906 SECTION 3 Financial Instruments and Liabilities An alternate exercise and problem set is available in the Connect library. On January 1, 2016, Sweetwater Furniture Company leased office space under a 21-year operating lease agreement. The contract calls for annual rent payments on December 31 of each year. The payments are $10,000 the first year and increase by $500 per year. Benefits expected from using the office space are expected to remain constant over the lease term. Required: Record Sweetwater’s rent payment at December 31, 2020 (the fifth rent payment) and December 31, 2030 (the 15th rent payment). On January 1, 2016, National Insulation Corporation (NIC) leased office space under a capital lease. Lease payments are made annually. Title does not transfer to the lessee and there is no bargain purchase option. Portions of the lessee’s lease amortization schedule appear below: Problems P 15–1 Operating lease; scheduled rent increases ● LO15–4 P 15–2 Lease amortization schedule ● LO15–5, LO15–8 Jan. 1 Payments Effective Interest Decrease in Balance Outstanding Balance 2016 192,501 2016 20,000 20,000 172,501 2017 20,000 17,250 2,750 169,751 2018 20,000 16,975 3,025 166,726 2019 20,000 16,673 3,327 163,399 2020 20,000 16,340 3,660 159,739 2021 20,000 15,974 4,026 155,713 — — — — — — — — — — — — — — — 2033 20,000 7,364 12,636 61,006 2034 20,000 6,101 13,899 47,107 2035 20,000 4,711 15,289 31,818 2036 35,000 3,182 31,818 0 Required: 1. What is NIC’s lease liability at the inception of the lease (after the first payment)? 2. What amount would NIC record as a leased asset? 3. What is the lease term in years? 4. What is the asset’s residual value expected at the end of the lease term? 5. How much of the residual value is guaranteed by the lessee? 6. What is the effective annual interest rate? 7. What is the total amount of minimum lease payments? 8. What is the total effective interest expense recorded over the term of the lease? Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for $2,000,000 and leased it to Mid-South Urologists Group, Inc., on January 1, 2016. P 15–3 Direct financing and sales-type lease; lessee and lessor ● LO15–3, LO15–5, LO15–6 Lease Description: Quarterly lease payments $130,516—beginning of each period Lease term 5 years (20 quarters) No residual value; no BPO Economic life of lithotripter 5 years Implicit interest rate and lessee’s incremental borrowing rate 12% Fair value of asset $2,000,000 Collectibility of the lease payments is reasonably assured, and there are no lessor costs yet to be incurred. Required: 1. How should this lease be classified by Mid-South Urologists Group and by Physicians’ Leasing? 2. Prepare appropriate entries for both Mid-South Urologists Group and Physicians’ Leasing from the inception of the lease through the second rental payment on April 1, 2016. Depreciation is recorded at the end of each fiscal year (December 31). 3. Assume Mid-South Urologists Group leased the lithotripter directly from the manufacturer, Rand Medical, which produced the machine at a cost of $1.7 million. Prepare appropriate entries for Rand Medical from the inception of the lease through the second lease payment on April 1, 2016.
Spiceland_Inter_Accounting8e_Ch15
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