ACCT 305 Study Guide - Final Guide: Finance Lease, Effective Interest Rate, Interest Expense

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blushsnake623

14 Apr 2020

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Sample practice questions: acct305 (do not distribute to others) Use the following information for questions 1 and 2. On january 1, 2018, ogleby corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for ogleby to make annual payments of ,000 at the beginning of each year for five years with title passing to ogleby at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of depreciation for all of its fixed assets. Ogleby accordingly accounts for this lease transaction as a finance lease. The present value of annual lease payments was ,578 at an effective interest rate of 10%. On january 1, 2020, ogleby should record: rent expense of ,000, interest expense of sh and lease liability of ,578, interest expense of ,764 and lease liability of ,400. interest expense of ,058 and lease liability of ,636.

Related Questions

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, Lindyâs 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.

crimsonraccoon647

Rogers Company signs a five year capital lease with ParkerCompany for office equiptment. Annual year-end lease payment is$10000 and the intrest rate is 8%.

1. Compute the present value of Rogers five-year leasepayments.

2. Prepare the journal entry to record Rogers capital lease atits inception.

3. Complete a lease payment schedule for the five years of thelease with the following headings. Assume that the beginningbalance of the lease liability (present value of lease payments) is$39927. (hint: to find the amount allocated to intrest in 1 year,multiply the intrest rate by the beginning-of-year lease liablity.The amount of the annual lease payment not allocated to principle.Reduce the lease liability by the amount allocated to principle toupdate the lease liability at each year-end.)

Period Ending Date	Beginning balance of lease liability	Intrest on lease Liablilty	Reduction of lease Liability	Cash Lease Payment	Ending Balance of Lease Liability

4. Use stright-line depreciation and prepare the journal entryto depreciate the leased asset at the end of year 1. Assume zerosalvage value and a 5 year life for the office equiptment.

5. Assume this is instead your first house and this is anamorization scheduel for your annual morgage payments you arebuying a $250000 house at 4% intrest. (this is now a morage not alease) You plan on paying off the house in 15 years and then turnit into a rental property. Recalculate the amounts. Then supposeyou have 6 kids and inturn will not be able to pay off the housefor 30 years. In all cases assume annual loan payments.

6.What is the difference in total intrest paid between the 15and 30 year loans? In a paragraph explain why there is a differencebetween the total intrest amounts.

(Do in Excel)

peachyellowjacket326

Problem 21-1 Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2014. The following information relates to the lease agreement.

1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.

2. The cost of the machinery is $475,000, and the fair value of the asset on January 1, 2017, is $681,000.

3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $91,000. Jensen depreciates all of its equipment on a straight-line basis.

4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017.

5. The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. 6. Glaus desires a 9% rate of return on its investments. Jensenâs incremental borrowing rate is 10%, and the lessorâs implicit rate is unknown. Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Annual rental payment $

Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Present value of minimum lease payments $

Prepare the journal entries Jensen would make in 2017 and 2018 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 58,971.)

Date	Account Titles and Explanation	Debit	Credit
1/1/2017	Leased Asset	$
	Lease Liabilty		$
	(to record the lease)
	Lease Liabilty	$
	Cash		$
	(to record lease payment)
12/31/2017	Depreciation expense	$
	Accumulated depreciation -Capital Lease		$
	(to record depreciation)
	Interest Expense	$
	Interest Payable		$
	(to record interest)
1/1/2018	Lease Liablity	$
	Interest Payable	$
	Cash		$
12/31/2018	Depreciation expense	$
	Accumulated depreciation -Capital Lease		$
	(to record depreciation)
	Interest Expense	$
	Interest Payable		$
	(to record interest)
(d)
Date	Account Titles and Explanation	Debit	Credit
1/1/2017	Lease Receivables	$681,000
	Cost of Goods Sold	$475,000
	Sales		$681000
	Inventory		$475000
	(Sales-type Lease)
	Cash	$
	Lease Receivable		$
	(to record lease payment)
12/31/2017	Interest Receivable	$
	Interest Revenue		$
1/1/2018	Cash	$
	Lease receivable		$
	Interest Receivable		$
12/31/2018	Interest Receivable	$
	Interest Revenue		$

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ACCT 305 Study Guide - Final Guide: Finance Lease, Effective Interest Rate, Interest Expense

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