Problem 20-23 The head office of Wildhorse Central Ltd. has operated in the western provinces for almost 50 years. Wildhorse Central uses ASPE. In 2004, new offices were constructed on the same site at a cost of $9.80 million. The new building was opened on January 4, 2005, and was expected to be used for 35 years, at which time it would have a value of approximately $2.20 million. ASPE Fra 2004, anew offices romerne structed monithe same site at a cost of In 2020, as competitors began to consider merger strategies among themselves, Wildhorse Central felt that the time was right to expand the number of its offices throughout the region. This plan required significant financing and, as a source of cash, Wildhorse Central looked into selling the building that housed its head office. On June 29, 2020, Rural Life Insurance Ltd. purchased the building (but not the land) for $7.70 million and immediately entered into a 20-year lease with Wildhorse Central to lease back the occupied space. The terms of the lease were as follows. 1. 2. 3. 4. 5. It is non-cancellable, with an option to purchase the building at the end of the lease for $1 million. The annual rental is $806,345, payable on June 29 each year, beginning on June 29, 2020. Rural Life expects to earn a return of 10% on its net investment in the lease, the same as Wildhorse Central's incremental borrowing rate. Wildhorse Central is responsible for maintenance, insurance, and property taxes. Estimates of useful life and residual value have not changed significantly since 2001. Straight-line depreciation is used by Wildhorse Central. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1. TABLE PV.1 Present Value of 1 (n) periods 11% 12% 2% 2% 3% 4% 5% 6% 7% 8% 9% 10% 15% 0.98039 0.97561 0.93458 0.92593 0.90909 0.89286 0.86957 1 0.97087 0.96156 0.95238 0.94340 0.91743 0.90090 2 0.96117 0.95181 0.94260 0.92456 0.90703 0.89000 0.87344 0.85734 0.84168 0.82645 0.81162 0.79719 0.75614 0.83962 0.79383 0.73119 3 0.94232 0.92860 0.91514 0.88900 0.86384 0.81630 0.77218 0.75132 0.71178 0.65752 0.82270 0.79209 0.57175 4 0.92385 0.90595 0.88849 0.85480 0.76290 0.73503 0.70843 0.68301 0.65873 0.63552 0.90583 0.74726 0.59345 5 0.88385 0.86261 0.82193 0.78353 0.71299 0.68058 0.64993 0.62092 0.56743 0.49718 0.70496 0.66634 0.50663 0.88797 0.86230 0.83748 0.79031 0.74622 0.63017 0.59627 0.56447 0.53464 0.43233 6 0.81309 0.51316 0.48166 0.87056 0.84127 0.75992 0.71068 0.66506 0.62275 0.58349 0.54703 0.45235 0.37594 7 0.73069 0.62741 0.85349 0.82075 0.78941 0.67684 0.58201 0.54027 0.50187 0.46651 0.43393 0.40388 0.32690 0.76642 0.83676 0.80073 0.70259 0.64461 0.59190 0.54393 0.50025 0.46043 0.42410 0.39092 0.36061 0.28426 9 0.82035 0.74409 10 0.78120 0.67556 0.61391 0.55839 0.50835 0.46319 0.42241 0.38554 0.35218 0.32197 0.24719 0.38753 0.21494 11 0.80426 0.76214 0.72242 0.64958 0.58468 0.52679 0.47509 0.42888 0.35049 0.31728 0.28748 0.4440 0.28584 0.78849 0.39711 0.31863 12 0.74356 0.70138 0.62460 0.55684 0.49697 0.35554 0.25668 0.18691 0.72542 0.41496 0.16253 13 0.77303 0.68095 0.60057 0.53032 0.46884 0.36770 0.32618 0.28966 0.25751 0.22917 0.38782 0.26333 0.23199 14 0.75788 0.70773 0.66112 0.57748 0.50507 0.44230 0.34046 0.29925 0.20462 0.14133 0.7430 0.69047 0.20900 15 0.64186 0.55526 0.48102 0.41727 0.36245 0.31524 0.27454 0.23939 0.18270 0.12289 0.53391 0.45811 0.39365 0.21763 16 0.72845 0.67362 0.62317 0.33873 0.29189 0.25187 0.18829 0.16312 0.10687 0.65720 0.60502 0.51337 0.37136 0.31657 0.27027 0.23107 0.14564 0.09293 17 0.71416 0.43630 0.19785 0.16963 TABLE PV.2 Present Value of an Annuity of 1 PV = 1 - ditir" (n) Periods 2% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 15% 1 0 .980390.97561 0.97087 0.96154 0.95238 0.94340 0.93458 0.92593 0.91743 0.909090 .90090 0.89286 0.86957 3 1.94156 2.88388 3.80773 4.71346 1.92742 2.85602 3.76197 4.64583 1.91347 2.82861 3.71710 4.57971 1.88609 1.85941 2.775092.72325 3.62990 3.54595 4.45182 4.32948 1.83339 2.67301 3.46511 4.21236 1.80802 1.78326 2.62432 2.57710 3.38721 3.31213 4.10020 3.99271 1.75911 2.53130 3.23972 3.88965 1.73554 2.48685 3.16986 3.79079 1.71252 2.44371 3.10245 3.69590 1.69005 2.40183 3.03735 3.60478 1.62571 2.28323 2.85498 3.35216 6 5.60143 6.47199 7.32548 8.16224 8.98259 9.78685 10.57534 11.34837 12.10625 12.84926 5.50813 5.417195.242145.075694.91732 4.76654 4.62288 6.349396.23028 6.00205 5.78637 5.58238 5.38929 5.20637 7.17014 7.019696.73274 6.46321 6.20979 5.97130 5.74664 7.970877.78611 7.435337.10782 6.801696.51523 6.24689 8.75206 8.53020 8.11090 7.721737.360097.02358 6.71008 9.51421 9.25262 8.76048 8.30641 7.88687 7.49867 7.13896 10.25776 9.95400 9.38507 8.86325 8.38384 7.94269 7.53608 10.98319 10.63496 9.98565 9.39357 8.85268 8.35765 7.90378 11.69091 11.29607 10.56312 9.89864 9.29498 8.74547 8.24424 12.38138 11.93794 11.11839 10.37966 9.71225 9.10791 8.55948 4.48592 5.03295 5.53482 5.99525 6.41766 6.80519 7.16073 7.48690 7.78615 8.06069 4.35526 4.23054 4.86842 4.71220 5.33493 5.14612 5.75902 5.53705 6.14457 5.88923 6.49506 6.20652 6.81369 6.49236 7.10336 6.74987 7.36669 6.98187 7.60608 7.19087 4.11141 3.78448 4.56376 4.16042 4.96764 4.48732 5.32825 4.77158 5.650225.01877 5.93770 5.23371 6.19437 5.42062 6.42355 5.58315 6.62817 5.72448 6.81086 5.84737 12 Using time value of money tables, a financial calculator, or Excel functions, calculate the lease payment that Rural Life would require from Wildhorse Central. Use Excel and prepare a lease amortization schedule for the first two payments. (Hint: You may find the ROUND formula helpful for rounding in Excel.) Start with an amount rounded to the nearest thousand dollars. (Start the table with an amount rounded to the the nearest thousand dollars. Round answers to 0 decimal places, e.g. 5,275.) Partial Lease Amortization Schedule Annual Lease Payment Date Interest Amortization Balance 6/29/20 6/29/20 6/29/21 Prepare all entries for Wildhorse Central Ltd. from June 29, 2020, to December 31, 2021. Wildhorse Central has a calendar year fiscal period. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Round answers to 0 decimal places, e.g. 5,275.) Debit Credit Date Account Titles and Explanation June 29, 2020 (To record sale of building.) June 29, 2020 (To record inception of lease and first lease payment.) Dec. 31, 2020 (To record amortization of deferred gross profit.) Dec. 31, 2020 (To record depreciation expense.) Dec. 31, 2020 (To record interest.) June 29, 2021 (To record lease payment.) Dec. 31, 2021 (To record amortization of deferred gross profit.) Dec. 31, 2021 (To record depreciation expense.) Dec. 31, 2021 (To record interest.) SHOW LIST OF ACCOUNTS LINK TO TEXT Assume instead that there was no option to purchase, that $7.70 million represents the building's fair value on June 29, 2020, and that the lease term was 12 years. Prepare all entries for Wildhorse Central from June 29, 2020, to December 31, 2021. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.) Account Titles and Explanation Debit Credit Date June 29, 2020 (To record sale of building.) June 29, 2020 (To record rent payment.) Dec. 31, 2020 (To record expired rent.) Dec. 31, 2020 (To adjust deferred profit.) June 29, 2021 (To record expired rent.) June 29, 2021 (To record rent payment.) Dec. 31, 2021 (To record expired rent.) Dec. 31, 2021 (To adjust deferred profit.) List Of Accounts CLOSE Problem 20-23 Accounts Payable Accounts Receivable Accumulated Depreciation Leased Buildings Accumulated Depreciation - Buildings Accumulated Depreciation Leased Equipment Accumulated Depreciation Rental Equipment Accumulated Depreciation Right-of-Use Asset Accumulated Depreciation - Software under Lease Accumulated Depreciation Vehicles Accumulated Depreciation Vehicles under Lease Amortization Expense Buildings Buildings under Lease Cash Cost of Goods Sold Deferred Profit on Sale-Leaseback Depreciation Expense Equipment Equipment Acquired for Lessee Equipment under Lease Insurance Expense Insurance Payable Insurance Revenue Interest Expense Interest Income Interest Payable Interest Receivable Inventory Land Rental Expense Land under Lease Lease Liability Lease Receivable Legal Expense Loss on Lease Low Value Lease Expense No Entry Obligations under Lease Operating Expenses Prepaid Expenses Prepaid Insurance Prepaid Rent Property Tax Expense Rent Expense Rental Equipment Rent Payable Rent Receivable Rent Revenue Repairs and Maintenance Expense Right-of-Use Asset Sales Revenue Selling Expenses Short-Term Lease Expense Software under Lease Unearned Interest Income Unearned Rent Revenue Vehicles Vehicles under Lease Problem 20-23 The head office of Wildhorse Central Ltd. has operated in the western provinces for almost 50 years. Wildhorse Central uses ASPE. In 2004, new offices were constructed on the same site at a cost of $9.80 million. The new building was opened on January 4, 2005, and was expected to be used for 35 years, at which time it would have a value of approximately $2.20 million. ASPE Fra 2004, anew offices romerne structed monithe same site at a cost of In 2020, as competitors began to consider merger strategies among themselves, Wildhorse Central felt that the time was right to expand the number of its offices throughout the region. This plan required significant financing and, as a source of cash, Wildhorse Central looked into selling the building that housed its head office. On June 29, 2020, Rural Life Insurance Ltd. purchased the building (but not the land) for $7.70 million and immediately entered into a 20-year lease with Wildhorse Central to lease back the occupied space. The terms of the lease were as follows. 1. 2. 3. 4. 5. It is non-cancellable, with an option to purchase the building at the end of the lease for $1 million. The annual rental is $806,345, payable on June 29 each year, beginning on June 29, 2020. Rural Life expects to earn a return of 10% on its net investment in the lease, the same as Wildhorse Central's incremental borrowing rate. Wildhorse Central is responsible for maintenance, insurance, and property taxes. Estimates of useful life and residual value have not changed significantly since 2001. Straight-line depreciation is used by Wildhorse Central. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1. TABLE PV.1 Present Value of 1 (n) periods 11% 12% 2% 2% 3% 4% 5% 6% 7% 8% 9% 10% 15% 0.98039 0.97561 0.93458 0.92593 0.90909 0.89286 0.86957 1 0.97087 0.96156 0.95238 0.94340 0.91743 0.90090 2 0.96117 0.95181 0.94260 0.92456 0.90703 0.89000 0.87344 0.85734 0.84168 0.82645 0.81162 0.79719 0.75614 0.83962 0.79383 0.73119 3 0.94232 0.92860 0.91514 0.88900 0.86384 0.81630 0.77218 0.75132 0.71178 0.65752 0.82270 0.79209 0.57175 4 0.92385 0.90595 0.88849 0.85480 0.76290 0.73503 0.70843 0.68301 0.65873 0.63552 0.90583 0.74726 0.59345 5 0.88385 0.86261 0.82193 0.78353 0.71299 0.68058 0.64993 0.62092 0.56743 0.49718 0.70496 0.66634 0.50663 0.88797 0.86230 0.83748 0.79031 0.74622 0.63017 0.59627 0.56447 0.53464 0.43233 6 0.81309 0.51316 0.48166 0.87056 0.84127 0.75992 0.71068 0.66506 0.62275 0.58349 0.54703 0.45235 0.37594 7 0.73069 0.62741 0.85349 0.82075 0.78941 0.67684 0.58201 0.54027 0.50187 0.46651 0.43393 0.40388 0.32690 0.76642 0.83676 0.80073 0.70259 0.64461 0.59190 0.54393 0.50025 0.46043 0.42410 0.39092 0.36061 0.28426 9 0.82035 0.74409 10 0.78120 0.67556 0.61391 0.55839 0.50835 0.46319 0.42241 0.38554 0.35218 0.32197 0.24719 0.38753 0.21494 11 0.80426 0.76214 0.72242 0.64958 0.58468 0.52679 0.47509 0.42888 0.35049 0.31728 0.28748 0.4440 0.28584 0.78849 0.39711 0.31863 12 0.74356 0.70138 0.62460 0.55684 0.49697 0.35554 0.25668 0.18691 0.72542 0.41496 0.16253 13 0.77303 0.68095 0.60057 0.53032 0.46884 0.36770 0.32618 0.28966 0.25751 0.22917 0.38782 0.26333 0.23199 14 0.75788 0.70773 0.66112 0.57748 0.50507 0.44230 0.34046 0.29925 0.20462 0.14133 0.7430 0.69047 0.20900 15 0.64186 0.55526 0.48102 0.41727 0.36245 0.31524 0.27454 0.23939 0.18270 0.12289 0.53391 0.45811 0.39365 0.21763 16 0.72845 0.67362 0.62317 0.33873 0.29189 0.25187 0.18829 0.16312 0.10687 0.65720 0.60502 0.51337 0.37136 0.31657 0.27027 0.23107 0.14564 0.09293 17 0.71416 0.43630 0.19785 0.16963 TABLE PV.2 Present Value of an Annuity of 1 PV = 1 - ditir" (n) Periods 2% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 15% 1 0 .980390.97561 0.97087 0.96154 0.95238 0.94340 0.93458 0.92593 0.91743 0.909090 .90090 0.89286 0.86957 3 1.94156 2.88388 3.80773 4.71346 1.92742 2.85602 3.76197 4.64583 1.91347 2.82861 3.71710 4.57971 1.88609 1.85941 2.775092.72325 3.62990 3.54595 4.45182 4.32948 1.83339 2.67301 3.46511 4.21236 1.80802 1.78326 2.62432 2.57710 3.38721 3.31213 4.10020 3.99271 1.75911 2.53130 3.23972 3.88965 1.73554 2.48685 3.16986 3.79079 1.71252 2.44371 3.10245 3.69590 1.69005 2.40183 3.03735 3.60478 1.62571 2.28323 2.85498 3.35216 6 5.60143 6.47199 7.32548 8.16224 8.98259 9.78685 10.57534 11.34837 12.10625 12.84926 5.50813 5.417195.242145.075694.91732 4.76654 4.62288 6.349396.23028 6.00205 5.78637 5.58238 5.38929 5.20637 7.17014 7.019696.73274 6.46321 6.20979 5.97130 5.74664 7.970877.78611 7.435337.10782 6.801696.51523 6.24689 8.75206 8.53020 8.11090 7.721737.360097.02358 6.71008 9.51421 9.25262 8.76048 8.30641 7.88687 7.49867 7.13896 10.25776 9.95400 9.38507 8.86325 8.38384 7.94269 7.53608 10.98319 10.63496 9.98565 9.39357 8.85268 8.35765 7.90378 11.69091 11.29607 10.56312 9.89864 9.29498 8.74547 8.24424 12.38138 11.93794 11.11839 10.37966 9.71225 9.10791 8.55948 4.48592 5.03295 5.53482 5.99525 6.41766 6.80519 7.16073 7.48690 7.78615 8.06069 4.35526 4.23054 4.86842 4.71220 5.33493 5.14612 5.75902 5.53705 6.14457 5.88923 6.49506 6.20652 6.81369 6.49236 7.10336 6.74987 7.36669 6.98187 7.60608 7.19087 4.11141 3.78448 4.56376 4.16042 4.96764 4.48732 5.32825 4.77158 5.650225.01877 5.93770 5.23371 6.19437 5.42062 6.42355 5.58315 6.62817 5.72448 6.81086 5.84737 12 Using time value of money tables, a financial calculator, or Excel functions, calculate the lease payment that Rural Life would require from Wildhorse Central. Use Excel and prepare a lease amortization schedule for the first two payments. (Hint: You may find the ROUND formula helpful for rounding in Excel.) Start with an amount rounded to the nearest thousand dollars. (Start the table with an amount rounded to the the nearest thousand dollars. Round answers to 0 decimal places, e.g. 5,275.) Partial Lease Amortization Schedule Annual Lease Payment Date Interest Amortization Balance 6/29/20 6/29/20 6/29/21 Prepare all entries for Wildhorse Central Ltd. from June 29, 2020, to December 31, 2021. Wildhorse Central has a calendar year fiscal period. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Round answers to 0 decimal places, e.g. 5,275.) Debit Credit Date Account Titles and Explanation June 29, 2020 (To record sale of building.) June 29, 2020 (To record inception of lease and first lease payment.) Dec. 31, 2020 (To record amortization of deferred gross profit.) Dec. 31, 2020 (To record depreciation expense.) Dec. 31, 2020 (To record interest.) June 29, 2021 (To record lease payment.) Dec. 31, 2021 (To record amortization of deferred gross profit.) Dec. 31, 2021 (To record depreciation expense.) Dec. 31, 2021 (To record interest.) SHOW LIST OF ACCOUNTS LINK TO TEXT Assume instead that there was no option to purchase, that $7.70 million represents the building's fair value on June 29, 2020, and that the lease term was 12 years. Prepare all entries for Wildhorse Central from June 29, 2020, to December 31, 2021. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.) Account Titles and Explanation Debit Credit Date June 29, 2020 (To record sale of building.) June 29, 2020 (To record rent payment.) Dec. 31, 2020 (To record expired rent.) Dec. 31, 2020 (To adjust deferred profit.) June 29, 2021 (To record expired rent.) June 29, 2021 (To record rent payment.) Dec. 31, 2021 (To record expired rent.) Dec. 31, 2021 (To adjust deferred profit.) List Of Accounts CLOSE Problem 20-23 Accounts Payable Accounts Receivable Accumulated Depreciation Leased Buildings Accumulated Depreciation - Buildings Accumulated Depreciation Leased Equipment Accumulated Depreciation Rental Equipment Accumulated Depreciation Right-of-Use Asset Accumulated Depreciation - Software under Lease Accumulated Depreciation Vehicles Accumulated Depreciation Vehicles under Lease Amortization Expense Buildings Buildings under Lease Cash Cost of Goods Sold Deferred Profit on Sale-Leaseback Depreciation Expense Equipment Equipment Acquired for Lessee Equipment under Lease Insurance Expense Insurance Payable Insurance Revenue Interest Expense Interest Income Interest Payable Interest Receivable Inventory Land Rental Expense Land under Lease Lease Liability Lease Receivable Legal Expense Loss on Lease Low Value Lease Expense No Entry Obligations under Lease Operating Expenses Prepaid Expenses Prepaid Insurance Prepaid Rent Property Tax Expense Rent Expense Rental Equipment Rent Payable Rent Receivable Rent Revenue Repairs and Maintenance Expense Right-of-Use Asset Sales Revenue Selling Expenses Short-Term Lease Expense Software under Lease Unearned Interest Income Unearned Rent Revenue Vehicles Vehicles under Lease
