental $74,357. Blossom Corp. intends to depreciate the leased asset using the sum-of-the-years'-digits depreciation method. How much gain on the sale should be reported at the end of 2017 in the financial statements?
(d) On January 1, 2017, Blue Co. sold equipment with an estimated useful life of 5 years. At the same time, Blue leased back the equipment for 2 years under a lease classified as an operating lease. The sales price (fair value) of the equipment was $211,600, the carrying amount is $298,700, the monthly rental under the lease is $6,000, and the present value of the rental payments is $115,502. For the year ended December 31, 2017, determine which items would be reported on its income statement for the sale-leaseback transaction.
Attachment:- Assignment.rar