CHAPTER 15 Leases 913 Required: 1. Prepare the appropriate entries for North American on (a) January 1, 2016, to record the sale-leaseback and (b) December 31, 2016, to record necessary adjustments. 2. Show how North American’s December 31, 2016, balance sheet and income statement would reflect the sale-leaseback. On January 1, 2016, Cook Textiles leased a building with two acres of land from Peck Development. The lease is for 10 years. No purchase option exists and the property will revert to Peck at the end of the lease. The building and land combined have a fair market value on January 1, 2016, of $1,450,000 and the building has an estimated life of 20 years with a residual value of $150,000. The lease calls for Cook to assume all costs of ownership and to make annual payments of $200,000 due at the beginning of each year. On January 1, 2016, the estimated value of the land was $400,000. Cook uses the straight-line method of depreciation and pays 10% interest on borrowed money. Peck’s implicit rate is unknown. Required: 1. Prepare journal entries for Cook Textiles for 2016. Assume the land could be leased without the building for $59,000 each year. 2. Assuming the land had a fair value on January 1, 2016, of $200,000 and could be leased alone for $30,000, prepare journal entries for Cook Textiles for 2016. Refer to the situation described in Problem 15–21. Required: How might your solution differ if Cook Textiles prepares its financial statements according to International Financial Reporting Standards? P 15–21 Real estate lease; land and building ● LO15–10 P 15–22 IFRS; real estate lease; land and building ● LO15–10, LO15–11 IFRS Broaden Your Perspective Apply your critical-thinking ability to the knowledge you’ve gained. These cases will provide you an opportunity to develop your research, analysis, judgment, and communication skills. You also will work with other students, integrate what you’ve learned, apply it in real-world situations, and consider its global and ethical ramifications. This practice will broaden your knowledge and further develop your decision-making abilities. Refer to the financial statements and related disclosure notes of PetSmart, Inc., located in the company’s financial statements and related disclosure notes for the year ended February 2, 2014, in Appendix B located at the back of the text. You also can locate the report online at the PetSmart website, petsmart.com. Required: 1. See the note on “Financing Arrangements and Lease Obligations” in the disclosure notes. What is PetSmart’s capital lease liability? 2. If the operating leases were capitalized, approximately how much would that increase the capital lease liability? 3. What effect would that have on the company’s debt to equity ratio? (Refer to the balance sheet.) “I don’t see that in my intermediate accounting text I saved from college,” you explain to another member of the accounting division of Dowell Chemical Corporation. “This will take some research.” Your comments pertain to the appropriate accounting treatment of a proposed sublease of warehouses Dowell has used for product storage. Dowell leased the warehouses one year ago on December 31. The five-year lease agreement called for Dowell to make quarterly lease payments of $2,398,303, payable each December 31, March 31, June 30, and September 30, with the first payment at the lease’s inception. As a capital lease, Dowell had recorded the leased asset and liability at $40 million, the present value of the lease payments at 8%. Dowell records depreciation on a straightline basis at the end of each fiscal year. Today, Jason True, Dowell’s controller, explained a proposal to sublease the underused warehouses to American Tankers, Inc. for the remaining four years of the lease term. American Tankers would be substituted as lessee under the original lease agreement. As the new lessee, it would become the primary obligor under the Analysis Case 15–1 Capitalizing operating leases; financial statement effects ● LO15–1 through LO15–5 Research Case 15–2 FASB codification; locate and extract relevant information and authoritative support for a financial reporting issue; capital lease; sublease of a leased asset ● LO15–1 through LO15–5
Spiceland_Inter_Accounting8e_Ch15
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