Chapter 21: Q7Q (page 1239)
Outline the accounting procedures involved in applying the operating method by a lessee.
A lessee's rent expense accrues day by day while the property is utilized under the operational method.
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(Operating Lease for Lessee and Lessor) On February 20, 2017, Barbara Brent Inc. purchased a machine for
Instructions
(a) What expense should Rudy Company record as a result of the facts above for the year ended December 31, 2017? Show supporting computations in good form.
Use the information for IBM from BE21-6. Assume the direct-financing lease was recorded at a present value of \(150,000. Prepare IBM’s December 31, 2017, entry to record interest.
Assume that IBM leased equipment that was carried at a cost of \)150,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2017, with equal rental payments of
Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston’s specifications. Upon completion of the engines, Winston has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is noncancelable, becomes effective on January 1, 2017, and requires annual rental payments of \(413,971 each January 1, starting January 1, 2017.
Winston’s incremental borrowing rate is 10%. The implicit interest rate used by Ewing Inc. and known to Winston is 8%. The total cost of building the three engines is \)2,600,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Winston depreciates similar equipment on a straight-line basis. At the end of the lease, Winston assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs.
Instructions
(f) Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2017, for both the lessee and the lessor.
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.
(a) Compute the amount of the lease receivable at the inception of the lease.
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
Instructions
(c) Prepare the journal entry to record depreciation of the leased asset for the year 2017.
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