CHAPTER 15 Leases 909 6. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 30, 2019, assuming the BPO is exercised on that date. Allied Industries manufactures high-performance conveyers that often are leased to industrial customers. On December 31, 2016, Allied leased a conveyer to Poole Carrier Corporation for a three-year period ending December 31, 2019, at which time possession of the leased asset will revert back to Allied. Equal payments under the lease are $200,000 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 Allied has no material cost uncertainties. The conveyer cost $450,000 to manufacture and has an expected useful life of six years. Its normal sales price is $659,805. The expected residual value of $150,000 at December 31, 2019, is guaranteed by United Assurance Group. Poole Carrier’s incremental borrowing rate and the interest rate implicit in the lease payments are 10%. Required: 1. Show how Allied Industries calculated the $200,000 annual lease payments. 2. How should this lease be classified (a) by Allied (the lessor) and (b) by Poole (the lessee)? Why? 3. Prepare the appropriate entries for both Poole and Allied on December 31, 2016. 4. Prepare an amortization schedule(s) describing the pattern of interest over the lease term. 5. Prepare the appropriate entries for both Poole and Allied on December 31, 2017, 2018, and 2019, assuming the conveyer is returned to Allied at the end of the lease and the actual residual value on that date is $105,000. Each of the four independent situations below describes a direct financing lease in which annual lease payments of $10,000 are payable at the beginning of each year. Each is a capital lease for the lessee. Determine the following amounts at the inception of the lease: A. The lessor’s: 1. Minimum lease payments 2. Gross investment in the lease 3. Net investment in the lease B. The lessee’s: 4. Minimum lease payments 5. Leased asset 6. Lease liability P 15–11 Operating lease to lessee—capital lease to lessor ● LO15–3, LO15–4, LO15–5, LO15–8 P 15–12 Lease concepts; direct financing leases; guaranteed and unguaranteed residual value ● LO15–3, LO15–5, LO15–8 Situation 1 2 3 4 Lease term (years) 4 4 4 4 Asset’s useful life (years) 4 5 5 5 Lessor’s implicit rate (known by lessee) 11% 11% 11% 11% Lessee’s incremental borrowing rate 11% 12% 11% 12% Residual value: Guaranteed by lessee 0 $4,000 0 0 Guaranteed by third party 0 0 $4,000 0 Unguaranteed 0 0 0 $4,000 Four independent situations are described below. For each, annual lease payments of $100,000 (not including any executory costs paid by lessor) are payable at the beginning of each year. Each is a capital lease for both the lessor and lessee. Determine the following amounts at the inception of the lease: A. The lessor’s: 1. Minimum lease payments 2. Gross investment in the lease 3. Net investment in the lease 4. Sales revenue 5. Cost of goods sold 6. Dealer’s profit B. The lessee’s: 7. Minimum lease payments 8. Leased asset 9. Lease liability P 15–13 Lease concepts ● LO15–3, LO15–5, LO15–8 ✮
Spiceland_Inter_Accounting8e_Ch15
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