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Chapter 21: Q13P_b. (page 1249)

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.

Short Answer

Expert verified

The total recovery of the lease receivable is $411,324.

Step by step solution

01

Meaning of lease liability

Lease liability means the amount of the lease liability in respect of any lease that would be required to be included in the statement of financial position prepared in accordance with the IFRS at the time of any determination and shall have a maturity period before the first date of such lease.

02

Preparing 10-year lease amortization schedule

AMIRANTE INC. (Lessor)

Lease Amortization Schedule

(Annuity due basis, guaranteed residual value)


Beginning of Year

Annual Lease Payment Plus Residual Value

Interest (10%) on Lease Receivable

Recovery of Lease Receivable

Lease Receivable

(a)

(b)

(d)

(e)

Initial PV

-

-

-

$411,324

1

$60,000

-

$60,000

351,324

2

60,000

$35,132

24,868

326,456

3

60,000

32,646

27,354

299,102

4

60,000

29,910

30,090

269,012

5

60,000

26,901

33,099

235,913

6

60,000

23,591

36,409

199,504

7

60,000

19,950

40,050

159,454

8

60,000

15,945

44,055

115,399

9

60,000

11,540

48,460

66,939

10

60,000

6,694

53,306

13,633

End of 10

15,000

1,367

13,633

0

$615,000

$203,676

$411,324

Note:

  1. The rounding error is $4.00 in interest (10%) on the lease receivable at end of 10
  2. Annual lease payment is required by the lease contract.
  3. Preceding balance of (d)10%, except at the beginning of the first year of the lease term
  4. (a) Minus (b).
  5. Preceding balance minus (c).

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Most popular questions from this chapter

Indiana Jones Corporation enters into a 6-year lease of equipment on January 1, 2017, which requires 6 annual payments of \(40,000 each, beginning January 1, 2017. In addition, Indiana Jones guarantees the lessor a residual value of \)20,000 at lease-end. The equipment has a useful life of 6 years. Prepare Indiana Jones鈥� January 1, 2017, journal entries assuming an interest rate of 10%.

Bradley Co. is expanding its operations and is in the process of selecting the method of financing this program. After some investigation, the company determines that it may (1) issue bonds and with the proceeds purchase the needed assets or (2) lease the assets on a long-term basis. Without knowing the comparative costs involved, answer these questions:

  1. What might be the advantages of leasing the assets instead of owning them?
  2. What might be the disadvantages of leasing the assets instead of owning them?
  3. In what way will the balance sheet be differently affected by leasing the assets as opposed to issuing bonds and purchasing the assets?

Assume that on January 1, 2017, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement. 1. The agreement requires equal rental payments of \(72,000 beginning on January 1, 2017. 2. The fair value of the building on January 1, 2017, is \)440,000. 3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of \(10,000. Kimberly-Clark depreciates similar buildings on the straight-line method. 4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. 5. Kimberly-Clark鈥檚 incremental borrowing rate is 12% per year. The lessor鈥檚 implicit rate is not known by Kimberly-Clark. 6. The yearly rental payment includes \)2,471 of executory costs related to taxes on the property.

Instructions

Prepare the journal entries on the lessee鈥檚 books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Kimberly-Clark鈥檚 corporate year-end is December 31.

Question: (Lessee Capitalization Criteria) On January 1, Santiago Company, a lessee, entered into three noncancelable leases for brand-new equipment, Lease L, Lease M, and Lease N. None of the three leases transfers ownership of the equipment to Santiago at the end of the lease term. For each of the three leases, the present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, is 75% of the fair value of the equipment.

The following information is peculiar to each lease.

  1. Lease L does not contain a bargain-purchase option. The lease term is equal to 80% of the estimated economic life of the equipment.
  2. Lease M contains a bargain-purchase option. The lease term is equal to 50% of the estimated economic life of the equipment.
  3. Lease N does not contain a bargain-purchase option. The lease term is equal to 50% of the estimated economic life of the equipment.

Instructions

(c) Assuming that the minimum lease payments are made on a straight-line basis, how should Santiago record each minimum lease payment for each of the three leases above?

Brecker Company leases an automobile with a fair value of \(10,906 from Emporia Motors, Inc., on the following terms:

  1. Non-cancelable term of 50 months.
  2. Rental of \)250 per month (at end of each month). (The present value at 1% per month is \(9,800.)
  3. Estimated residual value after 50 months is \)1,180. (The present value at 1% per month is \(715.) Brecker Company guarantees the residual value of \)1,180.
  4. Estimated economic life of the automobile is 60 months.
  5. Brecker Company鈥檚 incremental borrowing rate is 12% a year (1% a month). It is impracticable to determine Emporia鈥檚 implicit rate.

Instructions

(b) What is the present value of the minimum lease payments?
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