QUESTION 1:

On January 1, 2016, Winn Heat Transfer leased office space under a three-year operating lease agreement. The arrangement specified three annual rent payments of $86,000 each, beginning January 1, 2016, the inception of the lease, and at each January 1 through 2018. Winn also paid a $102,000 advance payment at the inception of the lease in addition to the first $86,000 rent payment. With permission of the owner, Winn made structural modifications to the building before occupying the space at a cost of $186,000. The useful life of the building and the structural modifications were estimated to be 30 years with no residual value.

Required:

Prepare the appropriate entries for Winn Heat Transfer from the inception of the lease through the end of 2016. Winn's fiscal year is the calendar year. Winn uses straight-line depreciation. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

• 1.

• Record the advance payment for rent.

• 2.

• Record the annual rent payment.

• 3.

• Record the structural modifications of the building.

• 4.

• Record the annual rent.

• 5.

• Record the advance payment allocation.

• 6.

• Record the depreciation expense.

QUESTION 3:

On June 30, 2016, Georgia-Atlantic, Inc., leased a warehouse facility from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $468,683 over a five-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2016. Georgia-Atlantics incremental borrowing rate is 10%, the same rate IC used to calculate lease payment amounts. IC purchased the warehouse from Builders, Inc. at a cost of $3.8 million. (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.	What pretax amounts related to the lease would IC report in its balance sheet at December 31, 2016?

2.	What pretax amounts related to the lease would IC report in its income statement for the year ended December 31, 2016?

QUESTION 4:

Each of the four independent situations below describes a capital lease in which annual lease payments are payable at the beginning of each year. (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			4
Lease term (years)		5			8			6			9
Lessors rate of return		10	%		11	%		9	%		12	%
Fair value of leased asset	$	65,000		$	365,000		$	90,000		$	480,000
Lessors cost of leased asset	$	65,000		$	365,000		$	60,000		$	480,000
Residual value:
Guaranteed by lessee		0		$	65,000			0		$	45,000
Unguaranteed		0			0		$	22,000		$	30,000

Determine the annual lease payments for each situation:

QUESTION 6:

On January 1, 2016, NRC Credit Corporation leased equipment to Brand Services under a direct financing lease designed to earn NRC a 12% rate of return for providing long-term financing. The lease agreement specified:

a.	Fifteen annual payments of $68,000 (including executory costs) beginning January 1, 2016, the inception of the lease and each December 31 thereafter through 2030.
b.	The estimated useful life of the leased equipment is 15 years with no residual value. Its cost to NRC was $470,658.
c.	The lease qualifies as a capital lease to Brand.
d.	A 15-year service agreement with Quality Maintenance Company was negotiated to provide maintenance of the equipment as required. Payments of $6,300 per year are specified, beginning January 1, 2016. NRC was to pay this executory cost as incurred, but lease payments reflect this expenditure.
e.	A partial amortization schedule, appropriate for both the lessee and lessor, follows:

	Payments	Effective Interest	Decrease in Balance	Outstanding Balance
(12% Outstanding balance)
																470,658
1/1/16		61,700											61,700			408,958
12/31/16		61,700		0.12		(408,958	)	=		49,075			12,625			396,333
12/31/17		61,700		0.12		(396,333	)	=		47,560			14,140			382,193

Assume the contract specified that NRC (the lessor) was to pay, not only the $6,300 maintenance fees, but also insurance of $830 per year, and was to receive a $380 management fee for facilitating service and paying executory costs. The lessees lease payments were increased to include an amount sufficient to reimburse executory costs plus NRCs fee.

Required:

Prepare the appropriate entries for both the lessee and lessor to record the second lease payment, executory costs, and depreciation (straight line) on December 31, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1.

Record the cash payment.

2.

Record the depreciation expense.

3.

Record the cash received.

QUESTION 7:

Terms of a lease agreement and related facts were:

a.	Costs of negotiating and consummating the completed lease transaction incurred by the lessor were $7,489.
b.	The retail cash selling price of the leased asset was $410,000. Its useful life was three years with no residual value.
c.	Collectibility of the lease payments by the lessor was reasonably predictable and there were no costs to the lessor that were yet to be incurred.
d.	The lease term is three years and the lessor paid $410,000 to acquire the asset (direct financing lease).
e.	Annual lease payments at the beginning of each year were $150,000.
f.	Lessors implicit rate when calculating annual rental payments was 9%.

(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.	Prepare the appropriate entries for the lessor to record the lease and related payments at its inception, January 1, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

• 1.

• Record the lease.

• 2.

• Record the payment of initial direct costs.

• 3.

• Record the cash received.

2.	Calculate the effective rate of interest revenue after adjusting the net investment by initial direct costs.

3.	Record any entry(s) necessary at December 31, 2016, the fiscal year-end. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

• Record the interest receivable.

QUESTION 12:

American Food Services, Inc., leased a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2016. The lease agreement for the $0.7 million (fair value and present value of the lease payments) machine specified four equal payments at the end of each year. The useful life of the machine was expected to be four years with no residual value. Barton and Bartons implicit interest rate was is 8%. (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.)

Respond to the question with the presumption that the guidance provided by the proposed Accounting Standards Update is being applied.

Required:

1.	Prepare the journal entry for American Food Services at the beginning of the lease on January 1, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

QUESTION 11:

Manufacturers Southern leased high-tech electronic equipment from Edison Leasing on January 1, 2016. Edison purchased the equipment from International Machines at a cost of $252,502. (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.)

Related Information:
Lease term	2 years (8 quarterly periods)
Quarterly lease payments	$22,500 at Jan. 1, 2016, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter.
Economic life of asset	2 years
Interest rate charged by the lessor	8%
Respond to the question with the presumption that the guidance provided by the proposed Accounting Standards Update is being applied.

Required:

Prepare appropriate entries for Manufacturers Southern from the beginning of the lease through March 31, 2016. Appropriate adjusting entries are made quarterly. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

• 1.

• Record the lease.

• 2.

• Record the cash payment.

• 3.

• Record the cash payment.

• 4.

• Record amortization expense.