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Chapter 21: Q21-12P_b(2) (page 1249)

Question: (Basic Lessee Accounting with Difficult PV Calculation) In 2016, Grishell Trucking Company negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were erected to the company’s specifications on land owned by the company. On January 1, 2017, Grishell Trucking Company took possession of the lease properties. On January 1, 2017 and 2018, the company made cash payments of \(948,000 that were recorded as rental expenses.

Although the terminals have a composite useful life of 40 years, the noncancelable lease runs for 20 years from January 1, 2017, with a bargain-purchase option available upon expiration of the lease.

The 20-year lease is effective for the period January 1, 2017, through December 31, 2036. Advance rental payments of \)800,000 are payable to the lessor on January 1 of each of the first 10 years of the lease term. Advance rental payments of \(320,000 are due on January 1 for each of the last 10 years of the lease. The company has an option to purchase all of these leased facilities for \)1 on December 31, 2036. It also must make annual payments to the lessor of \(125,000 for property taxes and \)23,000 for insurance. The lease was negotiated to assure the lessor a 6% rate of return.

Instructions

(b) Assuming that the present value of terminal facilities and related obligation at January 1, 2017, was \(7,600,000, prepare journal entries for Grishell Trucking Company to record the:

2) A mortization of the cost of the leased properties for 2019 using the straight-line method and assuming a zero salvage value.

Selected present value factors are as follows.

Periods

For an Ordinary Annuity of \)1 at 6%

For $1 at 6%

1

.943396

.943396

2

1.83393

.889996

8

6.209794

.627412

9

6.801692

.591898

10

7.360087

.558395

19

11.158117

.330513

20

11.469921

.311805

Short Answer

Expert verified

Answer

The accumulated depreciation-capital lease is$190,000.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Deprecation

Depreciation is a reduction in the price of a tangible assetthat affects the asset's monetary worth owing to a range of factors such as wear and tear from extended usage.

02

Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Depreciation Expense

190,000

Accumulated Depreciation

Capital Leases

190,000

(To record the annual depreciation expense

on leased assets)

Note: The leased asset is depreciated over its economic life because a bargain-purchase option is available at the end of the lease term.

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Most popular questions from this chapter

Geiberger Corporation manufactures replicators. On January 1, 2017, it leased to Althaus Company a replicator that had cost \(110,000 to manufacture. The lease agreement covers the 5-year useful life of the replicator and requires 5 equal annual rentals of \)40,800 payable each January 1, beginning January 1, 2017. An interest rate of 12% is implicit in the lease agreement. Collectibility of the rentals is reasonably assured, and there are no important uncertainties concerning costs. Prepare Geiberger’s January 1, 2017, journal entries.

(Lessee Entries, Capital Lease with Monthly Payments) Shapiro Inc. was incorporated in 2016 to operate as a computer software service firm with an accounting fiscal year ending August 31. Shapiro’s primary product is a sophisticated online inventory-control system; its customers pay a fixed fee plus a usage charge for using the system.

Shapiro has leased a large, Alpha-3 computer system from the manufacturer. The lease calls for a monthly rental of \(40,000 for the 144 months (12 years) of the lease term. The estimated useful life of the computer is 15 years.

Each scheduled monthly rental payment includes \)3,000 for full-service maintenance on the computer to be performed by the manufacturer. All rentals are payable on the first day of the month beginning with August 1, 2017, the date the computer was installed and the lease agreement was signed. The lease is noncancelable for its 12-year term, and it is secured only by the manufacturer’s chattel lien on the Alpha-3 system.

This lease is to be accounted for as a capital lease by Shapiro, and it will be depreciated by the straight-line method with no expected salvage value. Borrowed funds for this type of transaction would cost Shapiro 12% per year (1% per month). Following is a schedule of the present value of \(1 for selected periods discounted at 1% per period when payments are made at the beginning of each period.

Periods Present (months)

Present Value of \)1 per Period Discounted at 1% per Period

1

1.000

2

1.990

3

2.970

143

76.658

144

76.899

Instructions

Prepare all entries Shapiro should have made in its accounting records during August 2017 relating to this lease. Give full explanations and show supporting computations for each entry. Remember, August 31, 2017, is the end of Shapiro’s fiscal accounting period and it will be preparing financial statements on that date. Do not prepare closing entries.

Lessor Computations and Entries, Sales-Type Lease with Guaranteed Residual Value) Amirante Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is \(411,324, and its guaranteed residual value at the end of the noncancelable lease term is estimated to be \)15,000. The hospital will pay rents of \(60,000 at the beginning of each year and all maintenance, insurance, and taxes. Amirante Inc. incurred costs of \)250,000 in manufacturing the machine and $14,000 in negotiating and closing the lease. Amirante Inc. has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that the implicit interest rate is 10%.

Instructions

(b) Prepare a 10-year lease amortization schedule.

A lease agreement between Mooney Leasing Company and Rode Company is described in E21-8.

Inception date

May 1, 2017

Annual lease payment due at the beginning

of each year, beginning with May 1, 2017

\(21,227.65

Bargain-purchase option price at end of lease term

\) 4,000.00

Lease term

5 years

Economic life of leased equipment

10 years

Lessor’s cost

\(65,000.00

Fair value of asset at May 1, 2017

\)91,000.00

Lessor’s implicit rate

10%

Lessee’s incremental borrowing rate

10%

Instructions

(Round all numbers to the nearest cent.) Refer to the data in E21-8 and do the following for the lessor.

(a) Compute the amount of the lease receivable at the inception of the lease.

(Accounting for an Operating Lease) On January 1, 2017, Doug Nelson Co. leased a building to Patrick Wise Inc. The relevant information related to the lease is as follows.

  1. The lease arrangement is for 10 years.
  2. The leased building cost \(4,500,000 and was purchased for cash on January 1, 2017.
  3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value.
  4. Lease payments are \)275,000 per year and are made at the end of the year.
  5. Property tax expense of \(85,000 and insurance expense of \)10,000 on the building were incurred by Nelson in the first year. Payment on these two items was made at the end of the year.
  6. 6. Both the lessor and the lessee are on a calendar-year basis.

Instructions

(c) If Nelson paid $30,000 to a real estate broker on January 1, 2017, as a fee for finding the lessee, how much should Nelson Co. report as an expense for this item in 2017?
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