ACCT 557 Quiz 4 Perfect A+ Answer

1. (TCO D) Capitalization of lease requires which of the following?
2. (TCO D) Advantage(s) of leasing versus buying equipment is (are)
3. (TCO D) Pirate, Inc. leased equipment from Shoreline Enterprises under a four-year lease requiring equal annual payments of $425,000, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pirate, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pirate, Inc. in the first year of the asset’s life?

PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.5771 3.31213
10%, 4 periods 3.48685 3.16986
4. (TCO D) On January 2, 2013, Bentley Co. leases equipment from Harry’s Leasing Company with five equal annual payments of $30,000 each, payable beginning December 31, 2013. Bentley Co. agrees to guarantee the $60,000 residual value of the asset at the end of the lease term. Bentley’s incremental borrowing rate is 10%; however, it knows that Harry’s implicit interest rate is 8%. What journal entry would Harry’s Leasing Company make at January 2, 2013 assuming this is a direct–financing lease?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 0.68058
10%, 5 periods 4.16986 3.79079 0.62092
5. (TCO D) Lease A does not contain a bargain purchase option, but the lease term is equal to 90% 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% of the estimated economic life of the leased property. How should the lessee classify these leases?
6. (TCO D) Carl Leasing, Inc. agrees to lease medical equipment to Sally, Inc. on January 1, 2012. They agree on the following terms.

1) The normal selling price of the medical equipment is $260,000 and the cost of the asset to Carl Leasing, Inc. was $135,000.
2) Sally, Inc. will pay all maintenance, insurance, and tax costs directly and annual payments of $35,000 on January 1 each year.
3) The lease begins on January 1, 2012, and payments will be in equal annual installments.
4) The lease is noncancelable with no renewal option. The lease term is 10 years (the same as the estimated economic life).
5) At the end of the lease, the medical equipment will revert to Carl Leasing, Inc. and have an unguaranteed residual value of $20,000. Their implicit interest rate is 10%.
6) Carl Leasing, Inc. incurred costs of $6,500 in negotiating and closing the lease. There are no uncertainties regarding additional costs yet to be incurred and the collectability of the lease payments is reasonably predictable.

a) Determine what type of lease this would be for the lessee and calculate the initial obligation.
b) Prepare all the journal entries for Sally, Inc. for 2012. Assume a calendar year fiscal year.

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ACCT 557 Quiz 4 Perfect A+ Answer

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