Log in
Accounting
1
answer
0
watching
92
views

Lindy Corporation started operations in 2015 and leases itsretail space. The lease is for 20 years with annual payments of$98,491 starting on January 1, 2015. Using a 9% discount rate, thePV of the lease payments on January 1, 2015 was $980,000 - equal tothe FV of the property at that time. Lindy accounted for the leaseas an operating lease from inception. Lindy uses S-L depreciationfor all its assets and its income tax rate is 40%. Had Lindyaccounted for the lease as a capital lease it should have made thefollowing entries in 2015:

1/1 Leasedasset 980,000

Lease liability 980,000

Lease liability 98,491

Cash 98,491

12/31 Depreciation expense 49,000

Accum. Depr., LA 49,000

Interest expense 79,336

Lease liability 79,336

However, Lindy’s auditor believes that real estate leases suchas these should be accounted for as capital leases, and discoveredthe error after the books were closed in 2016. Prepare theappropriate 2016 journal entries to correct for this error assumingthe January 1, 2016 entry for the cash payment had already beenmade.

Watch
1
answer
0
watching
92
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Jean Keeling
Jean KeelingLv2
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

Federated Fabrications leased a tooling machine on January 1, 2016, for a three-year period ending December 31, 2018. The lease agreement specified annual payments of $32,000 beginning with the first payment at the inception of the lease, and each December 31 through 2017. The company had the option to purchase the machine on December 30, 2018, for $41,000 when its fair value was expected to be $56,000. The machine's estimated useful life was six years with no salvage value. Federated depreciates assets by the straight-line method. The company was aware that the lessor’s implicit rate of return was 10%, which was less than Federated’s incremental borrowing rate. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required:
1.

Calculate the amount Federated should record as a leased asset and lease liability for this capital lease.

2.

Prepare an amortization schedule that describes the pattern of interest expense for Federated over the lease term.

3.

Prepare the appropriate entries for Federated from the inception of the lease through the end of the lease term. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

On December 31, 2016, Yard Art Landscaping leased a deliverytruck from Branch Motors. Branch paid $39,000 for the truck. Itsretail value is $42,382.

The lease agreementspecified annual payments of $13,000 beginning December 31, 2016,the inception of the lease, and at each December 31 through 2019.Branch Motors’ interest rate for determining payments was 10%. Atthe end of the four-year lease term (December 31, 2020) the truckwas expected to be worth $11,000. The estimated useful life of thetruck is five years with no salvage value. Both companies usestraight-line depreciation.

Yard Art guaranteed a residualvalue of $5,000. Guarantor Assurance Corporation was engaged toguarantee a residual value of $8,000, but with a deductible equalto any amount paid by the lessee ($8,000 reduced by any amount paidby the lessee). Yard Art’s incremental borrowing rate is 9%.

A $3,000 per year maintenanceagreement was arranged for the truck with an outside service firm.As an expediency, Branch Motors agreed to pay this fee. It is,however, reflected in the $13,000 lease payments.

Collectibility of the lease payments byYard Art is reasonably predictable and there are no costs to thelessor that are yet to be incurred. (FV of $1, PV of $1, FVA of $1,PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriatefactor(s) from the tables provided.)

Required:

1.

How should this lease be classified by Yard Art Landscaping (thelessee)?

2.

Calculate the amount Yard Art Landscaping would record as aleased asset and a lease liability. (Round yourintermediate calculations to the nearest dollaramount.)


3.How should this lease be classified by Branch Motors (thelessor)?

Operating lease

Capital lease: Sales-type lease

Capital lease

Capital lease: Direct financing lease


4.Show how Branch Motors calculated the $13,000 annual leasepayments.

Lessor's Calculation of Lease PaymentsAmount to be recovered(fair value

Less:Present value of the residual value

Amount to be recovered through periodic lease payments

Lease payments at the beginning of each of the next fouryear

Add: Executory costs1,000Lease payments including executorycosts

5.

Calculate the amount Branch Motors would record as salesrevenue. (Round your intermediate calculations to thenearest dollar amount.)

6.
Prepare the appropriate entries for both Yard Art and Branch Motorson December 31, 2016. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount

·
1.

Record the lease for Yard Art.

· 2.

Record the lease payment for Yard Art.

· 3.

Record the lease for Branch Motors.

· 4.

Record cash received by Branch Motors

7. Prepare an amortization schedule that describes the patternof interest expense over the lease term for Yard Art.

8.

Prepare an amortization schedule that describes the pattern ofinterest revenue over the lease term for Branch Motors.


9.Prepare the appropriate entries for both Yard Art and BranchMotors on December 31, 2017. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount field. Round your intermediate calculations to the nearestdollar amount.)

· 1.

Record the maintenance expense for Yard Art.

2.

Record the lease payment for Yard Art.

3.

Record the depreciation expense for Yard Art.

4.

Record the cash received on lease by Branch Motors.


10.Prepare the appropriate entries for both Yard Art and BranchMotors on December 31, 2019 (the final lease payment). (Ifno entry is required for a transaction/event, select "No journalentry required" in the first account field. Round your intermediatecalculations to the nearest dollar amount.)

· 1.

Record the maintenance expense for Yard Art.

· 2.

Record the lease payment for Yard Art.

· 3.

Record the depreciation expense for Yard Art.

· 4.

Record the cash received on lease by Branch Motors.

11.
Prepare the appropriate entries for both Yard Art and Branch Motorson December 31, 2020 (the end of the lease term), assuming thetruck is returned to the lessor and the actual residual value ofthe truck was $3,000 on that date. (If no entry is requiredfor a transaction/event, select "No journal entry required" in thefirst account field. Round your intermediate calculations to thenearest dollar amount.)

· 1.

Record the maintenance expense for Yard Art.

· 2.

Record the depreciation expense for Yard Art.

· 3.

Record the last payment on lease for Yard Art.

· 4.

Record the last cash receipt on lease and settlement of lease byBranch Motors.

Weekly leaderboard

Home
Homework Help 3,900,000
Accounting 580,000
Start filling in the gaps now
Log in