On January 1, 2016, Nath-Langstrom Services, Inc., a computer software training firm, leased several computers from ComputerWorld Corporation under a two-year operating lease agreement. The

ACC 211 CHAPTER 15 HW 15-1 On January 1, 2016, Nath-Langstrom Services, Inc., a computer software training firm, leased several computers from ComputerWorld Corporation under a two-year operating lease agreement. The contract calls for four rent payments of $19,500 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by ComputerWorld at a cost of $109,000 and were expected to have a useful life of five years with no residual value. Required: 1. Prepare the appropriate entries for the lessee (Use straight-line depreciation.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) a) Record the lease payment for June 30, 2016. b) Record the lease payment for December 31, 2016. 2. Prepare the appropriate entries for the lessor from the inception of the lease through the end of 2016. (Use straight-line depreciation.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 2a) Record cash received. 2b) Record cash received. 2c) Record depreciation expense. 15-2 For each of the three independent situations below determine the amount of the annual lease payments. Each describes a capital lease in which annual lease payments are payable at the beginning of each year. Each lease agreement contains an option that permits the lessee to acquire the leased asset at an option price that is sufficiently lower than the expected fair value that the exercise of the option appears reasonably certain. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Situation ---------------------------------------------------1 2 3 Lease term (years) Lessor's rate of return Fair value of leased asset Lessor's cost of leased asset 5 10% $74,000 $57,000 15 11% $427,000 $427,000 4 9% $192,000 $152,000 Bargain purchase option: Option price Exercisable at end of year: $17,000 5 $57,000 5 $29,000 3 Require: Determine the annual lease payments for each situation: Annual Lease Payments: Situation 1: ---------------------Situation 2: ---------------------Situation 3: ---------------------- 15-3 Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians' Leasing purchased a lithotripter from Rand for $1,590,000 and leased it to Mid-South Urologists Group, Inc., on January 1, 2016. Lease Description: Quarterly lease payments $103,760 beginning of each period Lease term 5 years (20 quarters) No residual value; no BPO Economic life of lithotripter 5 years Implicit interest rate and lessee's incremental borrowing rate 12 % Fair value of asset $1,590,000 Collectability of the lease payments is reasonably assured, and there are no lessor costs yet to be incurred. Required: 1. How should this lease be classified by Mid-South Urologists Group and by Physicians' Leasing? 2. Prepare appropriate entries for both Mid-South Urologists Group and Physicians' Leasing from the inception of the lease through the second rental payment on April 1, 2016. Depreciation is recorded at the end of each fiscal year (December 31). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Mid-South Urologists Group (Lessee): a) Record lease. b) Record cash payment. January 01, 2016 c) Record cash payment. April 1, 2016 Physicians' Leasing (Lessor): d) Record lease. e) Record cash received. January 01, 2016 f) Record cash received. April 01, 2016 3. Assume Mid-South Urologists Group leased the lithotripter directly from the manufacturer, Rand Medical, which produced the machine at a cost of $1.2 million. Prepare appropriate entries for Rand Medical from the inception of the lease through the second lease payment on April 1, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 3a) Record lease. January 01, 2013 3b) Record cash received. January 01, 2016 3c) Record cash received. April 01, 2016 15-4 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 $586,260 and has an expected useful life of six years. Its normal sales price is $586,260. The lessee-guaranteed residual value at December 31, 2020, is $30,000. Equal payments under the lease are $160,000 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 cost uncertainties. Western Soya's incremental borrowing rate is 12%. Western Soya knows the interest rate implicit in the lease payments is 9%. Both companies use straight-line depreciation. Use (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Require: 1. Show how Rhone-Metro calculated the $160,000 annual lease payments. 2. Prepare the appropriate entries for both Western Soya Co. and Rhone-Metro on December 31, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Western Soya Co. a) Record lease. December 31, 2016 b) Record cash payment. December 31, 2016 Rhone-Metro Industries a) Record lease. December 31, 2016 b) Record cash received. December 31, 2016. 3. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor. Western Soya Co. a) Record depreciation expense. December 31, 2020 b) Record the end of the lease. December 31, 2020. Rhone-Metro Industries Record the end of the lease. December 31, 2020 ------------------------------------------------------------------------------------------------------------------------------------15-5 Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2016, Rhone-Metro 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 $580,000 to manufacture and has an expected useful life of six years. Its normal sales price is $618,738. The expected residual value of $26,000 at December 31, 2020, is not guaranteed. Equal payments under the lease are $174,000 (including $4,000 executory costs) 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 cost uncertainties. Western Soya's incremental borrowing rate is 10%. Western Soya knows the interest rate implicit in the lease payments is 9%. Both companies use straight-line depreciation. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Show how Rhone-Metro calculated the $174,000 annual lease payments. 2. Prepare the appropriate entries for both Western Soya Co. and Rhone-Metro on December 31, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Western Soya Co. (Lessee) a) Record lease. December 21, 2016 b) Record cash payment. December 31, 2016 Rhone-Metro a) Record lease. December 31, 2016 b) Record cash received. December 31, 2016 3. Prepare an amortization schedules describing the pattern of interest over the lease term for the lessee and the lessor. a) Lessee (unguaranteed residual value excluded): b) Lessor (unguaranteed residual value included): 4. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2017 (the second lease payment and depreciation). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) a) b) c) d) Record depreciation expense. December 31, 2017 Record operating expense. December 31, 2017 Record cash payment. December 31, 2017. Record cash received. December 31, 2017 5. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2020, assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is $1,200. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) A) B) C) D) Record operating expense. December 31, 2020. Record depreciation expense. December 31, 2020 Record the end of the lease. December 31, 2020 Record the end of the lease. December 31, 2020