In 2024, Nash Trucking Company negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were erected to the company's specifications on land owned by another company. On January 1, 2025, Nash Trucking took possession of the leased properties. Although the terminals have a composite useful life of 40 years, the non-cancelable lease runs for 20 years from January 1, 2025, with a bargain purchase option available upon expiration of the lease.
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- Determining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a 10-year cancelable (at the option of either party) agreement to lease a storage building from Wake Company. The following information pertains to this lease agreement: 1. The agreement requires rental payments of 100,000 at the beginning of each year. 2. The cost and fair value of the building on January 1, 2019, is 2 million. The storage building has not been specialized for Caswell. 3. The building has an estimated economic life of 50 years, with no residual value. Caswell depreciates similar buildings according to the straight-line method. 4. The lease does not contain a renewable option clause. At the termination of the lease, the building reverts to the lessor. 5. Caswells incremental borrowing rate is 14% per year. Wake set the annual rental to ensure a 16% rate of return (the loss in service value anticipated for the term of the lease). Caswell knows the implicit interest rate. 6. Executory costs of 7,000 annually, related to taxes on the property, are paid by Caswell directly to the taxing authority on Dec. 31 of each year. Required: 1. Determine what type of lease this is for the lessee. 2. Prepare appropriate journal entries on the lessees books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2019 and 2020.Lessee and Lessor Accounting Issues Diego Leasing Company agrees to provide La Jolla Company with equipment under a noncancelable lease for 5 years. The equipment has a 5-year life, cost Diego 25,000, and will have no residual value when the lease term ends. The fair value of the equipment is 30,000. La Jolla agrees to pay all executory costs (500 per year) throughout the lease period directly to a third party. On January 1, 2019, the equipment is delivered. Diego expects a 14% return on its net investment. The five equal annual rents are payable in advance starting January 1, 2019. Required: 1. Assuming this is a sales-type lease for the Diego and a finance lease for the La Jolla, prepare a table summarizing the lease and interest payments suitable for use by either party. 2. Next Level On the assumption that both companies adjust and close books each December 31, prepare journal entries relating to the lease for both companies through December 31, 2020, based on data derived in the table. Assume that La Jolla depreciates similar equipment by the straight line methodOn March 1, 2019, Elkhart enters into a new contract to build a specialized warehouse for 7 million. The promise to transfer the warehouse is determined to be a performance obligation. The contract states that if the warehouse is usable by November 30, 2019, Elkhart will receive a bonus of 600,000. For every week after November 30 that the warehouse is not usable, the bonus will decrease by 150,000. Elkhart provides the following completion schedule: Required: 1. Assume that Elkhart uses the expected value approach. What amount should Elkhart use for the transaction price? 2. Assume that Elkhart uses the most likely amount approach. What amount should Elkhart use for the transaction price? 3. Next Level What is the purpose of assessing whether a constraint on the variable consideration exists?
- Sales-Type Lease with Unguaranteed Residual Value Lessor Company and Lessee Company enter into a 5-year, noncancelable, sales-type lease on January 1, 2019, for equipment that cost Lessor 375,000 (useful life is 5 years). The fair value of the equipment is 400,000. Lessor expects a 12% return on the cost of the asset over the 5-year period of the lease. The equipment will have an estimated unguaranteed residual value of 20,000 at the end of the fifth year of the lease. The lease provisions require 5 equal annual amounts, payable each January 1, beginning with January 1, 2019. Lessee pays all executory costs directly to a third party. The equipment reverts to the lessor at the termination of the lease. Assume there are no initial direct costs, and the lessor expects to be able to collect all lease payments. Required: 1. Show how Lessor should compute the annual rental amounts. 2. Prepare a table summarizing the lease and interest receipts that would be suitable for Lessor. 3. Prepare a table showing the accretion of the unguaranteed residual asset. 4. Prepare the journal entries for Lessor for the years 2019, 2020, and 2021.In 2024, Monty Trucking Company negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were erected to the company's specifications on land owned by another company. On January 1, 2025, Monty Trucking took possession of the leased properties. Although the terminals have a composite useful life of 40 years, the non-cancelable lease runs for 20 years from January 1, 2025, with a bargain purchase option available upon expiration of the lease. The 20-year lease is effective for the period January 1, 2025, through December 31, 2044. Rental payments of $816,000 are payable to the lessor on January 1 of each of the first 10 years of the lease term. Advance rental payments of $326,400 are due on January 1 for each of the last 10 years of the lease. The company has an option to purchase all of these leased facilities for $1 on December 31. 2044. The lease was negotiated to assure the lessor a 6% rate of return.…In 2024, Sheffield Enterprises negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were constructed on land owned by the company. On January 1, 2025, Sheffield took possession of the leased property. The 20-year lease is effective for the period January 1, 2025, through December 31, 2044. Advance rental payments of $772,000 are payable to the lessor (owner of facilities) on January 1 of each of the first 10 years of the lease term. Advance payments of $430,000 are due on January 1 for each of the last 10 years of the lease term. Sheffield has an option to purchase all the leased facilities for $1 on December 31, 2044. At the time the lease was negotiated, the fair value of the truck terminals and freight storage facilities was pproximately $7,601,000. If the company had borrowed the money to purchase the facilities, it would have had to pay 9% interest. Compute the present value of lease vs purchase.…
- Crane Leasing Company signs an agreement on January 1, 2025, to lease equipment to Cullumber Company. The following information relates to this agreement. 1. 2. 3. 4. 5. The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. (a) The cost of the asset to the lessor is $401,000. The fair value of the asset at January 1, 2025, is $401,000. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $22,050, none of which is guaranteed. The agreement requires equal annual rental payments, beginning on January 1, 2025. Collectibility of the lease payments by Crane is probable. Click here to view factor tables. Assuming the lessor desires an 6% rate of return on its investment, calculate the amount of the annual rental payment required. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and the final answer to 0…On January 1, 2024, Ghosh Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2027, at which time possession of the leased asset will revert back to Ghosh The equipment cost Ghosh $957,800 and has an expected useful life of five years. . Ghosh expects the residual value at December 31, 2027, will be $301,800. . Negotiations led to the lessee guaranteeing a $341,800 residual value Equal payments under the finance/sales-type lease are $201.800 and are due on December 31 of each year with the first payment being made on December 31, 2024 • Karrier is aware that Ghosh used a 5% interest rate when calculating lease payments. . Note: Use tables, Excel, or a financial calculator. (EV of $1. PV of $1. EVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) Required: 1. Prepare the appropriate entries for both Karrier and Ghosh on January 1, 2024, to record the lease 2. Prepare all appropriate entries for both Karrier and Ghosh on December 31,…Oriole Leasing Company signs an agreement on January 1, 2025, to lease equipment to Pharoah Company. The following information relates to this agreement. 1. 2. 3. 4. 5. The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. The cost of the asset to the lessor is $291,000. The fair value of the asset at January 1, 2025, is $291,000. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $29,100, none of which is guaranteed. The agreement requires equal annual rental payments, beginning on January 1, 2025. Collectibility of the lease payments by Oriole is probable. Click here to view factor tables. (a) Your answer is correct. Assuming the lessor desires an 8% rate of return on its investment, calculate the amount of the annual rental payment required. (For calculation purposes, use 5 decimal places as displayed in the factor table provided…
- In 2019, Vaughn Trucking Company negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were erected to the company’s specifications on land owned by the company. On January 1, 2020, Vaughn Trucking took possession of the lease properties.Although the terminals have a composite useful life of 40 years, the non-cancelable lease runs for 20 years from January 1, 2020, with a bargain purchase option available upon expiration of the lease.The 20-year lease is effective for the period January 1, 2020, through December 31, 2039. Rental payments of $ 1,000,000 are payable to the lessor on January 1 of each of the first 10 years of the lease term. Advance rental payments of $ 400,000 are due on January 1 for each of the last 10 years of the lease. The company has an option to purchase all of these leased facilities for $1 on December 31, 2039. The lease was negotiated to assure the lessor a 6% rate of return.Selected…At January 1, 2024, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. • The lease agreement specifies annual payments of $25,000 beginning January 1, 2024, the beginning of the lease, and on each December 31 thereafter through 2031. The equipment was acquired recently by Crescent at a cost of $180,000 (its fair value) and was expected to have a useful life of 12 years with no salvage value at the end of its life. • Because the lease term is only nine years, the asset does have an expected residual value at the end of the lease term of $50,995. • Crescent seeks a 10% return on its lease investments. ● By this arrangement, the lease is deemed to be a finance lease. Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. What will be the effect of the lease on Café Med's earnings for the first year (ignore taxes)? Note: Enter decreases with negative sign. 2. What…S At January 1, 2024, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. • The lease agreement specifies annual payments of $24,000 beginning January 1, 2024, the beginning of the lease, and on each December 31 thereafter through 2031. • The equipment was acquired recently by Crescent at a cost of $162,000 (its fair value) and was expected to have a useful life of 13 years with no salvage value at the end of its life. ● . Because the lease term is only 9 years, the asset does have an expected residual value at the end of the lease term of $52,070. Crescent seeks a 12% return on its lease investments. By this arrangement, the lease is deemed to be an operating lease. Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. What will be the effect of the lease on Café Med's earnings for the first year (ignore taxes)? Note: Enter decreases with negative sign. 2.…