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Posted on Jul 17, 2024

just need help with 5-9 Leslie's Leasing Company (Leslie) leases assets to Lester's Construction Company (Lester). Leslie is the Lessor and Lester is the lessee.

just need help with 5-9 image text in transcribed

Leslie's Leasing Company (Leslie") leases assets to Lester's Construction Company (Lester). Leslie is the Lessor and Lester is the lessee. Lester is a public American company that files financial statements with the SEC. Therefore it must follow the new accounting rules for lease contracts. Those rules require that the lease contract is recognized "on balance sheet." Lester believes they have negotiated a new lease with Leslie that is a "finance lease." Leslie is "not so sure about this. Lester's fiscal year coincides with the calendar year; its year end is December 31". Use the "Factor" table below if you need such factors. The terms of the lease contract are below. Answer the questions that follow on the next page. START DATE January 1, 2019 CONTRACT END DATE December 31, 2022 FAIR VALUE of the LEASED ASSET: $100,000, after customization ESTIMATED ECONOMIC LIFE of the LEASED ASSET: 4 years from January 1, 2019 PROVISIONS TO TRANSFER OWNERSHIP: None PURCHASE OPTION CONTAINED IN THE LEASE: None ANNUAL LEASE PAYMENTS: $ 27,549 made at the END of each year LESLIE's (the Lessor's) IMPLIED INTEREST RATE: 4% RESIDUAL VALUE (Expected and Contractual): None None None ASSET SALVAGE VALUE at end of LEASE TERM: None Present Value & Annuity Factors from Chapter 6 of Kieso, et. al.'s Intermediate Accounting 16th Edition FACTORS YEAR PRESENT VALUE of 1 FUTURE VALUE of 1 PV of ORDINARY ANNUITY of 1 PV of ANNUITY DUE of 1 TABLE 6-2 Table 6-1 Table 6-4 Table 6-5 Payments at End Payments at Beginning Discount 3% 4% 4% 5% 4% 5% 4% Rates 3% 1 .96154 1.04000 .96154 .95238 1.00000 .97087 .94260 1.05000 1.10250 2 .92456 1.96154 3 .88900 1.00000 1.97087 2.91347 3.82861 2.88609 1.08160 1.12486 1.16986 1.21665 .91514 .88849 .86261 1.88609 2.77509 3.62990 4.45182 1.15763 1.21551 1.85941 2.72325 3.54595 4.32948 .85480 4 5 3.77509 .82193 1.27628 4.71710 4.62990 1:52 Answer 1 of 1 Done Solution 4 Calculate the present value of lease payment as of 1/1/2019 Lease Years Period Discounting factors Amounts payments 1 27549 31/12/2019 0.96154 26489 2 27549 31/12/2020 0.92456 25470 3 27549 31/12/2021 0.88900 24491 27549 31/12/2022 0.85480 23548 present value of lease 100000 payments Following are the 5 lease classification Test 1. Transfere of ownership Test :- At the end of the lease term the lease should be transferes the ownership of underlying asset to the lessee 2. Purchase option test :- The lease should provide the lessee an option to purchase the underlying asset so that lessee can reasonably exercise an option 3. Lease Term Test :- The lease term should be major part of remaining economic life of the assets. if the starting date falls near the end of the economic life of underlying assets than this is not be used for classifying the lease. 4. Present value of lease payments:- Total of present value of lease payment should be more than 90% or exceed of fair value of leased assets 5. Alternative use test :- The leased asset is expected to have no alternative use to the lessor at the end of the lease term. There is only Two test are passed that is 1 and 2 since the total of present value of lease payment is equal to the fair value of the asset and lease term is 4 years and econominc life of the underlying asset is also 4 years therefore it is clear that lease will be called as operating lease rather than financial lease because remaining 3 conditions are not satisfied. 3. since all the condition dose not satisfied by given lease there is only two test are passed and for being financial lease the term should satisfy the all the above mention criteria. therefore it dose not classified as financial lease 4. Amortization Table for lease obligation Years value of discounting present value of asset obligation Balance asset factor (A-B) 1 100000 1.04 104000 27549 76451 76451 1.04 79509 27549 51960 3 51906 1.04 54038 27549 26489 26489 27549 27549 A 2 4 1.04 0 5. Prepare a Table that will show each of the two expenses that will be recorded in the Income Statement for each of the next four years. Be sure to sum them up in an additional column. 6. Considering the Table in question #5. Does this lease result in "front end loading in the Lessee's Income Statement? Why? 7. Add up and state the total of the payments made to Leslie during the term of the lease. 8. Add up and state the total of all expenses charged to Earnings during the term of this lease. Are the amounts the same or different in #7 and # 8 and is the answer you come up with correct? (State: SAME/DIFFERENT and CORRECT/WRONG) Leslie's Leasing Company (Leslie") leases assets to Lester's Construction Company (Lester). Leslie is the Lessor and Lester is the lessee. Lester is a public American company that files financial statements with the SEC. Therefore it must follow the new accounting rules for lease contracts. Those rules require that the lease contract is recognized "on balance sheet." Lester believes they have negotiated a new lease with Leslie that is a "finance lease." Leslie is "not so sure about this. Lester's fiscal year coincides with the calendar year; its year end is December 31". Use the "Factor" table below if you need such factors. The terms of the lease contract are below. Answer the questions that follow on the next page. START DATE January 1, 2019 CONTRACT END DATE December 31, 2022 FAIR VALUE of the LEASED ASSET: $100,000, after customization ESTIMATED ECONOMIC LIFE of the LEASED ASSET: 4 years from January 1, 2019 PROVISIONS TO TRANSFER OWNERSHIP: None PURCHASE OPTION CONTAINED IN THE LEASE: None ANNUAL LEASE PAYMENTS: $ 27,549 made at the END of each year LESLIE's (the Lessor's) IMPLIED INTEREST RATE: 4% RESIDUAL VALUE (Expected and Contractual): None None None ASSET SALVAGE VALUE at end of LEASE TERM: None Present Value & Annuity Factors from Chapter 6 of Kieso, et. al.'s Intermediate Accounting 16th Edition FACTORS YEAR PRESENT VALUE of 1 FUTURE VALUE of 1 PV of ORDINARY ANNUITY of 1 PV of ANNUITY DUE of 1 TABLE 6-2 Table 6-1 Table 6-4 Table 6-5 Payments at End Payments at Beginning Discount 3% 4% 4% 5% 4% 5% 4% Rates 3% 1 .96154 1.04000 .96154 .95238 1.00000 .97087 .94260 1.05000 1.10250 2 .92456 1.96154 3 .88900 1.00000 1.97087 2.91347 3.82861 2.88609 1.08160 1.12486 1.16986 1.21665 .91514 .88849 .86261 1.88609 2.77509 3.62990 4.45182 1.15763 1.21551 1.85941 2.72325 3.54595 4.32948 .85480 4 5 3.77509 .82193 1.27628 4.71710 4.62990 1:52 Answer 1 of 1 Done Solution 4 Calculate the present value of lease payment as of 1/1/2019 Lease Years Period Discounting factors Amounts payments 1 27549 31/12/2019 0.96154 26489 2 27549 31/12/2020 0.92456 25470 3 27549 31/12/2021 0.88900 24491 27549 31/12/2022 0.85480 23548 present value of lease 100000 payments Following are the 5 lease classification Test 1. Transfere of ownership Test :- At the end of the lease term the lease should be transferes the ownership of underlying asset to the lessee 2. Purchase option test :- The lease should provide the lessee an option to purchase the underlying asset so that lessee can reasonably exercise an option 3. Lease Term Test :- The lease term should be major part of remaining economic life of the assets. if the starting date falls near the end of the economic life of underlying assets than this is not be used for classifying the lease. 4. Present value of lease payments:- Total of present value of lease payment should be more than 90% or exceed of fair value of leased assets 5. Alternative use test :- The leased asset is expected to have no alternative use to the lessor at the end of the lease term. There is only Two test are passed that is 1 and 2 since the total of present value of lease payment is equal to the fair value of the asset and lease term is 4 years and econominc life of the underlying asset is also 4 years therefore it is clear that lease will be called as operating lease rather than financial lease because remaining 3 conditions are not satisfied. 3. since all the condition dose not satisfied by given lease there is only two test are passed and for being financial lease the term should satisfy the all the above mention criteria. therefore it dose not classified as financial lease 4. Amortization Table for lease obligation Years value of discounting present value of asset obligation Balance asset factor (A-B) 1 100000 1.04 104000 27549 76451 76451 1.04 79509 27549 51960 3 51906 1.04 54038 27549 26489 26489 27549 27549 A 2 4 1.04 0 5. Prepare a Table that will show each of the two expenses that will be recorded in the Income Statement for each of the next four years. Be sure to sum them up in an additional column. 6. Considering the Table in question #5. Does this lease result in "front end loading in the Lessee's Income Statement? Why? 7. Add up and state the total of the payments made to Leslie during the term of the lease. 8. Add up and state the total of all expenses charged to Earnings during the term of this lease. Are the amounts the same or different in #7 and # 8 and is the answer you come up with correct? (State: SAME/DIFFERENT and CORRECT/WRONG)