Bunker Company negotiated a lease with Gilbreth Company that begins on January 1, 2017. The lease term is three years, and the asset's economic life is four years. The annual lease payments are $7,500, payable at the end of the year. The cost and fair value of the asset are $23,000. The lessee's cost of borrowing is 9%. Bunker accounts for leases under ASC 840. Required: 1. Determine whether Bunker must treat this lease as an operating lease or a capital lease. 2. Prepare an amortization table for the lease. 3. Prepare Bunker's journal entries for the first two years of the lease. 4. Assume that all facts remain the same except that the asset's useful life is six years. Is this an operating lease or a capital lease? Prepare journal entries for the first two years of the lease. 5. Compare the financial statement effects of the lease treatment you selected in require- ment 3 with the financial statement effects of the treatment you selected in requirement 4. Specifically, compare the effects on assets, liabilities, and equity under the two alterna- tive sets of assumptions as of December 31, 2017, immediately after the first lease pay- ment is made.
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According to ASC 840, a lease is classified as a capital lease if it meets any one of the following four criteria: the lease transfers ownership of the property to the lessee by the end of the lease term; the lease contains a bargain purchase option; the lease Show more…
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On January 1, 2021, NRC Credit Corporation leased equipment to Brand Services under a finance/sales-type lease designed to earn NRC a 10% rate of return for providing long-term financing. The lease agreement specified the following: Ten annual payments of $73,000 beginning January 1, 2021, the beginning of the lease and each December 31 thereafter through 2029. The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to Lesco was $417,665. The lease qualifies as a finance lease/sales-type lease. A 10-year service agreement with Quality Maintenance Company was negotiated to provide maintenance of the equipment as required. Payments of $7,000 per year are specified, beginning January 1, 2021. Lesco was to pay this cost as incurred, but lease payments reflect this expenditure. Also included in the $73,000 payments is an insurance premium of $6,000 providing coverage for the equipment. A partial amortization schedule, appropriate for both the lessee and lessor, follows: Decrease in Outstanding Balance Payments Effective Interest Balance Balance (10% * Outstanding balance) 412,300 1/1/2021 61,000 351,300 12/31/2021 61,000 0.1 (351,300) = 35,130 325,430 12/31/2022 61,000 0.1 (325,430) = 32,543 296,973 Required: 1. Prepare the appropriate entries for the lessee related to the lease on January 1, 2021 and December 31, 2021. 2. Prepare the appropriate entries for the lessor related to the lease on January 1, 2021 and December 31, 2021.
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Applying New Lease Accounting Standards for Operating Leases On January 1 of the current year, CCH Corporation entered into the following lease contract. Based on the facts, CCH Corporation classifies the lease as an operating lease. The company has a 5% cost of debt capital. Leased asset: Office space. Lease term: 5 years. Annual lease payment: $207,877 due at each year-end. Upfront fees: $10,000 paid in cash. Required Note: For the following questions, round your answers to the nearest whole dollar. a. Explain how the facts support the classification of the lease as an operating lease. Answer b. Determine the amount of the lease liability that CCH will add to its balance sheet at the inception of the lease. Answer c. 1. What amount will be added to the balance sheet as an asset? Answer 2. What will CCH Corporation call the asset on the balance sheet? Answer d. Prepare a lease amortization schedule that shows the interest and principal portions of each lease payment. Year Lease Liability, Start Implicit Interest Lease Amortization Lease Liability, End 1 2 3 4 5 e. At the end of the current year, what additional disclosure would CCH make in its footnotes pertaining to the four remaining lease payments? Answer 2021 2022 2023 2024 2025 Thereafter Total undiscontinued lease payments Imputed interest Total Operating lease liability Weighted average remaining lease life in years Weighted average discount rate
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Macinski Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $70,000 and a fair value of $95,000. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Macinski expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals are payable on each December 31, beginning December 31, 2020. Prepare the journal entry at the commencement of the lease for Sharrer, assuming (1) Sharrer does not know Macinski's implicit rate (Sharrer's incremental borrowing rate is 9%), and (2) Sharrer incurs initial direct costs of $10,000.
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