ACCT 306 WEEK 7 HOMEWORK

Exercise 15-2 (Algo) Finance lease; calculate lease payments [LO15-2]

American Food Services, Incorporated leased a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2024. The lease agreement for the $5.5 million (fair value and present value of the lease payments) machine specified four equal payments at the end of each year. The useful life of the machine was expected to be four years with no residual value. Barton and Barton’s implicit interest rate was 11%.

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. Prepare the journal entry for American Food Services at the beginning of the lease on January 1, 2024.
  2. Prepare an amortization schedule for the four-year term of the lease.
  3. & 4.Prepare the appropriate entries related to the lease on December 31, 2024 and 2026.

Exercise 15-3 (Algo) Finance lease; lessee; balance sheet and income statement effects [LO15-2]

On June 30, 2024, Georgia-Atlantic, Incorporated leased warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $509,761 over a five-year lease term, payable each June 30 and December 31, with the first payment on June 30, 2024. Georgia-Atlantic’s incremental borrowing rate is 8%, the same rate IC uses to calculate lease payment amounts. Amortization is recorded on a straight-line basis at the end of each fiscal year. The fair value of the equipment is $4.30 million.

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. Determine the present value of the lease payments on June 30, 2024 that Georgia-Atlantic uses to record the right-of-use asset and lease liability.
  2. What amount related to the lease would Georgia-Atlantic report in its balance sheet at December 31, 2024 (ignore taxes)?
  3. What amount related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2024 (ignore taxes)?

Note: For all requirements, enter your answers in whole dollars and not in millions. Round your final answers to the nearest whole dollar.

Exercise 15-12 (Algo) Lessee; finance lease; effect on financial statements [LO15-2]

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 $23,000 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 $198,000 (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 9 years, the asset does have an expected residual value at the end of the lease term of $123,313.
  • 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.

  1. What will be the balances in the balance sheet accounts related to the lease at the end of the first year for Café Med (ignore taxes)?

Note: For all requirements, round your intermediate calculations and final answers to the nearest whole dollars.

Exercise 15-38 (Static) FASB codification research; reassessment of lease terms [LO15-8]

The lease term is the noncancelable period for which a lessee has the right to use an underlying asset, modified by any renewal or termination options that are “reasonably certain” to be exercised, or not exercised. Options whose exercise is under the control of the lessor are automatically included. The FASB Accounting Standards Codification® represents the single source of authoritative U.S. generally accepted accounting principles.

Required:

  1. Access the FASB’s Codification Research System at the FASB website (www.fasb.org) and select Basic View. Determine the specific eight-digit Codification citation (XXX-XX-XX-X) that describes the guidelines for determining when the lessee should reassess the term of the lease.

Problem 15-5 (Algo) Lessee; operating lease; advance payment; leasehold improvement [LO15-4]

On January 1, 2024, Winn Heat Transfer leased office space under a three-year operating lease agreement. The arrangement specified three annual lease payments of $66,000 each, beginning December 31, 2024, and on each December 31 through 2026. The lessor, HVAC Leasing, calculates lease payments based on an annual interest rate of 5%. Winn also paid a $207,000 advance payment at the beginning of the lease. With permission of the owner, Winn made structural modifications to the building before occupying the space at a cost of $273,000. The useful life of the building and the structural modifications were estimated to be 30 years with no residual value.

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:

Prepare the appropriate entries for Winn Heat Transfer from the beginning of the lease through the end of 2026. Winn’s fiscal year is the calendar year.

Note: If no entry is required for a transaction/event, select “No journal entry required” in the first account field. Round your answers to the nearest whole dollar.