CHAPTER 15 Leases 895 Ward Products leased office space under a 10-year operating lease agreement. The lease specified 120 monthly rent payments of $5,000 each, beginning at the inception of the lease. In addition to the first rent payment, Ward also paid a $100,000 advance payment at the lease’s inception. What will be the effect of the lease on Ward’s earnings for the first year (ignore taxes)? Corinth Co. leased equipment to Athens Corporation for an eight-year period, at which time possession of the leased asset will revert back to Corinth. The equipment cost Corinth $16 million and has an expected useful life of 12 years. Its normal sales price is $22.4 million. The present value of the minimum lease payments for both the lessor and lessee is $20.4 million. The first payment was made at the inception of the lease. Collectibility of the remaining lease payments is reasonably assured, and Corinth has no material cost uncertainties. How should Athens classify this lease? Why? In the situation described in BE 15–4, how should Corinth classify this lease? Why? The 2013 annual report of the Sonic Corporation reported minimum lease payments receivable of $1,701,000 and a net investment in direct financing leases of $1,531,000. What accounts for the difference between these two amounts? Explain. A lease agreement calls for quarterly lease payments of $5,376 over a 10-year lease term, with the first payment at July 1, the lease’s inception. The interest rate is 8%. Both the fair value and the cost of the asset to the lessor are $150,000. What would be the amount of interest expense the lessee would record in conjunction with the second quarterly payment at October 1? What would be the amount of interest revenue the lessor would record in conjunction with the second quarterly payment at October 1? A lease agreement that qualifies as a capital lease calls for annual lease payments of $26,269 over a six-year lease term, with the first payment at January 1, the lease’s inception. The interest rate is 5%. If lessee’s fiscal year is the calendar year, what would be the amount of the lease liability that the lessee would report in its balance sheet at the end of the first year? What would be the interest payable? In the situation described in BE 15–8, what would be the pretax amounts related to the lease that the lessee would report in its income statement for the year ended December 31? In the situation described in BE 15–8, assume the asset being leased cost the lessor $125,000 to produce. Determine the price at which the lessor is “selling” the asset (present value of the lease payments). What would be the amounts related to the lease that the lessor would report in its income statement for the year ended December 31 (ignore taxes)? Manning Imports is contemplating an agreement to lease equipment to a customer for five years. Manning normally sells the asset for a cash price of $100,000. Assuming that 8% is a reasonable rate of interest, what must be the amount of quarterly lease payments (beginning at the inception of the lease) in order for Manning to recover its normal selling price as well as be compensated for financing the asset over the lease term? Ace Leasing acquires equipment and leases it to customers under long-term direct financing leases. Ace earns interest under these arrangements at a 6% annual rate. Ace leased a machine it purchased for $600,000 under an arrangement that specified annual payments beginning at the inception of the lease for five years. The lessee had the option to purchase the machine at the end of the lease term for $100,000 when it was expected to have a residual value of $160,000. Calculate the amount of the annual lease payments. BE 15–3 Operating lease; advance payment ● LO15–4 BE 15–4 Lease classification ● LO15–3, LO15–5 BE 15–5 Lease classification ● LO15–3, LO15–5 BE 15–6 Net investment in leases; Sonic ● LO15–5 Real World Financials BE 15–7 Capital lease; calculate interest ● LO15–5 BE 15–8 Capital lease; lessee; balance sheet effects ● LO15–5 BE 15–9 Capital lease; lessee; income statement effects ● LO15–5 BE 15–10 Sales-type lease; lessor; income statement effects ● LO15–6 BE 15–11 Sales-type lease; lessor; calculate lease payments ● LO15–6 BE 15–12 Bargain purchase option; lessor; direct financing lease ● LO15–5, LO15–6, LO15–7
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