Wiley Plus Help
Question 1
Assume that IBM leased equipment that was carried at a cost of $113,000 to Sharon Swander Company. The term of the lease is 5 years beginning January 1, 2017, with equal rental payments of $26,205 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is $113,000. The equipment has a useful life of 5 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM.
Prepare IBM’s January 1, 2017, journal entries at the inception of the lease. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. 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.)
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| Date | Account Titles and Explanation | Debit | Credit |
| January 1, 2017 |
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| (To record the lease.) | |||
| January 1, 2017 |
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| (To record first lease payment.) | |||
| SHOW LIST OF ACCOUNTS |
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Question 4
On January 1, 2017, Marin Co. leased a building to Headland Inc. The relevant information related to the lease is as follows.
| 1. | The lease arrangement is for 10 years. | |
| 2. | The leased building cost $4,725,000 and was purchased for cash on January 1, 2017. | |
| 3. | The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value. | |
| 4. | Lease payments are $276,200 per year and are made at the end of the year. | |
| 5. | Property tax expense of $82,500 and insurance expense of $9,600 on the building were incurred by Marin in the first year. Payment on these two items was made at the end of the year. | |
| 6. | Both the lessor and the lessee are on a calendar-year basis. |
(a) Prepare the journal entries that Marin Co. should make in 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
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| (To record receipt of lease payment.) | |||
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| (To record insurance and property tax.) |
(b) Prepare the journal entries that Headland Inc. should make in 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
| Date | Account Titles and Explanation | Debit | Credit |
| 12/31/17 |
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(c) If Marin paid $29,900 to a real estate broker on January 1, 2017, as a fee for finding the lessee, how much should Marin Co. report as an expense for this item in 2017?
| Expense should be reported |
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| SHOW LIST OF ACCOUNTS | ||||
| LINK TO TEXT | ||||
Question 5
On February 20, 2017, Bramble Inc. purchased a machine for $1,357,200 for the purpose of leasing it. The machine is expected to have a 10-year life, no residual value, and will be depreciated on the straight-line basis. The machine was leased to Sunland Company on March 1, 2017, for a 4-year period at a monthly rental of $19,100. There is no provision for the renewal of the lease or purchase of the machine by the lessee at the expiration of the lease term. Bramble paid $32,160 of commissions associated with negotiating the lease in February 2017.
(a) What expense should Sunland Company record as a result of the facts above for the year ended December 31, 2017?
| Rent Expense |
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(b) What income or loss before income taxes should Bramble record as a result of the facts above for the year ended December 31, 2017? (Hint: Amortize commissions over the life of the lease.)
| Income from lease before taxes |
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| LINK TO TEXT |
Question 6
Presented below are four independent situations. (Round answers to 0 decimal places, e.g. 125. If answer is 0, please enter 0. Do not leave any fields blank.)
(a) On December 31, 2017, Pronghorn Inc. sold computer equipment to Daniell Co. and immediately leased it back for 10 years. The sales price of the equipment was $516,800, its carrying amount is $400,800, and its estimated remaining economic life is 12 years. Determine the amount of deferred revenue to be reported from the sale of the computer equipment on December 31, 2017.
| The amount of deferred revenue to be reported |
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(b) On December 31, 2017, Stellar Co. sold a machine to Cross Co. and simultaneously leased it back for one year. The sales price of the machine was $477,700, the carrying amount is $416,100, and it had an estimated remaining useful life of 14 years. The present value of the rental payments for the one year is $34,800. At December 31, 2017, how much should Stellar report as deferred revenue from the sale of the machine?
| The amount of deferred revenue to be reported |
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(c) On January 1, 2017, Pearl Corp. sold an airplane with an estimated useful life of 10 years. At the same time, Pearl leased back the plane for 10 years. The sales price of the airplane was $501,600, the carrying amount $375,100, and the annual rental $73,588. Pearl Corp. intends to depreciate the leased asset using the sum-of-the-years’-digits depreciation method. How much gain on the sale should be reported at the end of 2017 in the financial statements?
| The gain on the sale should be reported |
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(d) On January 1, 2017, Martinez Co. sold equipment with an estimated useful life of 5 years. At the same time, Martinez leased back the equipment for 2 years under a lease classified as an operating lease. The sales price (fair value) of the equipment was $210,900, the carrying amount is $299,000, the monthly rental under the lease is $6,100, and the present value of the rental payments is $116,342. For the year ended December 31, 2017, determine which items would be reported on its income statement for the sale-leaseback transaction.
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| LINK TO TEXT |
| WRITING (Off-Balance-Sheet Financing) Matt Ryan Corporation is interested in building its own soda can manufacturing plant adjacent to its existing plant in Partyville, Kansas. The objective would be to ensure a steady supply of cans at a stable price and to minimize transportation costs. However, the company has been experiencing some financial problems and has been reluctant to borrow any additional cash to fund the project. The company is not concerned with the cash flow problems of making payments, but rather with the impact of adding additional long-term debt to its balance sheet. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The president of Ryan, Andy Newlin, approached the president of the Aluminum Can Company (ACC), its major supplier, to see if some agreement could be reached. ACC was anxious to work out an arrangement, since it seemed inevitable that Ryan would begin its own can production. The Aluminum Can Company could not afford to lose the account. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| After some discussion, a two-part plan was worked out. First, ACC was to construct the plant on Ryan’s land adjacent to the existing plant. Second, Ryan would sign a 20-year purchase agreement. Under the purchase agreement, Ryan would express its intention to buy all of its cans from ACC, paying a unit price which at normal capacity would cover labor and material, an operating management fee, and the debt service requirements on the plant. The expected unit price, if transportation costs are taken into consideration, is lower than current market. If Ryan did not take enough production in any one year and if the excess cans could not be sold at a high enough price on the open market, Ryan agrees to make up any cash shortfall so that ACC could make the payments on its debt. The bank will be willing to make a 20-year loan for the plant, taking the plant and the purchase agreement as collateral. At the end of 20 years, the plant is to become the property of Ryan. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Instructions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (a) What are project financing arrangements using special-purpose entities? | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (b) What are take-or-pay contracts? | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (c) Should Ryan record the plant as an asset together with the related obligation? | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (d) If not, should Ryan record an asset relating to the future commitment? | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (e) What is meant by off-balance-sheet financing? | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
