# Acc302 Intermediate Accounting: Unit 7 Homework (E21-2, E21-9, P21-1)

Acc302 Intermediate Accounting
Unit 7 Homework (E21-2, E21-9, P21-1)

E21-2 Lessee Accounting Issues
The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010. The lease terms, provision, and related events are as follows:
a)The lease term is five years. The lease is non-cancelable and requires equal rental payments to be made at the end of each year.
b)The computers have an estimated life of five years, a fair value of \$300,000, and a zero estimated residual value.
c) Sax Company agrees to pay all executor costs.
d) The lease contains no renewal or bargain purchase option.
e) The annual payment is set by Appleton at \$83,222.92 to earn a rate of return of 12% on its net investment. The Sax Company is aware of this rate, which is equal to its borrowing rate.
f) Sax Company uses the straight-line method to record depreciation on similar equipment.

Required:
1. Determine what type of lease this is for Sax Company.
2. Calculate the amount of the asset and liability of the Sax Company at the inception of the lease (round to the nearest dollar).
3. Prepare a table summarizing the lease payments and interest expense.
4. Prepare journal entries for Sax Company for the years 2010 and 2011.
5. If the lease term is 3 years and the annual payments is \$110,000, how would Sox Company classify the lease under (a) U.S. GAAP and (b) IFRS?
Under U.S. (1), the Sax Company would classify the lease as an (2) lease. The lease (3) meet either of the first (4) criteria. The (5) criterion is (6) since the 3-year lease life is 60% of the economic life of 5 years. The (7) criterion is also (8) since the (9) of the lease payments of \$264,201 (\$110,000 x 2.401831) is 88.1% of the fair value of \$300,000. Therefore, the lease would be an (10) lease.
Complete the paragraph above by selecting the word, number, or phrase that best fits the corresponding number (you may use the answer more than once).

Under IFRS, the Sax Company would have to exercise (1) but it is (2) that it would classify the lease as a "(3)" lease since (4) of the indicators would probably be considered to be met. The present value of 88.1% is probably "(5) all" of the fair value of the asset. Also, it could be argued that 60% is the "(6)" of the economic life of the asset.
Complete the paragraph above by selecting the word, number, or phrase that best fits the corresponding number (you may use the answer more than once).

E21-9 Lessee and Lessor Accounting Issues
The following information is available for a noncancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee. Assume that the lease payments are made at the beginning of each month, interest and straight-line depreciation are recognized at the end of each month, and the residual value of the leased asset is zero at the end of a three-year life.
Cost of equipment to lessor (Anson Company) 50,000
Initial payment by lessee (Bullard Company) at inception of lease 2,000
Present value of remaining 35 payments of \$2,000 each discounted at 1% per month 58,817

Required
1. Record the lease (including the initial receipt of \$2,000) and the receipt of the second and third installments of \$2,000 in the accounts of the Anson Company. Carry computations to the nearest dollar.
2. Record the lease (including the initial payment of \$2,000), the payment of the second and third installments of \$2,000, and monthly depreciation in the accounts of the Bullard Company. The lessee records the lease obligation at net present value. Carry computations to the nearest dollar.

P21-1 Determining Type of Lease and Subsequent Accounting
On January 1, 2007 the Alice Company leases electronic equipment for five years, agreeing to pay \$70,000 annually at the beginning of each year under the noncancelable lease. Superior Electronics Company, the lessor, agrees to pay all executory costs, estimated to be \$3,450 per year. The cost and also fair value of the equipment is \$500,000. Its estimated life is 10 years. The estimated residual value at the end of five years is \$200,000; at the end of 10 years, it is \$5,000. There is no bargain purchase option in the lease nor any agreement to transfer ownership at the end of the lease to the lessee. The lessee’s incremental borrowing rate is 12%. During 2007 Superior Electronics pays property taxes of \$650, maintenance costs of \$1,600, and insurance of \$1,200. There are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor. Straight-line depreciation is considered the appropriate method by both companies.

Required
1. Identify the type of lease involved for Alice Company and Superior Electronics Company and give reasons for your classifications. (Round to two decimal places).
2. Prepare appropriate journal entries for 2007 for the lessee and lessor (round to the nearest dollar).
3. If the residual value at the end of five years is guaranteed by Alice, identify the type of lease. Prepare journal entries for 2010 and 2011 for the lessee and the lessor. Also prepare the journal entries for the lessee and the lessor when the lessee pays the guaranteed residual value.