Lease payment 8 lease obligation balance 1111 6000000

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Lease Payment 8% Lease Obligation Balance 1/1/11 $6,000,000 12/31/11 $611,112 $480,000 $131,112 5,868,888 (b) Lopez Corporation (Lessor) January 1, 2011 Land ............................................................................................. 6,000,000 Cash ................................................................................. 6,000,000 Lease Receivable ......................................................................... 6,000,000 Land .................................................................................. 6,000,000 December 31, 2011 Cash ............................................................................................. 611,112 Lease Receivable ............................................................. 131,112 Interest Revenue .............................................................. 480,000 21 - 35
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Test Bank for Intermediate Accounting, Thirteenth Edition *Ex. 21-117 —Sale-leaseback. On January 1, 2011, Hester Co. sells machinery to Beck Corp. at its fair value of $480,000 and leases it back. The machinery had a carrying value of $420,000, the lease is for 10 years and the implicit rate is 10%. The lease payments of $71,000 start on January 1, 2011. Hester uses straight-line depreciation and there is no residual value. Instructions (a) Prepare all of Hester's entries for 2011. (b) Prepare all of Beck's entries for 2011. *Solution 21-117 (a) Hester Co. (Lessee) January 1, 2011 Cash ............................................................................................. 480,000 Machinery ......................................................................... 420,000 Unearned Profit on Sale-Leaseback ................................. 60,000 Leased Machinery ........................................................................ 480,000 Lease Liability ................................................................... 480,000 Lease Liability ............................................................................... 71,000 Cash ................................................................................. 71,000 December 31, 2011 Depreciation Expense .................................................................. 48,000 Accumulated Depreciation—Capital Lease ....................... 48,000 Unearned Profit on Sale-Leaseback ............................................. 6,000 Depreciation Expense ....................................................... 6,000 Interest Expense [10% × ($480,000 – $71,000)] .......................... 40,900 Interest Payable ................................................................ 40,900 (b) Beck Corp. (Lessor) January 1, 2011 Machinery ..................................................................................... 480,000 Cash ................................................................................. 480,000 Lease Receivable ......................................................................... 480,000 Machinery ......................................................................... 480,000 Cash ............................................................................................. 71,000 Lease Receivable ............................................................. 71,000 December 31, 2011 Interest Receivable ....................................................................... 40,900 Interest Revenue .............................................................. 40,900 21 - 36
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Accounting for Leases PROBLEMS Pr. 21-118 —Lessee accounting—capital lease. Eubank Company, as lessee, enters into a lease agreement on July 1, 2010, for equipment. The following data are relevant to the lease agreement: 1. The term of the noncancelable lease is 4 years, with no renewal option. Payments of $422,689 are due on June 30 of each year. 2. The fair value of the equipment on July 1, 2010 is $1,400,000. The equipment has an economic life of 6 years with no salvage value. 3. Eubank depreciates similar machinery it owns on the sum-of-the-years'-digits basis. 4. The lessee pays all executory costs. 5. Eubank's incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3.31213; at 10%, 3.16986. Instructions (a) Indicate the type of lease Eubank Company has entered into and what accounting treatment is applicable. (b) Prepare the journal entries on Eubank's books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar. Include a partial amortization schedule.) 1. July 1, 2010. 2. December 31, 2010. 3. June 30, 2011. 4. December 31, 2011. Solution 21-118 (a) Capitalized amount: $422,689 × PV of an ordinary annuity for 4 periods at 8% $422,689 × 3.31213 = $1,400,000 Because the present value of the lease payments ($1,400,000) equals the fair value, $1,400,000, of the leased property, it is a capital lease and must be accounted for under the capital lease method. (b) 1. July 1, 2010 Leased Equipment Under Capital Leases ............................... 1,400,000 Lease Liability ............................................................. 1,400,000 2. December 31, 2010 Depreciation Expense ............................................................. 280,000 Accumulated Depreciation—Capital Leases [($1,400,000 × 4/10) × 6/12] ................................... 280,000 Interest Expense ($112,000 × 6/12) ........................................ 56,000 Interest Payable .......................................................... 56,000 21 - 37
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Test Bank for Intermediate Accounting, Thirteenth Edition Solution 21-118 (cont.) Lease Amortization Schedule Annual Interest on Reduction of Balance of Date Lease Payment Unpaid Obligation
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