chapter 21 cont( 81,82,83,85,91,92,93)

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Hook $210,000

Emley $(360,000)

Terry $(450,000)

81. Hook Company leased equipment to Emley Company on July 1, 2010, for a one-year period expiring June 30, 2011, for $60,000 a month. On July 1, 2011, Hook leased this piece of equipment to Terry Company for a three-year period expiring June 30, 2014, for $75,000 a month. The original cost of the equipment was $4,800,000. The equipment, which has been continually on lease since July 1, 2006, is being depreciated on a straight-line basis over an eight-year period with no salvage value. Assuming that both the lease to Emley and the lease to Terry are appropriately recorded as operating leases for accounting purposes, what is the amount of income (expense) before income taxes that each would record as a result of the above facts for the year ended December 31, 2011?

$720,000.

Hull Co. leased equipment to Riggs Company on May 1, 2011. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2012. Riggs could have bought the equipment from Hull for $3,200,000 instead of leasing it. Hull's accounting records showed a book value for the equipment on May 1, 2008, of $2,800,000. Hull's depreciation on the equipment in 2011 was $360,000. During 2011, Riggs paid $720,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $64,000 in 2011. After the lease with Riggs expires, Hull will lease the equipment to another company for two years.


82. Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the year ended December 31, 2011, should be

$296,000.

Hull Co. leased equipment to Riggs Company on May 1, 2011. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2012. Riggs could have bought the equipment from Hull for $3,200,000 instead of leasing it. Hull's accounting records showed a book value for the equipment on May 1, 2008, of $2,800,000. Hull's depreciation on the equipment in 2011 was $360,000. During 2011, Riggs paid $720,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $64,000 in 2011. After the lease with Riggs expires, Hull will lease the equipment to another company for two years.


83. The income before income taxes derived by Hull from this lease for the year ended December 31, 2011, should be

$82,465.

85. Mays Company has a machine with a cost of $400,000 which also is its fair market value on the date the machine is leased to Park Company. The lease is for 6 years and the machine is estimated to have an unguaranteed residual value of $40,000. If the lessor's interest rate implicit in the lease is 12%, the six beginning-of-the-year lease payments would be

$225,000 and $155,160

91. Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July 1, 2011. The lease is appropriately accounted for as a sale by Metro and as a purchase by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2021. The first of 10 equal annual payments of $621,000 was made on July 1, 2011. Metro had purchased the equipment for $3,900,000 on January 1, 2011, and established a list selling price of $5,400,000 on the equipment. Assume that the present value at July 1, 2011, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $4,500,000.


Assuming that Sands, Inc. uses straight-line depreciation, what is the amount of deprecia-tion and interest expense that Sands should record for the year ended December 31, 2011?

$600,000 and $155,160

92. Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July 1, 2011. The lease is appropriately accounted for as a sale by Metro and as a purchase by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2021. The first of 10 equal annual payments of $621,000 was made on July 1, 2011. Metro had purchased the equipment for $3,900,000 on January 1, 2011, and established a list selling price of $5,400,000 on the equipment. Assume that the present value at July 1, 2011, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $4,500,000.

What is the amount of profit on the sale and the amount of interest income that Metro should record for the year ended December 31, 2011?

$211,875 and $62,475

93. Roman Company leased equipment from Koenig Company on July 1, 2011, for an eight-year period expiring June 30, 2019. Equal annual payments under the lease are $300,000 and are due on July 1 of each year. The first payment was made on July 1, 2011. The rate of interest contemplated by Roman and Lennon is 8%. The cash selling price of the equipment is $1,861,875 and the cost of the equipment on Koenig's accounting records was $1,650,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Koenig, what is the amount of profit on the sale and the interest income that Lennon would record for the year ended December 31, 2011?

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