Chapter%2015%20-%20In-Class%20Exercises - In‐Class...

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Unformatted text preview: In‐Class Exercises Chapter 15 Exercise #1 On January 1, 2010, Ajax International (Lessor) leases equipment to Comet Limited (Lessee). The equipment has a market value of $150,000 and an estimated useful life of 10 years with no salvage value. The lease term is 7 years with annual payments of $22,815, plus $2,000 to cover executory costs (for a total payment of $24,815 beginning immediately. The lease is not cancellable. The implicit interest rate of the lease is 6%, of which Comet is fully aware. At the end of the lease period, Comet can exercise a bargain purchase option for $20,000. Required: 1) Prepare the schedule of lease payments. 2) Prepare the following journal entries for the lessee, Comet Limited: a) Recording the lease on January 1, 2010, including recording the first payment. b) Record lease amortization on December 31, 2010. c) Record the lease payment on December 31, 2010 and December 31, 2011. d) Record the exercise of the bargain purchase option on December 31, 2016. Exercise #2 On January 1, 2009, Ajax Finance Company arranges the lease of an aging Boeing 737 to Nowing Airlines. Ajax purchases the used plane from Podunk Air for $8,400,000. The non‐cancellable lease has a term of 5 years (the plane has a remaining life of 7 years) with an annual payment of $1,503,084.49, plus annual executory costs of $50,000. At the end of the lease period, Ajax regains possession of the plane and estimates its residual value will be $2,000,000. Both lessor and lessee have incremental borrowing rates of 5%. Required: Prepare the following journal entries assuming a direct financing lease: a) Record Ajax’s purchase of the 737. b) Record the initial lease (net method) and the first lease payment. c) Record the second lease payment. d) Record the recovery of the asset at the end of the lease. Exercise #3 On January 1, 2009, Ajax Farm Supply leased a used combine to Farmer John. The combine has a useful life of 5 years. Ajax has the combine on its books at a cost of $70,000 and they paid $2,000 initial direct costs as well. The lease terms: Five year lease period. Annual payments of $17,280, starting immediately. Executory costs of $800 to be paid annually by the lessee. Residual value at the end of the lease will be zero. Both Ajax and Farmer John can borrow at 4% per annum. Required: Prepare the following journal entries: a) The required entries at the beginning of the lease, including the first lease payment b) Recording the second lease payment ACCT 4050 Page 1 of 4 Chapter 15 ‐ In‐Class Exercises ...
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This note was uploaded on 04/06/2011 for the course ACCT 4050 taught by Professor Rodney during the Spring '11 term at University of Georgia Athens.

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