896 SECTION 3 Financial Instruments and Liabilities An alternate exercise and problem set is available in the Connect library On January 1, 2016, Nath-Langstrom Services, Inc., a computer software training firm, leased several computers from ComputerWorld Corporation under a two-year operating lease agreement. The contract calls for four rent payments of $10,000 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by ComputerWorld at a cost of $90,000 and were expected to have a useful life of six years with no residual value. Required: Prepare the appropriate entries for both (a) the lessee and (b) the lessor from the inception of the lease through the end of 2016. (Use straight-line depreciation.) On January 1, 2016, Winn Heat Transfer leased office space under a three-year operating lease agreement. The arrangement specified three annual rent payments of $80,000 each, beginning January 1, 2016, the inception of the lease, and at each January 1 through 2018. Winn also paid a $96,000 advance payment at the inception of the lease in addition to the first $80,000 rent payment. With permission of the owner, Winn made structural modifications to the building before occupying the space at a cost of $180,000. The useful life of the building and the structural modifications were estimated to be 30 years with no residual value. Required: Prepare the appropriate entries for Winn Heat Transfer from the inception of the lease through the end of 2016. Winn’s fiscal year is the calendar year. Winn uses straight-line depreciation. (Note: Exercises 15–3, 15–4, and 15–5 are three variations of the same basic situation.) Manufacturers Southern leased high-tech electronic equipment from Edison Leasing on January 1, 2016. Edison purchased the equipment from International Machines at a cost of $112,080. IFRS Exercises E 15–1 Operating lease ● LO15–4 E 15–2 Operating lease; advance payment; leasehold improvement ● LO15–4 E 15–3 Capital lease; lessee ● LO15–5 On January 1, James Industries leased equipment to a customer for a four-year period, at which time possession of the leased asset will revert back to James. The equipment cost James $700,000 and has an expected useful life of six years. Its normal sales price is $700,000. The residual value after four years, guaranteed by the lessee, is $100,000. Lease payments are due on December 31 of each year, beginning with the first payment at the end of the first year. Collectibility of the remaining lease payments is reasonably assured, and there are no material cost uncertainties. The interest rate is 5%. Calculate the amount of the annual lease payments. Adams Storage and Appraisal leased equipment to OAC Corporation for an eight-year period, at which time possession of the leased asset will revert back to Adams. The equipment cost Adams $32 million and has an expected useful life of 11 years. Its normal sales price is $45 million. The present value of the minimum lease payments for both the lessor and lessee is $40 million. The first payment was made at the inception of the lease. How would OAC classify this lease if it prepares its financial statements using IFRS? Why? BE 15–13 Guaranteed residual value; direct financing lease ● LO15–5 through LO15–6, LO15–8 BE 15–14 IFRS; lease classification ● LO15–3, LO15–11 Related Information: Lease term 2 years (8 quarterly periods) Quarterly rental payments $15,000 at the beginning of each period Economic life of asset 2 years Fair value of asset $112,080 Implicit interest rate 8% (Also lessee’s incremental borrowing rate) Required: Prepare a lease amortization schedule and appropriate entries for Manufacturers Southern from the inception of the lease through January 1, 2017. Depreciation is recorded at the end of each fiscal year (December 31) on a straight-line basis. Edison Leasing leased high-tech electronic equipment to Manufacturers Southern on January 1, 2016. Edison purchased the equipment from International Machines at a cost of $112,080. E 15–4 Direct financing lease; lessor ● LO15–5
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