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Chapter 10: Q18DQ (page 473)

Question: When can a lease create both an asset and a liability for the lessee?

Short Answer

Expert verified

Answer

A lessee records a lease property as both assets and liability in case of a capital lease.

Step by step solution

01

Meaning of Lease

A contractual agreement between the two parties is the lessor and the lessee that the lessor or the asset owner provides a right to use his asset for a particular period by paying the cash, i.e., the rent is termed lease.

02

Explanation regarding the lease that creates both asset and liability for the lessee

In the case of acapital lease, therisks and rewards related to the ownership of assets aretransferred from the lessor to the lessee, so the lessee records this leased property as assets and the lease liability in his books of accounts at the time when the lease contract starts.

Generally, this lease liability is recorded as a long-term liability, and the particular portion of rent that needs to be paid in the next year is recorded as a current liability.

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Most popular questions from this chapter

Ike issues \(180,000 of 11%, three-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. They are issued at \)184,566. Their market rate is 10% at the issue date.

Required

  1. Prepare the January 1, 2017, journal entry to record the bonds’ issuance.
  2. Determine the total bond interest expense to be recognized over the bonds’ life.
  3. Prepare an effective interest amortization table like Exhibit 10B.2 for the bonds’ first two years.
  4. Prepare the journal entries to record the first two interest payments.
  5. Prepare the journal entry to record the bonds’ retirement on January 1, 2019, at 98.

Analysis Component

6. Assume that the market rate on January 1, 2017, is 12% instead of 10%. Without presenting numbers, describe how this change affects the amounts reported on Ike’s financial statements.

Rogers Company signs a five-year capital lease with Packer Company for office equipment. The annual year-end lease payment is \(10,000, and the interest rate is 8%.

Required

  1. Compute the present value of Rogers’s five-year lease payments.
  2. Prepare the journal entry to record Rogers’s capital lease at its inception.
  3. Complete a lease payment schedule for the five years of the lease with the following headings. Assume that the beginning balance of the lease liability (present value of lease payments) is \)39,927. (Hint: To find the amount allocated to interest in year 1, multiply the interest rate by the beginning-of-year lease liability. The amount of the annual lease payment not allocated to interest is allocated to principal. Reduce the lease liability by the amount allocated to principal to update the lease liability at each year-end.)

Period ending date

Beginning balance of lease liability

Interest on lease liability

Reduction on lease liability

Cash lease payment

Ending balance of lease liability

4.Use straight-line depreciation and prepare the journal entry to depreciate the leased asset at the end of year 1. Assume zero salvage value and a five-year life for the office equipment.

Refer to the statements for Google in Appendix A. For the year ended December 31, 2015, what was its debt-to-equity ratio? What does this ratio tell us?

On July 1, 2017, Advocate Company exercises an \(8,000 call option (plus par value) on its outstanding bonds that have a carrying value of \)416,000 and par value of $400,000. The company exercises the call option after the semiannual interest is paid on June 30, 2017. Record the entry to retire the bonds

Citywide Company issues bonds with a par value of $150,000 on their stated issue date. The bonds mature in five years and pay 10% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 8%.

1. What is the amount of each semiannual interest payment for these bonds?

2. How many semiannual interest payments will be made on these bonds over their life?

3. Use the interest rates given to determine whether the bonds are issued at par, at a discount, or at a premium.

4. Compute the price of the bonds as of their issue date.

5. Prepare the journal entry to record the bonds’ issuance
See all solutions

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