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Answered: - ACCT 3040 Name 1) ABC Inc. leased equipment from Tommy Inc. on


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ACCT 3040

 


 

Name

 


 

1) ABC Inc. leased equipment from Tommy Inc. on 12/31/2006. The lease is noncancelable. The lease agreement specified annual payments of $60,894 beginning with

 

the first payment at the inception of the lease, and each December 31 through 2008. No

 

executory costs are included in the annual payment. The leases gives ABC the option to

 

purchase the equipment on 12/31/2009 for 22,000 when the fair value is expected to be

 

30,000. If the purchase option is not exercised, the equipment will be returned to Tommy.

 

Additional information:

 

Fair value of the leased property on 12/31/2006: $185,000

 

Estimated economic life of the property as of 12/31/2006: 5 years

 

Salvage value at the end of its economic life: 0

 

Cost of the equipment for the lessor: 160,000

 

Lessee?s incremental borrowing rate equals or exceeds the lessor?s implicit rate and

 

implicit rate in the lease is 9%.

 

Collectibility is reasonably assured and the lessor has substantially completed

 

performance.

 

Requirement 1: Calculate the present value of minimum lease payment.

 


 

Requirement 2: If this is a capital lease for the lessor, is it a sales-type capital lease or a

 

direct financing capital lease?

 


 

Requirement 3: Record the JE separately for the lessee and lessor on 12/31/2006 and

 

12/31/2007.

 


 

Requirement 4: Complete the following items for lessee.

 

12/31/2007

 


 

12/31/2006

 


 

Leased equipment, net

 

Lease payable

 

Interest expense

 

Depreciation expense

 

Requirement 5: Complete the following items for lessor.

 

12/31/2007

 


 

12/31/2006

 


 

Lease receivable

 

Interest revenue

 


 

2) On 1/1/2005, JK Inc. (lessee) and EQ, Inc. entered into a non-cancelable lease that does

 

not transfer title and does not contain a purchase option. The lease covers 3 years of the

 

equipment?s 5-year economic life. The annual rental payments of $40,000 include

 

executory costs of 3,500 and are due at the beginning of each of the three years.

 

Estimated residual value is 4,300. The asset will be returned to the lessor on 12/31/2007.

 

Additional information:

 

Fair value of the leased property on 1/1/05: $107,000

 

Estimated economic life of the property as of 1/1/05: 5 years

 

Cost of the equipment for the lessor: 93,500

 

Lessee?s incremental borrowing rate equals or exceeds the lessor?s implicit rate and

 

implicit rate in the lease is 8%.

 

Collectibility is reasonably assured and the lessor has substantially completed

 

performance.

 

Requirement 1: Calculate the PVMLP under the following alternative situations:

 

a) Lessee guarantees the $4,300 residual value. PVMLP =

 

b) Lessee does NOT guarantee the $4,300 residual value. PVMLP =

 


 

Requirement 2: Determine accounting classification under the following alternative

 

situations:

 

a) Lessee guarantees the $4,300 residual value. an Operating or a Capital lease

 

b) Lessee does NOT guarantee the $4,300 residual value. an Operating or a Capital lease

 


 

Requirement 3: Record the JE separately for the lessee on 1/1/05 under the following

 

alternative situations:

 


 

a) Lessee guarantees the $4,300 residual value.

 

b) Lessee does NOT guarantee the $4,300 residual value.

 


 

 


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