A lease might specify that lease payments may be increased (or decreased) at some future time during the lease term depending on whether or not some specified event occurs such as revenues or profits exceeding some designated level. Under what circumstances are contingent rentals included or excluded from lease payments? If excluded, how are they recognized in income determination?
> The long-term liability section of Eastern Post Corporation’s balance sheet as of December 31, 2017, included 10% bonds having a face amount of $40 million and a remaining premium of $6 million. On January 1, 2018, Eastern Post retired some of the bonds
> King Company leased equipment from Mann Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $52,538 over a six-year lease term (also the asset’s useful life), with the first payment at January 1, the beginni
> At January 1, 2018, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $25,000 beginning January 1, 2018, the beginning of the lease, and at each December 31
> At January 1, 2018, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $25,000 beginning January 1, 2018, the beginning of the lease, and at each December 31
> King Cones leased ice cream-making equipment from Ace Leasing. Ace earns interest under such arrangements at a 6% annual rate. The lease term is eight months with monthly payments of $10,000 due at the end of each month. King Cones elected the short-term
> Edison Leasing leased high-tech electronic equipment to Manufacturers Southern on January 1, 2018. Edison purchased the equipment from International Machines at a cost of $112,080. Related Information: Lease term …………………………………………… 2 years (8 quarterly pe
> Appling Enterprises issued 8% bonds with a face amount of $400,000 on January 1, 2018. The bonds sold for $331,364 and mature in 2037 (20 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually on June 30 an
> Early extinguishment of debt often produces a gain or a loss. How is the gain or loss determined?
> At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a seven-year operating lease agreement. The contract calls for quarterly rent payments of $25,000 each. The office building was acquired by Lakeside at a cost
> At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a seven-year operating lease agreement. The contract calls for quarterly rent payments of $25,000 each. The office building was acquired by Lakeside at a cost
> A lease agreement that qualifies as a finance lease calls for annual lease payments of $26,269 over a six-year lease term (also the asset’s useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 5%. The lessor
> A lease agreement that qualifies as a finance lease calls for annual lease payments of $26,269 over a six-year lease term (also the asset’s useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 5%. If the les
> A lease agreement that qualifies as a finance lease calls for annual lease payments of $26,269 over a six-year lease term (also the asset’s useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 5%. If the les
> When bonds are issued at a premium the debt declines each period. Explain.
> Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements according to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year ended December 31, 2015, are available in Connect. This m
> A finance lease agreement calls for quarterly lease payments of $5,376 over a 10-year lease term, with the first payment on July 1, the beginning of the lease. The annual interest rate is 8%. Both the present value of the lease payments and the cost of t
> Manufacturers Southern leased high-tech electronic equipment from Edison Leasing on January 1, 2018. Edison purchased the equipment from International Machines at a cost of $112,080. Related Information: Lease term………………………………………….…..... 2 years (8 quart
> Corinth Co. leased nonspecialized equipment to Athens Corporation for an eight-year period, at which time possession of the equipment will revert back to Corinth. The equipment cost Corinth $16 million and has an expected useful life of 12 years. Its nor
> On December 31, 2018, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid $40,000 for the truck. Its retail value is $45,114. The lease agreement specified annual payments of $11,000 beginning December 31, 2018, the beginning of
> On January 1, 2018, Jasperse Corporation leased equipment under a finance lease designed to earn the lessor a 12% rate of return for providing long-term financing. The lease agreement specified ten annual payments of $75,000 beginning January 1, and each
> Bryant leased equipment that had a retail cash selling price of $600,000 and a useful life of five years with no residual value. The lessor paid $530,000 to acquire the equipment and used an implicit rate of 8% when calculating annual lease payments of $
> On January 1, Garcia Supply leased a truck for a four-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $10,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate.
> Hoffman Corporation issued $60 million of 5%, 20-year bonds at 102. Each of the 60,000 bonds was issued with 10 detachable stock warrants, each of which entitled the bondholder to purchase, for $20, one share of $1 par common stock. At the time of sale,
> On January 1, James Industries leased equipment to a customer for a four-year period, at which time possession of the leased asset will revert back to James. The equipment cost James $700,000 and has an expected useful life of six years. Its normal sales
> Ace Leasing acquires equipment and leases it to customers under long-term sales-type leases. Ace earns interest under these arrangements at a 6% annual rate. Ace leased a machine it purchased for $600,000 under an arrangement that specified annual paymen
> On January 1, Espinoza Moving and Storage leased a truck for a four-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $10,000 due on December 31 of each year, calculated by the lessor using a 5%
> Cupola Fan Corporation issued 10%, $400,000, 10-year bonds for $385,000 on June 30, 2018. Debt issue costs were $1,500. Interest is paid semiannually on December 31 and June 30. One year from the issue date (July 1, 2019), the corporation exercised its c
> On June 30, 2018, Georgia-Atlantic, Inc. leased warehouse equipment from Builders, Inc. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $562,907 over a three-year lease term, payable each June 30 and December 31, with
> In accounting for an operating lease, how are the lessee’s and lessor’s income statements affected?
> Target Corporation prepares its financial statements according to U.S. GAAP. Target’s financial statements and disclosure notes for the year ended January 30, 2016, are available in Connect. This material is also available under the Investor Relations li
> Branif Leasing leases mechanical equipment to industrial consumers under sales-type leases that earn Branif a 10% rate of return for providing long-term financing. A lease agreement with Branson Construction specified 20 annual payments beginning Decembe
> At the beginning of an operating lease, the lessor will record what asset or assets, if any?
> What is selling profit on a sales-type lease? How do we account for a sales-type lease with a selling profit?
> In accounting for a finance lease/sales-type lease, how are the lessee’s and lessor’s income statements affected?
> Lukawitz Industries leased non-specialized equipment to Seminole Corporation for a four-year period, at which time possession of the leased asset will revert back to Lukawitz. The equipment cost Lukawitz $4 million and has an expected useful life of six
> A lessee should classify a lease transaction as a finance lease if it is noncancelable and one or more of five classification criteria are met. Otherwise, it is an operating lease. What are these criteria?
> How are leases and installment notes the same? How do they differ?
> How does an installment note differ from a note for which the principal is paid as a single amount at maturity?
> On June 30, 2018, Georgia-Atlantic, Inc. leased warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $562,907 over a three-year lease term, payable each June 30 and December
> How is interest expense determined in a finance lease transaction? How does the approach compare to other forms of debt (such as bonds payable or notes payable)?
> The long-term liability section of Twin Digital Corporation’s balance sheet as of December 31, 2017, included 12% bonds having a face amount of $20 million and a remaining discount of $1 million. Disclosure notes indicate the bonds were issued to yield 1
> On August 31, 2015, Chickasaw Industries issued $25 million of its 30-year, 6% convertible bonds dated August 31, priced to yield 5%. The bonds are convertible at the option of the investors into 1,500,000 shares of Chickasaw’s common stock. Chickasaw re
> Terms of a lease agreement and related facts were: a. The lease asset had a retail cash selling price of $100,000. Its useful life was six years with no residual value (straight-line depreciation). b. Annual lease payments at the beginning of each year w
> EDGAR, the Electronic Data Gathering. Analysis, and Retrieval system, performs automated collection, validation, indexing, acceptance and forwarding of submissions by companies and others who are required by law to file forms with the U.S. Securities and
> AGF Foods Company is a large, primarily domestic, consumer Foods Company involved in the manufacture, distribution, and sale of a variety of food products. Industry averages are derived from Troy’s The Almanac of Business and Industrial
> The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assistant to the controller for Hunt Manufacturing, wore one of the gloomy faces that were just emerging from the conference room. “Wow, I knew it was bad, but n
> The Jaecke Group, Inc., manufactures various kinds of hydraulic pumps. In June 2018, the company signed a fouryear purchase agreement with one of its main parts suppliers, Hydraulics, Inc. Over the four-year period, Jaecke has agreed to purchase 100,000
> The basic concept of “substance over form” influences lease accounting. Explain.
> While reading a recent issue of Health & Fitness, a trade journal, Brandon Wilde noticed an ad for equipment he had been seeking for use in his business. The ad offered oxygen therapy equipment under the following terms: Model BL 44582 $204,000 zero inte
> The following appeared in the October 15, 2018, issue of the Financial Smarts Journal: This announcement is not an offer of securities for sale or an offer to buy securities. New Issue …………………………………………………………………………………………….. October 15, 2018 $750,000,000 C
> On January 1, 2018, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: Required: 1. What is the face amount of the bonds? 2. What is
> On January 1, 2018, Bradley Recreational Products issued $100,000, 9%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $96,768 to yield an annual return of 10%. Required: 1. Prepare an amortization sch
> Three years ago American Insulation Corporation issued 10%, $800,000, 10-year bonds for $770,000. American Insulation exercised its call privilege and retired the bonds for $790,000. The corporation uses the straight-line method to determine interest. R
> On January 1, 2018, Lesco Leasing leased equipment to Quality Services under a finance/sales-type lease designed to earn NRC a 12% rate of return for providing long-term financing. The lease agreement specified: a. Ten annual payments of $56,000 beginnin
> On January 1, 2018, Baddour, Inc., issued 10% bonds with a face amount of $160 million. The bonds were priced at $140 million to yield 12%. Interest is paid semiannually on June 30 and December 31. Baddour’s fiscal year ends September 30. Required: 1. W
> Compare the two commonly used methods of determining interest on bonds.
> On January 1, 2018, Instaform, Inc., issued 10% bonds with a face amount of $50 million, dated January 1. The bonds mature in 2037 (20 years). The market yield for bonds of similar risk and maturity is 12%. Interest is paid semiannually. Required: 1. De
> At January 1, 2018, Rothschild Chair Company, Inc., was indebted to First Lincoln Bank under a $20 million, 10% unsecured note. The note was signed January 1, 2015, and was due December 31, 2021. Annual interest was last paid on December 31, 2016. Rothsc
> On March 1, 2018, Baddour, Inc., issued 10% bonds, dated January 1, with a face amount of $160 million. The bonds were priced at $140 million (plus accrued interest) to yield 12%. Interest is paid semiannually on June 30 and December 31. Baddour’s fiscal
> On June 30, 2018, Georgia-Atlantic, Inc. leased a warehouse facility from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $562,907 over a three-year lease term, payable each June 30 and December
> The following transactions relate to bond investments of Livermore Laboratories. The company’s fiscal year ends on December 31. Livermore uses the straight-line method to determine interest. 2018 July 1 Purchased $16 million of Bracecourt Corporation 10%
> When a company sells an asset and simultaneously leases it back, what criteria must be met to apply sale-leaseback accounting rather than accounting for the transaction as a loan ?
> HP Inc. (formerly Hewlett-Packard Company) issued zero-coupon notes at the end of its 1997 fiscal year that mature at the end of its 2017 fiscal year. One billion, eight hundred million dollars face amount of 20-year debt sold for $968 million, a price t
> What is a purchase option? How does it affect accounting for a lease?
> Cordova Tools has bonds outstanding during a year in which the market rate of interest has risen. If Cordova has elected the fair value option for the bonds, will it report a gain or a loss on the bonds for the year? Explain.
> At January 1, 2018, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $25,000 beginning January 1, 2018, the beginning of the lease, and at each December 31
> Eye Deal Optometry leased vision-testing equipment from Insight Machines on January 1, 2018. Insight Machines manufactured the equipment at a cost of $200,000 and lists a cash selling price of $250,177. Appropriate adjusting entries are made quarterly. R
> Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2018, Rhone-Metro leased equipment to Western Soya Co. for a noncancelable stated lease term of four years ending December 31, 2022, at which time possession of the lea
> At times, companies try to induce voluntary conversion by offering an added incentive—maybe cash, stock warrants, or a more favorable conversion ratio. How is such an inducement accounted for? How is it measured?
> American Food Services, Inc. leased a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2018. The lease agreement for the $4 million (fair value and present value of the lease paym
> Listed below are several terms and phrases associated with long-term debt. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it. List A List B a. Straight-line method b. Discount c. Liquidati
> Each of the three independent situations below describes a finance lease in which annual lease payments are payable at the end of each year. The lessee is aware of the lessor’s implicit rate of return. Required: For each situation, det
> Each of the four independent situations below describes a lease requiring annual lease payments of $10,000. For each situation, determine the appropriate lease classification by the lessee and indicate why. Situation 1 4 Lease term (years) 4. 4 4 As
> To raise operating funds, National Distribution Center sold its office building to an insurance company on January 1, 2018, for $800,000 and immediately leased the building back. The operating lease is for the final 12 years of the building’s estimated 2
> To raise operating funds, Signal Aviation sold an airplane on January 1, 2018, to a finance company for $770,000. Signal immediately leased the plane back for a 13-year period, at which time ownership of the airplane will transfer to Signal. The airplane
> Access the FASB’s Codification Research System at the FASB website (www.fasb.org). Determine the specific citation for accounting for each of the following items: 1. Definition of initial direct costs. 2. When a modification to a contract is reported as
> The lease term is the noncancelable period for which a lessee has the right to use an underlying asset, modified by any renewal or termination options that are “reasonably certain” to be exercised, or not exercised. Options whose exercise is under the co
> Listed below are several terms and phrases associated with leases. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it. List A List B 1. Effective rate times balance a. PV of purchase option
> The following relate to an operating lease agreement: a. The lease term is 3 years, beginning January 1, 2018. b. The leased asset cost the lessor $800,000 and had a useful life of eight years with no residual value. The lessor uses straight-line depreci
> On December 31, 2018, Rhone-Metro Industries leased equipment to Western Soya Co. for a four-year period ending December 31, 2022, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost Rhone-Metro $365,760 and h
> The discount rate influences virtually every amount reported in connection with a lease by both the lessor and the lessee. What is the lessor’s discount rate when determining the present value of lease payments? What is the lessee’s discount rate?
> The lease agreement and related facts indicate the following: a. Leased equipment had a retail cash selling price of $300,000. Its useful life was five years with no residual value. b. The lease term is five years and the lessor paid $265,000 to acquire
> On January 1, 2018, NFB Visual Aids issued $800,000 of its 20-year, 8% bonds. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. NFB Visual Aids records interest expense at the effective rate and elected the
> Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2018, Rhone-Metro leased equipment to Western Soya Co. for a four-year period ending December 31, 2022, at which time possession of the leased asset will revert back to
> Newton Labs leased chronometers from Brookline Instruments on January 1, 2018. Brookline Instruments manufactured the chronometers at a cost of $200,000. The chronometers have a fair value of $260,000. Appropriate adjusting entries are made quarterly. Re
> Could a finance lease under IFRS be classified as an operating lease under U.S. GAAP? Explain.
> Braxton Technologies, Inc., constructed a conveyor for A&G Warehousers that was completed and ready for use on January 1, 2018. A&G paid for the conveyor by issuing a $100,000, four-year note that specified 5% interest to be paid on December 31 of each y
> At the beginning of 2018, VHF Industries acquired a machine with a fair value of $6,074,700 by issuing a four-year, noninterest-bearing note in the face amount of $8 million. The note is payable in four annual installments of $2 million at the end of eac
> At January 1, 2018, Brant Cargo acquired equipment by issuing a five-year, $150,000 (payable at maturity), 4% note. The market rate of interest for notes of similar risk is 10%. Required: 1. Prepare the journal entry for Brant Cargo to record the purcha
> At the beginning of the year, Lambert Motors issued the three notes described below. Interest is paid at year-end. 1. The company issued a two-year, 12%, $600,000 note in exchange for a tract of land. The current market rate of interest is 12%. 2. Lamber
> On January 1, 2018, Darnell Window and Pane issued $18 million of 10-year, zero-coupon bonds for $5,795,518. Required: 1. Prepare the journal entry to record the bond issue. 2. Determine the effective rate of interest. 3. Prepare the journal entry to re
> The fiscal year ends December 31 for Lake Hamilton Development. To provide funding for its Moonlight Bay project, LHD issued 5% bonds with a face amount of $500,000 on November 1, 2018. The bonds sold for $442,215, a price to yield the market rate of 6%.
> McWherter Instruments sold $400 million of 8% bonds, dated January 1, on January 1, 2018. The bonds mature on December 31, 2037 (20 years). For bonds of similar risk and maturity, the market yield was 10%. Interest is paid semiannually on June 30 and Dec
> A zero-coupon bond pays no interest. Explain.
> On February 1, 2018, Cromley Motor Products issued 9% bonds, dated February 1, with a face amount of $80 million. The bonds mature on January 31, 2022 (4 years). The market yield for bonds of similar risk and maturity was 10%. Interest is paid semiannual
> Amber Mining and Milling, Inc., contracted with Truax Corporation to have constructed a custom-made lathe. The machine was completed and ready for use on January 1, 2018. Amber paid for the lathe by issuing a $600,000, three-year note that specified 4% i
> When are initial direct costs recognized in an operating lease? In a sales-type lease with selling profit? In a sales-type lease with no selling profit? Why?
> Wilkins Food Products, Inc., acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2016. In payment for the machine Wilkins issued a three-year installment note to be paid in thre
> At the end of 2017, Majors Furniture Company failed to accrue $61,000 of interest expense that accrued during the last five months of 2017 on bonds payable. The bonds mature in 2031. The discount on the bonds is amortized by the straight-line method. The
> When companies offer new debt security issues, they publicize the offerings in the financial press and on Internet sites. Assume the following were among the debt offerings reported in December 2018: New Securities Issues Corporate National Equipment Tra
