EXERCISES

Exercise 15-1

Exercise 15-2

Operating Lease

Capital lease; lessee

LO15-4

LO15-5

Text: E 15-1

Text: E 15-3

Exercise 15-3

On

Direct financing
lease; lessor
LO15-5
Text: E 15-4

January 1, 2013, Gothic Corporation, an internet training firm, leased several

computers from HardWhere Inc. under a 3-year operating lease agreement. The
contract calls for four rent payments of $40,000 each, payable semiannually on
June 30 and December 31 each year. The computers were acquired by
HardWhere at a cost of $350,000 and were expected to have a useful life of 5
years with no residual value.
Required:
Prepare the appropriate entries for both (a) the lessee and (b) the lessor from
the inception of the lease through the end of 2013. (Use straight-line
depreciation.)
[Note: Exercises 2, 3, and 4 are three variations of the same basic situation.]

Manufacturers Eastern leased high-tech electronic equipment from Franklin

Leasing on January 1, 2013. Franklin purchased the equipment from National
Machines at a cost of $107,866.
Related information:
Lease term
3 years (12 quarterly periods)
Quarterly rental payments
$10,000 - beginning of each period
Economic life of asset
3 years
Fair value of asset
$107,866
Implicit interest rate
8%
(Also lessees incremental borrowing rate)
Required:
Prepare a lease amortization schedule and appropriate entries for Manufacturers
Eastern from the inception of the lease through January 1, 2012. Depreciation
is recorded at the end of each fiscal year (December 31) on a straight-line basis.
[Note: Exercises 2, 3, and 4 are three variations of the same basic situation.]

Franklin Leasing leased high-tech electronic equipment to Manufacturers

Eastern on January 1, 2013. Franklin purchased the equipment from National
Machines at a cost of $107,866.
Related information:
Lease term
3 years (12 quarterly periods)
Quarterly rental payments
$10,000 - beginning of each period
Economic life of asset
3 years
Fair value of asset
$107,866
Implicit interest rate
8%
(Also lessees incremental borrowing rate)
Required:
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Exercise 15-4

Exercise 15-5

Sales-type lease;
lessor

Sale-leaseback;
capital lease

LO15-6

LO15-10

Text: E 15-5

Text: E 15-25

Prepare a lease amortization schedule and appropriate entries for Franklin

Leasing from the inception of the lease through January 1, 2012. Franklins
fiscal year ends December 31.
[Note: Exercises 2, 3, and 4 are three variations of the same basic situation.]

Manufacturers Eastern leased high-tech electronic equipment from National

Machines on January 1, 2013. National Machines manufactured the equipment
at a cost of $90,000.
Related information:
Lease term
3 years (12 quarterly periods)
Quarterly rental payments
$10,000 - beginning of each period
Economic life of asset
3 years
Fair value of asset
$107,866
Implicit interest rate
8%
(Also lessees incremental borrowing rate)
Required:
1. Show how National Machines determined the $10,000 quarterly rental
payments.
2. Prepare appropriate entries for National Machines to record the lease at its
inception, January 1, 2013, and the second rental payment on April 1, 2013.
To raise operating funds, WSMM Broadcasting sold a helicopter used in
news reports on January 1, 2013, to a finance company for $1,540,000.
WSMM immediately leased the helicopter back for a 13-year period, at which
time ownership of the helicopter will transfer to WSMM. The helicopter has a
fair value of $1,600,000. Its cost and its carrying value were $1,240,000. Its
useful life is estimated to be 20 years. The lease requires WSMM to make
payments of $205,542 to the finance company each January 1. WSMM
depreciates assets on a straight-line basis. The lease has an implicit rate of 11%.
Required:
Prepare the appropriate entries for WSMM on (a) January 1, 2013, to record
the sale-leaseback and (b) December 31, 2013, to record necessary adjustments.
PROBLEMS

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15-2

Intermediate Accounting, 7e

Problem 15-1

Problem 15-2

Direct financing
and sales-type
lease; lessee and
lessor

Guaranteed
residual value;
direct financing
lease

LO15-3 LO15-5
LO15-6

LO15-3 LO15-5
LO15-8

Text: P 15-3

Text: P 15-8

Tech-Knowledgies develops and manufactures voice recognition hardware.

Star Leasing purchased a voice recognition hardware from Tech-Knowledgies
for $500,000 and leased it to Pal Learning Systems on January 1, 2013.
Lease description:
Quarterly rental payments
$32,629 - beginning of each period
Lease term
5 years (20 quarters)
No residual value; no BPO
Economic life of lithotripter
5 years
Implicit interest rate and
lessees incremental
borrowing rate
12%
Fair value of asset
$500,000
Collectibility of the rental payments is reasonably assured, and there are no
lessor costs yet to be incurred.
Required:
1. How should this lease be classified by Pal Learning Systems and by Star
Leasing?
2. Prepare appropriate entries for both Pal Learning Systems and Star Leasing
from the inception of the lease through the second rental payment on April
1, 2013. Depreciation is recorded at the end of each fiscal year (December
31).
3. Assume Pal Learning Systems leased the hardware directly from the
manufacturer, Tech-Knowledgies, which produced the machine at a cost of
$450,000. Prepare appropriate entries for Tech-Knowledgies from the
inception of the lease through the second rental payment on April 1, 2013.
On December 31, 2013, HHH Corp. leased equipment to Blair Co. for a 4year period ending December 31, 2017, at which time possession of the leased
asset will revert back to HHH Corp. The equipment cost HHH Corp.
$1,097,280 and has an expected useful life of 6 years. Its normal sales price is
$1,097,280. The lessee-guaranteed residual value at December 31, 2017, is
$75,000. Equal payments under the lease are $300,000 and are due on
December 31 of each year. The first payment was made on December 31, 2013.
Collectibility of the remaining lease payments is reasonably assured, and HHH
Corp. has no material cost uncertainties. Blairs incremental borrowing rate is
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12%. Blair knows the interest rate implicit in the lease payments is 10%. Both
companies use straight-line depreciation.
Required:
1. Show how HHH Corp. calculated the $300,000 annual rental payments.
2. How should this lease be classified (a) by Blair Co. (the lessee) and (b) by
HHH Corp. (the lessor)? Why?
3. Prepare the appropriate entries for both Blair Co. and HHH Corp. on
December 31, 2013.
4. Prepare an amortization schedule(s) that describes the pattern of interest
over the lease term for the lessee and the lessor.
5. Prepare all appropriate entries for both Blair and HHH Corp. on December
31, 2014 (the second rent payment and depreciation).
6. Prepare the appropriate entries for both Blair and HHH Corp. on December
31, 2017 (the end of the lease), assuming the equipment is returned to HHH
Corp. and the actual residual value on that date is $4,500.

TheMcGrawHillCompanies,Inc.,2013
15-4

Intermediate Accounting, 7e

Problem 15-3
Lessee and lessor
Addendum
Text: P 15-23

Respondtothisproblemwiththepresumptionthattheguidanceprovided
bythenewAccountingStandardsUpdateisbeingapplied.
The Pastner Sporting Goods leased equipment from Walton Industries on
January 1, 2013. Walton Industries had manufactured the equipment at a cost
of $400,000. Its cash selling price and fair value is $500,000.
Other information:
Lease term
Annual payments
Life of asset
Rate the lessor charges

4 years
$139,778 beginning Jan.1, 2013,
and at Dec. 31, 2013, 2014, and
2015
4 years
8%

Required:
1. Prepare the appropriate entries for Pastner Sporting Goods (Lessee) on
January 1, 2013 and December 31, 2013. Round to nearest dollar.
2. Prepare the appropriate entries for Walton Industries (Lessor) on January 1,
2013 and December 31, 2013. Round to nearest dollar.

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