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CHAPTER 15 Leases 907 At the beginning of 2016, VHF Industries acquired a machine with a fair value of $6,074,700 by signing a fouryear lease. The lease is payable in four annual payments of $2 million at the end of each year. Required: 1. What is the effective rate of interest implicit in the agreement? 2. Prepare the lessee’s journal entry at the inception of the lease. 3. Prepare the journal entry to record the first lease payment at December 31, 2016. 4. Prepare the journal entry to record the second lease payment at December 31, 2017. 5. Suppose the fair value of the machine and the lessor’s implicit rate were unknown at the time of the lease, but that the lessee’s incremental borrowing rate of interest for notes of similar risk was 11%. Prepare the lessee’s entry at the inception of the lease. (Note: You may wish to compare your solution to Problem 15–4 with that of Problem 14–12, which deals with a parallel situation in which the machine was acquired with an installment note.) (Note: Problems 15–5, 15–6, and 15–7 are three variations of the same basic situation.) Werner Chemical, Inc., leased a protein analyzer on September 30, 2016. The five-year lease agreement calls for Werner to make quarterly lease payments of $391,548, payable each September 30, December 31, March 31, June 30, with the first payment at September 30, 2016. Werner’s incremental borrowing rate is 12%. Depreciation is recorded on a straight-line basis at the end of each fiscal year. The useful life of the equipment is five years. Required: 1. Determine the present value of the lease payments at September 30, 2016 (to the nearest $000). 2. What amounts related to the lease would Werner report in its balance sheet at December 31, 2016 (ignore taxes)? 3. What amounts related to the lease would Werner report in its income statement for the year ended December 31, 2016 (ignore taxes)? 4. What amounts related to the lease would Werner report in its statement of cash flows for the year ended December 31, 2016 (ignore taxes)? Abbott Equipment leased a protein analyzer to Werner Chemical, Inc., on September 30, 2016. Abbott purchased the machine from NutraLabs, Inc., at a cost of $6 million. The five-year lease agreement calls for Werner to make quarterly lease payments of $391,548, payable each September 30, December 31, March 31, June 30, with the first payment at September 30, 2016. Abbot’s implicit interest rate is 12%. Required: 1. What amounts related to the lease would Abbott report in its balance sheet at December 31, 2016 (ignore taxes)? 2. What amounts related to the lease would Abbott report in its income statement for the year ended December 31, 2016 (ignore taxes)? 3. What amounts related to the lease would Abbott report in its statement of cash flows for the year ended December 31, 2016 (ignore taxes)? NutraLabs, Inc., leased a protein analyzer to Werner Chemical, Inc., on September 30, 2016. NutraLabs manufactured the machine at a cost of $5 million. The five-year lease agreement calls for Werner to make quarterly lease payments of $391,548, payable each September 30, December 31, March 31, June 30, with the first payment at September 30, 2016. NutraLabs’ implicit interest rate is 12%. Required: 1. Determine the price at which NutraLabs is “selling” the equipment (present value of the lease payments) at September 30, 2016 (to the nearest $000). 2. What amounts related to the lease would NutraLabs report in its balance sheet at December 31, 2016 (ignore taxes)? 3. What amounts related to the lease would NutraLabs report in its income statement for the year ended December 31, 2016 (ignore taxes)? 4. What amounts related to the lease would NutraLabs report in its statement of cash flows for the year ended December 31, 2016 (ignore taxes)? (Note: Problems 15–8, 15–9, and 15–10 are three variations of the same basic situation.) On December 31, 2016, Rhone-Metro Industries leased equipment to Western Soya Co. for a four-year period ending December 31, 2020, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost Rhone-Metro $365,760 and has an expected useful life of six years. Its normal sales price is $365,760. The lessee-guaranteed residual value at December 31, 2020, is $25,000. Equal payments under the lease are $100,000 and are due on December 31 of each year. The first payment was made on December 31, 2016. Collectibility of the remaining lease payments is reasonably assured, and Rhone-Metro has no material P 15–4 Capital lease ● LO15–5 P 15–5 Capital lease; lessee; financial statement effects ● LO15–5 P 15–6 Direct financing lease; lessor; financial statement effects ● LO15–5 P 15–7 Sales-type lease; lessor; financial statement effects ● LO15–6 P 15–8 Guaranteed residual value; direct financing lease ● LO15–3, LO15–5, LO15–8


Spiceland_Inter_Accounting8e_Ch15
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