ACC1113E Homeworks Chapter 1

E21-1 (Lessee Entries; Capital Lease with Unguaranteed Residual Value)
On January 1, 2014, Burke Corporation signed a 5-year noncancelable lease for a machine. The terms of
the lease called for Burke to make annual payments of $8,668 at the beginning of each year, starting
January 1, 2014. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed
residual value. The machine reverts back to the lessor at the end of the lease term. Burke uses the
straight-line method of depreciation for all of its plant assets. Burke’s incremental borrowing rate is
10%, and the Lessor’s implicit rate is unknown.
Instructions
(a) What type of lease is this? Explain.
(b) Compute the present value of the minimum lease payments.
(c) Prepare all necessary journal entries for Burke for this lease through January 1, 2015.
E21-2 (Lessee Computations and Entries; Capital Lease with Guaranteed Residual Value)
Pat Delaney Company leases an automobile with a fair value of $8,725 from John Simon Motors, Inc., on
the following terms:
1. Noncancelable term of 50 months.
2. Rental of $200 per month (at end of each month). (The present value at 1% per month is $7,840.)
3. Estimated residual value after 50 months is $1,180. (The present value at 1% per month is $715.)
Delaney Company guarantees the residual value of $1,180.
4. Estimated economic life of the automobile is 60 months.
5. Delaney Company’s incremental borrowing rate is 12% a year (1% a month). Simon’s implicit rate is
unknown.
Instructions
(a) What is the nature of this lease to Delaney Company?
(b) What is the present value of the minimum lease payments?
(c) Record the lease on Delaney Company’s books at the date of inception.
(d) Record the first month’s depreciation on Delaney Company’s books (assume straight-line).
(e) Record the first month’s lease payment.
E21-8 (Lessee Entries with Bargain-Purchase Option)

The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and
Rode Company, a lessee.
Inception date: May 1, 2014
Annual lease payment due at the beginning of each year, beginning with May 1, 2014:
$21,227.65
Bargain-purchase option price at end of lease term: $ 4,000.00
Lease term: 5 years
Economic life of leased equipment: 10 years
Lessor’s cost: $65,000.00
Fair value of asset at May 1, 2014: $91,000.00
Lessor’s implicit rate 10%
Lessee’s incremental borrowing rate 10%
The collectability of the lease payments is reasonably predictable, and there are no important
uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility
for all executory costs.
Instructions
(Round all numbers to the nearest cent.)
(a) Discuss the nature of this lease to Rode Company.
(b) Discuss the nature of this lease to Mooney Company.
(c) Prepare a lease amortization schedule for Rode Company for the 5-year lease term.
(d) Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to
record the payments and expenses related to this lease for the years 2014 and 2015. Rode’s annual
accounting period ends on December 31. Reversing entries are used by Rode.
E21-9 (Lessor Entries with Bargain-Purchase Option)
A lease agreement between Mooney Leasing Company and Rode Company is described in E21-8.
Instructions
(Round all numbers to the nearest cent.)
Refer to the data in E21-8 and do the following for the lessor.
(a) Compute the amount of the lease receivable at the inception of the lease.
(b) Prepare a lease amortization schedule for Mooney Leasing Company for the 5-year lease term.
(c) Prepare the journal entries to reflect the signing of the lease agreement and to record the receipts
and income related to this lease for the years 2014, 2015, and 2016. The lessor’s accounting period
ends on December 31. Reversing entries are not used by Mooney.
E21-12 (Accounting for an Operating Lease)
On January 1, 2014, Doug Nelson Co. leased a building to Patrick Wise Inc. The relevant information
related to the lease is as follows.
1. The lease arrangement is for 10 years.
2. The leased building cost $4,500,000 and was purchased for cash on January 1, 2014.
3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no
salvage value.
4. Lease payments are $275,000 per year and are made at the end of the year.
5. Property tax expense of $85,000 and insurance expense of $10,000 on the building were incurred by
Nelson in the first year. Payment on these two items was made at the end of the year.
6. Both the lessor and the lessee are on a calendar-year basis.
Instructions
(a) Prepare the journal entries that Nelson Co. should make in 2014.
(b) Prepare the journal entries that Wise Inc. should make in 2014.
(c) If Nelson paid $30,000 to a real estate broker on January 1, 2014, as a fee for finding the lessee, how
much should be reported as an expense for this item in 2014 by Nelson Co.?
P21-15 (Operating Lease vs. Capital Lease)
You are auditing the December 31, 2014, financial statements of Hockney, Inc., manufacturer of
novelties and party favors. During your inspection of the company garage, you discovered that a used
automobile not listed in the equipment subsidiary ledger is parked there. You ask Stacy Reeder, plant
manager, about the vehicle, and she tells you that the company did not list the automobile because the
company was only leasing it. The lease agreement was entered into on January 1, 2014, with Crown New
and Used Cars.
You decide to review the lease agreement to ensure that the lease should be afforded operating lease
treatment, and you discover the following lease terms.
1. Noncancelable term of 4 years.
2. Rental of $3,240 per year (at the end of each year). (The present value at 8% per year is $10,731.)
3. Estimated residual value after 4 years is $1,100. (The present value at 8% per year is $809.) Hockney
guarantees the residual value of $1,100.
4. Estimated economic life of the automobile is 5 years.
5. Hockney’s incremental borrowing rate is 8% per year.
Instructions
You are a senior auditor writing a memo to your supervisor, the audit partner in charge of this audit, to
discuss the above situation. Be sure to include (a) why you inspected the lease agreement, (b) what you
determined about the lease, and (c) how you advised your client to account for this lease. Explain every
journal entry that you believe is necessary to record this lease properly on the client’s books. (It is also
necessary to include the fact that you communicated this information to your client.)

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E21-1 (Lessee Entries; Capital Lease with Unguaranteed Residual Value)

(a) What type of lease is this? Explain.

(b) Compute the present value of the minimum lease payments.

1. Noncancelable term of 50 months.

4. Estimated economic life of the automobile is 60 months.

(a) What is the nature of this lease to Delaney Company?

(b) What is the present value of the minimum lease payments?

(e) Record the first month’s lease payment.

E21-8 (Lessee Entries with Bargain-Purchase Option)

Inception date: May 1, 2014

Bargain-purchase option price at end of lease term: $ 4,000.00

Lease term: 5 years

Economic life of leased equipment: 10 years

Lessor’s cost: $65,000.00

Fair value of asset at May 1, 2014: $91,000.00

Lessor’s implicit rate 10%

Lessee’s incremental borrowing rate 10%

(Round all numbers to the nearest cent.)

(a) Discuss the nature of this lease to Rode Company.

(b) Discuss the nature of this lease to Mooney Company.

E21-9 (Lessor Entries with Bargain-Purchase Option)

(Round all numbers to the nearest cent.)

E21-12 (Accounting for an Operating Lease)

1. The lease arrangement is for 10 years.

6. Both the lessor and the lessee are on a calendar-year basis.

P21-15 (Operating Lease vs. Capital Lease)

1. Noncancelable term of 4 years.

4. Estimated economic life of the automobile is 5 years.

5. Hockney’s incremental borrowing rate is 8% per year.

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