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Gordon Company, as lessee, enters into a lease agreement onJanuary 1, 2016, with Wayne Corporation, as lessor, for equipment.The following data are relevant to the lease agreement:

 The term of the noncancelable lease is 4 years, with norenewal option. Payments of $253,613 are due on December 31 of eachyear, with the first payment occurring in one year on December 31,2016.

 The fair value of the equipment on January 1, 2016 is$840,000. The equipment has an economic life of 6 years with nosalvage value.

 Gordon depreciates similar machinery it owns on thestraight-line basis.

 Gordon's incremental borrowing rate is 10% per year. Thelessee is aware that the lessor used an implicit rate of 8% incomputing the lease payments (present value factor for 4 periods at8%, 3.312134; at 10%, 3.169861).

 Wayne originally purchased the equipment from Kent Company ata cost of $840,000.

 Collectibility of the payments is reasonably predictable, andthere are no important uncertainties surrounding the costs yet tobe incurred by Wayne Company.

REQUIRED: (a) Indicate the type of lease Gordon Company hasentered into and the reasons for your conclusion.

(b) Prepare the journal entries on Gordon's books that relate tothe lease agreement for the following dates: (Round all amounts tothe nearest dollar. Include a partial amortization schedule.) 1.January 1, 2016. 2. December 31, 2016.

(c) Indicate the type of lease Wayne Company has entered intoand the reasons for your conclusion.

(d) Prepare the journal entries on Wayne's books that relate tothe lease agreement for the following dates: (Round all amounts tothe nearest dollar. Include a partial amortization schedule.) 1.January 1, 2016. 2. December 31, 2016.

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Sixta Kovacek
Sixta KovacekLv2
28 Sep 2019

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On January 1, 2018, Foley Company (as lessor) entered into a noncancelable lease agreement with Pinkley Company for machinery which was carried on the accounting records of Foley at $9,060,000 and had a fair value of $9,600,000. Minimum lease payments under the lease agreement which expires on December 31, 2027, total $14,200,000. Payments of $1,420,000 are due each January 1. The first payment was made on January 1, 2018 when the lease agreement was finalized. The interest rate of 10% which was stipulated in the lease agreement is the implicit rate set by the lessor. The effective interest method of amortization is being used. Pinkley expects the machine to have a ten-year life with no salvage value, and be depreciated on a straight-line basis. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Instructions (a) From the lessee's viewpoint, what kind of lease is the above agreement? From the lessor's viewpoint, what kind of lease is the above agreement? (b) What should be the income before income taxes derived by Foley from the lease for the year ended December 31, 2018? (c) Ignoring income taxes, what should be the expenses incurred by Pinkley from this lease for the year ended December 31, 2018? (d) What journal entries should be recorded by Pinkley Company on January 1, 2018? (e) What journal entries should be recorded by Foley Company on January 1, 2018?

Question 28 (17 points)

On January 1, 2011, the TadpoleCompany leased manufacturing equipment from the Frog Company. Thefollowing information about this lease is available:

Noncancelable term of the lease: 10years, with no bargain purchase option

Economic life of equipment: 15years

Fair value (cost to the lessor) of theequipment: $375,000

Lease payments, due at the end of eachyear: $55,000

Tadpole Company's incrementalborrowing rate (The implicit rate is not known by Tadpole): 12%

Tadpole Company's depreciation method:straight-line

a)From the lessee’s perspective, what type of lease is this andwhy?

b)What are the journal entries required for 2011 by thelessee?

c)Assume the same facts as above, except that the amount of theyearly lease payments is $65,000 and the economic life of theequipment is 10 years. What type of lease is this and why?

d)Assume the same facts as (c) above. What journal entries arerequired in 2011 by the lessee?

e)Assume the same facts as (c) above. Prepare a partial balancesheet as of December 31, 2011 to show the relevant accounts andbalances of this lease arrangement from the perspective of thelessee.

Problem 2 On January 1, 2016, Caterpillar Inc. entered in alease with Newmont Mining for a 797F mining truck. The term of thenon-cancelable lease is ten years and payments are required onJanuary 1 of each year. The first payment is due on January 1,2017. Additional terms of the lease are as follows:

1. Newmont Mining has an option to purchase the mining truck for$300,000 when the lease expires at which time the fair value isexpected to be $1,200,000.

2. The cost of the 797F mining truck to Caterpillar is$3,500,000. It has an estimated life of fifteen years and a salvagevalue of zero at the end of its lease due to extreme wear andtear.

3. Caterpillar sets lease payments to earn 6% on itsinvestment.

4. Collectibility of the payments is reasonably predictable, andthere are no important uncertainties surrounding the costs yet tobe incurred by Caterpillar.

5. Caterpillar has a 12-31 year-end.

Required:

1. Determine the lease payment.

2. Prepare a lease amortization schedule for both the lessor andthe lessee for the entire life of the lease.

3. Prepare the journal entries on the books of the lessor forthe first and last year of the lease.

4. Prepare the journal entries on the books of the lessee forthe first and last year of the lease.

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