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Q13P_a(1).

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Intermediate Accounting (Kieso)
Found in: Page 1249

Short Answer

Lessor Computations and Entries, Sales-Type Lease with Guaranteed Residual Value) Amirante Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is $411,324, and its guaranteed residual value at the end of the noncancelable lease term is estimated to be $15,000. The hospital will pay rents of $60,000 at the beginning of each year and all maintenance, insurance, and taxes. Amirante Inc. incurred costs of $250,000 in manufacturing the machine and $14,000 in negotiating and closing the lease. Amirante Inc. has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that the implicit interest rate is 10%.

Instructions

(a) Discuss the nature of this lease in relation to the lessor and compute the amount of each of the following items.

  1. Lease receivable at inception of the lease.

The present value of minimum lease payments is $411,324.

See the step by step solution

Step by Step Solution

Meaning of sale-type lease

In a sales-type lease, the lessor is assumed to be selling a product to the lessee, which necessitates the reporting of a profit or loss on the sale. As a result, at the lease's start date, the following accounting is applied: (a) Recognize assets. (b)Recognize net investment.

Explaining the nature of the lease in relation to the lessor

The non-cancelable lease is a sales-type capital lease because:

  1. the lease term is for 83 percent (1012) of the economic life of the leased asset,
  2. the present value of the minimum lease payments exceeds 90 percent of the fair value of the leased property,
  3. the collectability of the lease payments is reasonably predictable, and there are no uncertainties as to reimbursable costs yet to be incurred by the lessor, and
  4. The lease provides the lessor with manufacturing capabilities.

Computation of the amount of lease receivable at the inception of the lease

Present value of annual payments of $60,000 made at the beginning of each period for 10 years

$405,541

Present value of guaranteed residual value

5,783

Present value of minimum lease payments

$411,324

Working notes:

Calculation of present value of annual payments

Note: PV of an annuity due @ 10%

Calculation of guaranteed residual value

Note: PV of $1 at 10% for 10 years

Most popular questions for Business-studies Textbooks

(Lessee Entries, Capital Lease with Monthly Payments) Shapiro Inc. was incorporated in 2016 to operate as a computer software service firm with an accounting fiscal year ending August 31. Shapiro’s primary product is a sophisticated online inventory-control system; its customers pay a fixed fee plus a usage charge for using the system.

Shapiro has leased a large, Alpha-3 computer system from the manufacturer. The lease calls for a monthly rental of $40,000 for the 144 months (12 years) of the lease term. The estimated useful life of the computer is 15 years.

Each scheduled monthly rental payment includes $3,000 for full-service maintenance on the computer to be performed by the manufacturer. All rentals are payable on the first day of the month beginning with August 1, 2017, the date the computer was installed and the lease agreement was signed. The lease is noncancelable for its 12-year term, and it is secured only by the manufacturer’s chattel lien on the Alpha-3 system.

This lease is to be accounted for as a capital lease by Shapiro, and it will be depreciated by the straight-line method with no expected salvage value. Borrowed funds for this type of transaction would cost Shapiro 12% per year (1% per month). Following is a schedule of the present value of $1 for selected periods discounted at 1% per period when payments are made at the beginning of each period.

Periods Present (months)

Present Value of $1 per Period Discounted at 1% per Period

1

1.000

2

1.990

3

2.970

143

76.658

144

76.899

Instructions

Prepare all entries Shapiro should have made in its accounting records during August 2017 relating to this lease. Give full explanations and show supporting computations for each entry. Remember, August 31, 2017, is the end of Shapiro’s fiscal accounting period and it will be preparing financial statements on that date. Do not prepare closing entries.

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