Lease Paper 5

1

A lessee had a ten-year capital lease requiring equal annual payments. The reduction of the lease liability in year two should equal






2

On January 2, year 1, Cole Co. signed an eight-year noncancelable lease for a new machine, requiring $15,000 annual payments at the beginning of each year. The machine has a useful life of twelve years, with no salvage value. Title passes to Cole at the lease expiration date. Cole uses straight-line depreciation for all of its plant assets. Aggregate lease payments have a present value on January 2, year 1, of $108,000 based on an appropriate rate of interest. For year 1, Cole should record depreciation (amortization) expense for the leased machine at






3

On January 2, year 1, Nori Mining Co. (lessee) entered into a five-year lease for drilling equipment. Nori accounted for the acquisition as a capital lease for $240,000, which includes a $10,000 bargain purchase option. At the end of the lease, Nori expects to exercise the bargain purchase option. Nori estimates that the equipment’s fair value will be $20,000 at the end of its eight-year life. Nori regularly uses straight-line depreciation on similar equipment. For the year ended December 31, year 1, what amount should Nori recognize as depreciation expense on the leased asset?






4

On January 1, year 1, Harrow Co. as lessee signed a five-year noncancelable equipment lease with annual payments of $100,000 beginning December 31, year 1. Harrow treated this transaction as a capital lease. The five lease payments have a present value of $379,000 at January 1, year 1, based on interest of 10%. What amount should Harrow report as interest expense for the year ended December 31, year 1?






5

On January 1, year 1, West Co. entered into a ten-year lease for a manufacturing plant. The annual minimum lease payments are $100,000. In the notes to the December 31, year 2 financial statements, what amounts of subsequent years’ lease payments should be disclosed?
Amount for appropriate required period
Aggregate amount for the lease term






6

Cott, Inc. prepared an interest amortization table for a fiveyear lease payable with a bargain purchase option of $2,000, exercisable at the end of the lease. At the end of the five years, the balance in the leases payable column of the spreadsheet was zero. Cott has asked Grant, CPA, to review the spreadsheet to determine the error. Only one error was made on the spreadsheet. Which of the following statements represents the best explanation for this error?






7

On December 31, year 1, Lane, Inc. sold equipment to Noll, and simultaneously leased it back for twelve years. Pertinent information at this date is as follows:
Sales price $480,000
Carrying amount 360,000
Estimated remaining economic life 15 years
At December 31, year 1, how much should Lane report as deferred gain from the sale of the equipment?






8

The following information pertains to a sale and leaseback of equipment by Mega Co. on December 31, year 1:
Sales price $400,000
Carrying amount $300,000
Monthly lease payment $ 3,250
Present value of lease payments $ 36,900
Estimated remaining life 25 years
Lease term 1 year
Implicit rate 12%
What amount of deferred gain on the sale should Mega report at December 31, year 1?






9

On December 31, year 1, Parke Corp. sold Edlow Corp. an airplane with an estimated remaining useful life of ten years. At the same time, Parke leased back the airplane for three years. Additional information is as follows:
Sales price $600,000
Carrying amount of airplane at date of sale $100,000
Monthly rental under lease $ 6,330
Interest rate implicit in the lease as computed by Edlow and known by Parke (this rate is lower than the lessee’s incremental borrowing rate) 12%
Present value of operating lease rentals ($6,330 for 36 months @ 12%) $190,581
The leaseback is considered an operating lease. In Parke’s December 31, year 1 balance sheet, what amount should be included as deferred revenue on this transaction?






10

On June 30, year 1, Lang Co. sold equipment with an estimated useful life of eleven years and immediately leased it back for ten years. The equipment’s carrying amount was $450,000; the sale price was $430,000; and the present value of the lease payments, which is equal to the fair value of the equipment, was $465,000. In its June 30, year 1 balance sheet, what amount should Lang report as deferred loss?






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