Chapter 21: Q 4IFRS (page 1263)
Outline the accounting procedures involved in applying the operating lease method by a lessee.
Answer
Under the operating method, rent expense (and a compensating liability) accrues day by day to the lessee as the property is used.
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A lease agreement between Mooney Leasing Company and Rode Company is described in E21-8.
Inception date | May 1, 2017 |
Annual lease payment due at the beginning of each year, beginning with May 1, 2017 | \(21,227.65 |
Bargain-purchase option price at end of lease term | \) 4,000.00 |
Lease term | 5 years |
Economic life of leased equipment | 10 years |
Lessor’s cost | \(65,000.00 |
Fair value of asset at May 1, 2017 | \)91,000.00 |
Lessor’s implicit rate | 10% |
Lessee’s incremental borrowing rate | 10% |
Instructions
(Round all numbers to the nearest cent.) Refer to the data in E21-8 and do the following for the lessor.
(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 2017, 2018, and 2019. The lessor’s accounting period ends on December 31. Reversing entries are not used by Mooney.
Question: (Lessee Entries and Balance Sheet Presentation, Capital Lease) On January 1, 2017, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of \(137,899 (including the executory costs of \)6,000) at the beginning of each year, starting January 1, 2017. The taxes, the insurance, and the maintenance, estimated at \(6,000 a year, are the obligations of the lessee. The leased equipment is to be capitalized at \)550,000. The asset is to be depreciated on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cage’s incremental borrowing rate is 12%, and the implicit rate in the lease is 10%, which is known by Cage. Title to the equipment transfers to Cage when the lease expires. The asset has an estimated useful life of 5 years and no residual value.
Instructions
(d) Prepare the journal entry to record the interest expense for the year 2017.
Metheny Corporation’s lease arrangements qualify as sales-type leases at the time of entering into the transactions. How should the corporation recognize revenues and costs in these situations?
(Lessee Computations and Entries, Capital Lease with Guaranteed Residual Value) Assume the same data as in P21-13 and that Chambers Medical Center has an incremental borrowing rate of 10%.
Lessor Computations and Entries, Sales-Type Lease with Guaranteed Residual Value) Amirante Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is \(411,324, and its guaranteed residual value at the end of the noncancelable lease term is estimated to be \)15,000. The hospital will pay rents of \(60,000 at the beginning of each year and all maintenance, insurance, and taxes. Amirante Inc. incurred costs of \)250,000 in manufacturing the machine and $14,000 in negotiating and closing the lease. Amirante Inc. has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that the implicit interest rate is 10%.
Instructions
b) Prepare a 10-year lease amortization schedule.
Question: The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee.
Inception date | January 1, 2017 |
Annual lease payment due at the beginning of each year, beginning with January 1, 2017 | \(124,798 |
Residual value of equipment at end of lease term, guaranteed by the lessee | \)50,000 |
Lease term | 6 years |
Economic life of leased equipment | 6 years |
Fair value of asset at January 1, 2017 | \(600,000 |
Lessor’s implicit rate | 12% |
Lessee’s incremental borrowing rate | 12% |
The lessee assumes responsibility for all executory costs, which are expected to amount to \)5,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straightline depreciation method for all equipment.
Instructions
(b) Prepare all of the journal entries for the lessee for 2017 and 2018 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31 and reversing entries are used when appropriate.
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