acct chp 21 (100-109)

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Lease A Capital lease

Lease B Capital lease

100. Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases?

$606,528.

101. On December 31, 2011, Burton, Inc. leased machinery with a fair value of $840,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $160,000 beginning December 31, 2011. The lease is appropriately accounted for by Burton as a capital lease. Burton's incremental borrowing rate is 11%. Burton knows the interest rate implicit in the lease payments is 10%.
The present value of an annuity due of 1 for 6 years at 10% is 4.7908.
The present value of an annuity due of 1 for 6 years at 11% is 4.6959.
In its December 31, 2011 balance sheet, Burton should report a lease liability of

$1,492,200.

102. On December 31, 2010, Harris Co. leased a machine from Catt, Inc. for a five-year period. Equal annual payments under the lease are $630,000 (including $30,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2010, and the second payment was made on December 31, 2011. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was $2,502,000. The lease is appropriately accounted for as a capital lease by Harris. In its December 31, 2011 balance sheet, Harris should report a lease liability of

the current liability shown for the lease at the end of year 1.

103. A lessee had a ten-year capital lease requiring equal annual payments. The reduction of the lease liability in year 2 should equal

$90,000

On January 2, 2011, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $150,000 starting at the end of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $900,000, based on implicit interest of 10%.

104. In its 2011 income statement, what amount of interest expense should Hernandez report from this lease transaction?

$60,000

On January 2, 2011, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $150,000 starting at the end of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $900,000, based on implicit interest of 10%.

105. In its 2011 income statement, what amount of depreciation expense should Hernandez report from this lease transaction?

should be recognized over the period of the lease using the effective interest method.

106. In a lease that is recorded as a sales-type lease by the lessor, interest revenue

$170,000

107. Torrey Co. manufactures equipment that is sold or leased. On December 31, 2011, Torrey leased equipment to Dalton for a five-year period ending December 31, 2016, at which date ownership of the leased asset will be transferred to Dalton. Equal payments under the lease are $220,000 (including $20,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2011. Collectibility of the remaining lease payments is reasonably assured, and Torrey has no material cost uncertainties. The normal sales price of the equipment is $770,000, and cost is $600,000. For the year ended December 31, 2011, what amount of income should Torrey realize from the lease transaction?

a deferred gain.

*108. Jamar Co. sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reported as a capital lease. At the time of the sale, the gain should be reported as

$0.

*109. On December 31, 2011, Haden Corp. sold a machine to Ryan and simultaneously leased it back for one year. Pertinent information at this date follows:
Sales price $900,000
Carrying amount 825,000
Present value of reasonable lease rentals
($7,500 for 12 months @ 12%) 85,000
Estimated remaining useful life 12 years
In Haden's December 31, 2011 balance sheet, the deferred profit from the sale of this machine should be

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