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Chapter 21: Q21-2p-b (page 1245)

Question: (Lessee-Lessor Entries, Operating Lease) Cleveland Inc. leased a new crane to Abriendo Construction under a 5-year noncancelable contract starting January 1, 2017. Terms of the lease require payments of \(33,000 each January 1, starting January 1, 2017. Cleveland will pay insurance, taxes, and maintenance charges on the crane, which has an estimated life of 12 years, a fair value of \)240,000, and a cost to Cleveland of \(240,000. The estimated fair value of the crane is expected to be \)45,000 at the end of the lease term. No bargain-purchase or -renewal options are included in the contract. Both Cleveland and Abriendo adjust and close books annually at December 31. Collectibility of the lease payments is reasonably certain, and no uncertainties exist relative to unreimbursable lessor costs. Abriendo鈥檚 incremental borrowing rate is 10%, and Cleveland鈥檚 implicit interest rate of 9% is known to Abriendo.

Instructions

(b) Prepare all the entries related to the lease contract and leased asset for the year 2017 for the lessee and lessor, assuming the following amounts.

  1. Insurance \(500.
  2. Property taxes \)2,000.
  3. Maintenance and repairs \(650.
  4. Straight-line depreciation and salvage value \)15,000.

Short Answer

Expert verified

Answer

Accumulated depreciation is $18,750.

Step by step solution

01

Meaning of Lease contract

A lease contract is a lawful contract between a lessor and the lessee. In a lease, the contract lessor is the owner of the asset while the lessee has only rights to use the assetson the lease.

02

Preparing journal entries (Lessee’s Entries)

Date

Particular

Debit ($)

Credit ($)

Rent Expense

33,000

Cash

33,000

03

Preparing journal entries (Lessor’s Entries)

Date

Particular

Debit ($)

Credit ($)

Insurance Expense

500

Property Tax Expense

2,000

Maintenance and Repairs Expense

650

Accounts Payable

3,150

Depreciation Expense

18,750

Accumulated Depreciation

Capital Leases

18,750

Cash

33,000

Rent Revenue

33,000

WorkingNotes:-CalculationofaccumulateddepreciationleaseAccumulateddeppreciation=costofcleveland-slavagevalueEstimatedlife=$240,000-$15,00012=$225,00012=18,750

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Most popular questions from this chapter

The residual value is the estimated fair value of the leased property at the end of the lease term.

(a) Of what significance is (1) an unguaranteed and (2) a guaranteed residual value in the lessee鈥檚 accounting for a capitalized-lease transaction?

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鈥檚 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

(a) Explain the probable relationship of the $550,000 amount to the lease arrangement.

(Lessor Computations and Entries, Sales-Type Lease with Unguaranteed Residual Value) George Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is \(278,072, and its unguaranteed residual value at the end of the lease term is estimated to be \)20,000. National will pay annual payments of \(40,000 at the beginning of each year and all maintenance, insurance, and taxes. George incurred costs of \)180,000 in manufacturing the equipment and $4,000 in negotiating and closing the lease. George has determined that the collectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 10%.

Instructions

(c) Prepare all of the lessor鈥檚 journal entries for the first year.

How should changes in the estimated unguaranteed residual value be handled by the lessor?

(Accounting for an Operating Lease) On January 1, 2017, Doug Nelson Co. leased a building to Patrick Wise Inc. The relevant information related to the lease is as follows.

  1. The lease arrangement is for 10 years.
  2. The leased building cost \(4,500,000 and was purchased for cash on January 1, 2017.
  3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value.
  4. Lease payments are \)275,000 per year and are made at the end of the year.
  5. Property tax expense of \(85,000 and insurance expense of \)10,000 on the building were incurred by Nelson in the first year. Payment on these two items was made at the end of the year.
  6. 6. Both the lessor and the lessee are on a calendar-year basis.

Instructions

(b) Prepare the journal entries that Wise Inc. should make in 2017
See all solutions

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