Aquarius Incorporated (AI) uses leases as a method of selling its products. In early 2011, AI completed construction of a passenger ferry for use between Manhattan and Staten Island. On April 1, 2011, the ferry was leased to the Manhattan Ferry Line on a contract specifying that ownership of the ferry will transfer to the lessee at the end of the lease period. Annual lease payments do not include executory costs. Other terms of the agreement are as follows: Original Cost of the ferry $1,500,000 Fair Value of ferry at the lease date $2,107,102 Lease Payments (paid in advance) $225,000 Estimated residual value (unguaranteed) $78,000 Incremental borrowing rate - lessee $10% Date of first lease payment April 1, 2011 Lease period 20 years Required: (a) Compute the amount of financial revenue that will be earned over the lease term and the manufacturers profit that will be earned immediately by Aquarius. (11 points) (b) Give the entry to record the signing of the lease on Aquarius books. (8 points) (c) Compute the implicit rate of interest on the lease. (5 points) (d) Give the journal entries necessary on Aquarius books to record the lease for the first three years, exclusive of the initial entry. Aquarius has a calendar accounting year. (39 points) (e) Indicate the balance of Lease Payments Receivable at December 31, 2013. (12 points) Question 2 Truck Leasing Company (TLC) buys trucks for leasing to various delivery companies. On October 1, 2010, TLC leases a truck to Showman Delivery Company. The cost of the truck to TLC was $196,110, which approximated its fair value on the lease date. The lease payments stipulated in the lease are $33,000 per year in advance for the 10-year period of the lease. The payments include executory costs of $3,000 per year. The expected economic life of the equipment is also 10 years. The title to the equipment remains in the hands of TLC at the end of the lease term, although only nominal residual value is expected at that time. Showman incremental borrowing rate is 10%, and it uses the straight-line method of depreciation on all owned equipment. Both Showman and TLC have fiscal year ending September 30 and lease payments are made on this date. Required: (a) Prepare the entries to record the lease and the first lease payment on the books of the lessor and lessee, assuming the lease meets the criteria of a direct financing lease for the lessor and a capital lease for the lessee. (20 points) (b) Compute the implicit rate of interest of the lessor. (5 points) (c) Give all entries required to account for the lease on both the lessees and lessors books for the fiscal years 2011, 2012, and 2013. (50 points) Question 3 Jacks Mining and Manufacturing Company (JMMC) leases from Emily Leasing Company three machines under the following operating lease terms: Machine 1: Lease period 10 years, beginning April 1, 2005; lease peyments-$18,000 per year, payable in advance. Machine 2: Lease period 10 years, beginning July 1, 2009, lease payments-$30,000 per year, payable in advance. Machine 3: Lease period 15 years, beginning January 1, 2010, lease payments-$12,500 per year, payable in advance. Required: Prepare the note to the 2011 financial statements that would be required to disclose the lease commitments of JMMC. JMMCs accounting period is a calendar year. (20 points) Question 4 You are the accountant for Makers Corporation, an equipment manufacturer. In order to help customers finance their purchases, Makers often leases, rather than sells the equipment. Makers structures the lease contracts so that most of its leases are classified as operating leases. This is because customers strongly prefer this treatment in order to keep the lease obligation off their balance sheets. This treatment does result in a delay in Makers ability to report profits from the sales, but this delay has been viewed as part of the cost of doing business and keeping customers happy. The president of Makers Corporation just returned from a week-long accounting and finance seminar at the Keller Graduate School of Management, Devry College of New York. She is excited about the session she attended on the accounting for leases. She was told, or thinks she was told, that there is no need for Makers to report its leasing arrangements as operating leases, as according to US GAAP, lessors can always classify a lease as a sales-type lease even when the lessee classifies the same lease as an operating lease. The president tells you to get to work restating Makers most recent financial statements to reflect reclassification of all Makers leases from operating leases to sales-type leases. Required: (a) Write a Memo to the President clarifying the US accounting rules governing sales-type and operating leases. Carefully explain the circumstances in which the same lease can be classified as a sales-type lease by the lessor and an operating lease by the lessee. (20 points) (b) How different would your answer to (a) above be if the case were based on IFRS? (10 points)