ACCT 3021 Lecture : New Chp 21 Class Notes Repaired

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azuremammoth471

15 Mar 2019

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John q. gooddeal invests ,000 in a new apartment building called the. He expects the building to have a useful life of 40 years. Mr. gooddeal leases each of the 20 apartments in the place to individual students. Each student signs a lease for 6, 9, or 12 months for a payment of. The members of alpha, alpha, alpha fraternity approach mr. gooddeal about leasing the place as their new fraternity house. 35 years for payments of ,558 made at the beginning of each year. In substance, the lessee has a pseudo ownership. A lease is a contractual agreement between a lessor (owner of the property) and a lessee (user of leased property). Leases have turned into big business with banks taking the lead. Banks have low-cost funds, so they can buy assets and lease them out. Lower payments than if you were to purchase. Lower risk of obsolescence. (technological decide to purchase or lease)

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Kola Corporation (âKolaâ) leases quality weapons to customers. She gains a loyal following of customers because quality is of limited supply but high demand due to its usefulness for the upcoming winter. Further, Kola tends to offer more favorable financing terms than competitors offering substitutive products (e.g., Walnut, LLC).

Kola was recently approached by the Noodle, Inc. (Noodle) which is interested in leasing a substantial stock of weapons over a potentially lengthy period of time. Noodle has indicated a willingness to pay any rate that Kola Corporation demands for its quality products, but generally receives an interest rate of 12% on all other borrowing transactions. Noodleâs management are a very noble group, so payments are reasonably assured. Further, there are no material cost uncertainties.

Kola has gathered its council to discuss entering into such a contract with Noodle and has invited you to provide financial council. Kolaâs board has proposed several alternative sets of lease terms (below) and would like you determine what Noodleâs annual payments will be under each scenario, if payments are made at the beginning of the period.

	A	B	C	D
Fair value of weapons to be leased	$365,760	$365,760	$365,760	$365,760
Book value of weapons to be leased	$365,760	$290,760	$365,760	$365,760
Desired Profit on Lease Initiation	$0	$75,000	$0	$0
Lease Term	11 years	11 years	6 years	6 years
Useful Life of leased assets	13 years	13 years	6 years	6 years
Desired rate of return	10%	10%	10%	13.225%
Residual Value (guaranteed)	$24,350	$24,350	$25,000	$75,000

REQUIRED:

Prepare a schedule for Kola which uses Excel to compute Noodleâs necessary annual payment under each of the scenarios listed in the chart above. The schedule should list for each scenario above the desired present value of lease payments, future value of the leased asset, the lease term, and the interest rate and utilize an Excel formula to compute a payment. Kola is a high paying client of your firm, so the schedule should be extremely organized and professional looking (e,g., include a title, date, description in the top left-hand corner and utilize borders, font effects, etc. in cells to make the worksheet look visually appealing).

(Note: You must use only Excel to prepare and present all parts of this table. Do not use a hand-held calculator, and do not use the compound interest tables to solve any part of this problem. Points will be deducted if Excel formulas are not used for each necessary computation.)

Prepare a worksheet that determines the type of lease for each party to the transaction. The purpose of this worksheet is to automate the determination of lease type. This worksheet should show:

The particulars for each lease scenario.

List each capital lease requirement and indicate whether or not it is met

Use Excel formulas where meeting a particular criteria requires a calculation or is contingent on one of the lease criteria (e.g., âifâ statements). The only items that should be hard-keyed in here are the particulars for the lease scenario and the answers to the first two capital lease criteria (ownership transfer, and bargain purchase option) for the lessee/lessor and the answers to the two lessor-only capital lease criteria.

For the requirements below, assume Kola Corporation chooses lease option A and enters into an agreement with Noodle on 1/1/18. Noodle should return the weapons on 12/31/2028.

Prepare a lease amortization schedule describing the pattern of payments and interest over the lease term for both Kola and Noodle.

(Note: You must use only Excel to prepare and present all parts of this table. Do not use a hand-held calculator, and do not use the compound interest tables to solve any part of this problem.)

Prepare the appropriate entries for both Kola and Noodle on 1/1/18. Numbers in journal entries should be linked to the table prepared in number 3 above or computed using Excel formulas.

Prepare the appropriate entries for both Kola and Noodle through 1/1/21. Numbers in journal entries should be linked to the table prepared in number 3 above or computed using Excel formulas.

Prepare the appropriate entries for both Kola and Noodle on 12/31/2028. Assume the weapons returned to Kola have a residual value of $500.

periwinkleotter127

Sable Inc. is a company based in San Francisco, CA, that manufactures and supplies earthmoving and construction equipment. Sable either sells the equipment to customers or leases it under terms specific to a customerâs needs. Buildit Inc. is a growing construction company in Los Angeles, CA, that specializes in building residential properties. Buildit recently entered into a contract with Sable to lease a bulldozer, which Buildit will use for a new project involving the construction of several condominiums in the Los Angeles area. The pertinent terms of the lease are as follows:

â¢ The lease term is for 10 years, while the economic life of the bulldozer is estimated to be 15 years. The useful life of the bulldozer is also estimated to be 15 years.

â¢ Annual lease payments of $16,000 are due at the end of each year. Buildit is also responsible for all maintenance, insurance, and taxes arising from the lease of the bulldozer.

â¢ The residual value of the bulldozer is estimated to be $24,000 at the end of the lease term. Sable does not have a residual value guarantee.

â¢ The lease does not transfer ownership of the bulldozer to Buildit by the end of the lease term or provide an option for Buildit to purchase the equipment.

â¢ The bulldozer costs Sable $100,000 to manufacture and this model is currently listed for sale at $135,000 should customers wish to purchase it outright. Sable believes that the lease payments from Buildit will be collected when they are due.

In addition, the equipment is fully constructed and no additional costs will be incurred to complete production of the bulldozer before lease commencement. As a result of a recent economic downturn that has directly impacted the construction industry, a number of companies in the industry have modified their sales or lease terms to maintain profitability. Some of Sableâs direct competitors have negotiated lower lease payments or reduced their selling prices in an effort to stimulate sales. For example, several bulldozers with the same specifications as the one leased to Buildit have recently sold for an average sales price of $125,000, as opposed to Sableâs current list price of $135,000. The rate implicit in the lease is 6.93 percent assuming the fair value of the bulldozer is $125,000 at the beginning of the lease term and 5.45 percent assuming the fair value is $135,000. Copyright 2014 Deloitte Development, LLC All Rights Reserved Required: 1. Summarize the facts of the case (1 paragraph) 2. How should Buildit classify the lease in its accounting records? Research and cite the FASB Codification to support your answer. Hint: criteria for determining capital versus operating lease and Direct financing versus sales-type lease. (1-2 paragraphs) 3. What is the fair value of the bulldozer? Support your answer. (1 paragraph) 4. Under the new ASU effective in 2018 (Topic 842), how would Builditâs accounting treatment change for this lease? Reference the Codification to support your answer. (1-2 paragraphs). This is an individual writing assignment, therefore you should be researching and writing your response on your own. Your submission should be well written using the attached rubric and above requirements as a guideline.

Sable Inc. (Sable) is a company based in San Francisco thatmanufactures and supplies earthmoving and construction equipment.Sable either sells the equipment to customers or leases it underterms specific to a customerâs needs. Buildit Inc. (Buildit) is agrowing construction company in Los Angeles that specializes inbuilding residential properties. Buildit recently entered into acontract with Sable to lease a bulldozer, which Buildit will usefor a new project involving the construction of severalcondominiums in the Los Angeles area. The pertinent terms of thelease are as follows: â¢ The lease term is for 10 years, while theeconomic life of the bulldozer is estimated to be 15 years. Theuseful life of the bulldozer is also estimated to be 15 years. â¢Annual lease payments of $16,000 are due at the end of each year.Buildit is also responsible for all maintenance, insurance, andtaxes arising from the lease of the bulldozer. â¢ The residual valueof the bulldozer is estimated to be $24,000 at the end of the leaseterm. Sable does not have a residual value guarantee. â¢ The leasedoes not transfer ownership of the bulldozer to Buildit by the endof the lease term or provide an option for Buildit to purchase theequipment. â¢ The bulldozer costs Sable $100,000 to manufacture, andthis model is currently listed for sale at $135,000 shouldcustomers wish to purchase it outright. Sable believes that thelease payments from Buildit will be collected when they are due. Inaddition, the equipment is fully constructed and no additionalcosts will be incurred to complete production of the bulldozerbefore lease commencement. As a result of a recent economicdownturn that has directly affected the construction industry, anumber of companies in the industry have modified their sales orlease terms to maintain profitability. Some of Sableâs directcompetitors have negotiated lower lease payments or reduced theirselling prices in an effort to stimulate sales. For example,several bulldozers with the same specifications as the one leasedto Buildit have recently sold for an average sales price of$125,000, as opposed to Sableâs current list price of $135,000. Therate implicit in the lease is 6.9336 percent assuming the fairvalue of the bulldozer is $125,000 at the beginning of the leaseterm and 5.45 percent assuming the fair value is $135,000.Required: 1. How should Sable classify the lease in its accountingrecords? 2. Provide the journal entries that Sable should recordto: a. Initially record the lease. b. Account for the first leasepayment made to Sable at the end of year 1

ACCT 3021 Lecture : New Chp 21 Class Notes Repaired

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