c21BExercises.

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B EXERCISES

2 E21-1B (Lessee Entries; Capital Lease with Unguaranteed Residual Value) On January 1, 2014, Manor
Inc. signed a 6-year noncancelable lease for a printing press. The terms of the lease called for Manor to
make annual payments of $54,291 at the beginning of each year, starting January 1, 2014. The printing
press has an estimated useful life of 6 years and a $10,000 unguaranteed residual value. The printing press
reverts back to the lessor at the end of the lease term. Manor uses the straight-line method of deprecia-
tion for all of its plant assets. Manor’s incremental borrowing rate is 12%, 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 Manor for this lease through January 1, 2015.

2 E21-2B (Lessee Computations and Entries; Capital Lease with Guaranteed Residual Value) Jupiter
Corp. leases a rocket-themed amusement ride with a fair value of $110,000 on the following terms:
1. Noncancelable term of 10 years.
2. Rental of $16,000 per year (at the end of each year). The present value at 10% per year is $98,313.
3. Estimated residual value after 10 years is $10,000. The present value at 10% per year is $3,855.
Jupiter Corp. guarantees the residual value of $10,000.
4. Estimated economic life of the ride is 12 years.
5. Jupiter’s incremental borrowing rate is 10% a year. The lessor’s implicit rate is unknown.

Instructions
(a) What is the nature of this lease to Jupiter?
(b) What is the present value of the minimum lease payments?
(c) Record the lease on Jupiter’s books at the date of inception.
(d) Record the first year’s depreciation on Jupiter’s books. (Assume straight-line.)
(e) Record the first year’s lease payment.

2 7 E21-3B (Lessee Entries; Capital Lease with Executory Costs and Unguaranteed Residual Value) As-
sume that on January 1, 2014, Yard Waste Corp. signs a 6-year noncancelable lease agreement to lease an
industrial-strength mulching machine. The following information pertains to this lease agreement.
1. The agreement requires equal rental payments of $81,680 beginning on January 1, 2014.
2. The fair value of the machine on January 1, 2014, is $400,000.
3. The machine has an estimated economic life of 10 years, with an unguaranteed residual value of
$35,000. Yard Waste depreciates similar machines on the straight-line method.
4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
5. Yard Waste’s incremental borrowing rate is 8% per year. The lessor’s implicit rate is not known by
Yard Waste.
6. The yearly rental payment includes $1,563.19 of executory costs related to insurance on the
machine.

Instructions
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. Yard Waste’s corporate year-
end is December 31.

5 E21-4B (Lessor Entries; Direct-Financing Lease with Option to Purchase) Power Top Leasing signs a
lease agreement on January 1, 2014, to lease power equipment to Manual Bottoms Company. The term of
the noncancelable lease is 4 years, and payments are required at the end of each year. The following in-
formation relates to this agreement:
1. Manual Bottoms Company has the option to purchase the equipment for $25,000 upon the termi-
nation of the lease.
2. The equipment has a cost and fair value of $325,000 to Power Top Leasing. The useful economic
life is 5 years, with a salvage value of $25,000.
3. Manual Bottoms Company is required to pay $2,000 each year to the lessor for executory costs.
4. Power Top Leasing desires to earn a return of 12% on its investment.
5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties
surrounding the costs yet to be incurred by the lessor.
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2 • Chapter 21 Accounting for Leases

Instructions
(a) Prepare the journal entries on the books of Power Top Leasing to reflect the payments received un-
der the lease and to recognize income for the years 2014 and 2015.
(b) Assuming that Manual Bottoms Company exercises its option to purchase the equipment on De-
cember 31, 2017, prepare the journal entry to reflect the sale on Power Top Leasing’s books.

2 3 E21-5B (Type of Lease; Amortization Schedule) Delphi Leasing Company leases a new machine that
has a cost and fair value of $225,000 to Lindy Corporation on a 5-year noncancelable contract. Lindy Cor-
poration agrees to assume all risks of normal ownership including such costs as insurance, taxes, and
maintenance. The machine has a 5-year useful life and no residual value. The lease was signed on Janu-
ary 1, 2014. Delphi Leasing Company expects to earn a 12% return on its investment. The annual rentals
are payable on each December 31.

Instructions
(a) Discuss the nature of the lease arrangement and the accounting method that each party to the lease
should apply.
(b) Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that
covers all the years involved.

8 E21-6B (Lessor Entries; Sales-Type Lease) Bench Inc., an equipment manufacturer, leased a machine to
Unicycle Company on January 1, 2014. The lease is for a 6-year period and requires equal annual pay-
ments of $41,747 at the beginning of each year. The first payment is received on January 1, 2014. Bench
had built the machine during 2013 for a total cost of $160,000. Collectibility of lease payments is reason-
ably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Bench.
Bench set the annual rental to ensure a 10% rate of return. The machine has an economic life of 8 years
with no residual value and reverts to Bench at the termination of the lease.

Instructions
(a) Compute the amount of the lease receivable.
(b) Prepare all necessary journal entries for Bench for 2014 and 2015.

8 E21-7B (Lessee-Lessor Entries; Sales-Type Lease) On January 1, 2014, Global Corporation leased equip-
ment to Local Inc. The following information pertains to this lease.
1. The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to
the lessor at the termination of the lease.
2. Equal rental payments are due on January 1 of each year, beginning in 2014.
3. The fair value of the equipment on January 1, 2014, is $320,000, and its cost is $265,000.
4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $30,000.
Local depreciates all of its equipment on a straight-line basis.
5. Global set the annual rental to ensure a 12% rate of return. Local’s incremental borrowing rate is
10%, and the implicit rate of the lessor is unknown.
6. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround
the amount of costs yet to be incurred by the lessor.

Instructions
(a) Calculate the amount of the annual rental payment.
(b) Discuss the nature of this lease to Global and Local.
(c) Prepare all the necessary journal entries for Local for 2014.
(d) Prepare all the necessary journal entries for Global for 2014.

6 E21-8B (Lessee Entries with Bargain Purchase Option) The following facts pertain to a noncancelable
lease agreement between Earth Leasing Corporation and New Moon Company, a lessee.

Inception date October 1, 2014

Annual lease payment due at the beginning of
each year, beginning with October 1, 2014 $31,415.63
Bargain purchase option price at end of lease term $5,000.00
Lease term 6 years
Economic life of leased equipment 12 years
Lessor’s cost $120,000.00
Fair value of asset at October 1, 2014 $160,000.00
Lessor’s implicit rate (not known by lessee) 8%
Lessee’s incremental borrowing rate 6%
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B Exercises • 3

The collectibility of the lease payments is reasonably predictable, and there are no important uncertain-
ties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all
executory costs.

Instructions
(a) Discuss the nature of this lease to Earth Leasing.
(b) Discuss the nature of this lease to New Moon.
(c) Prepare a lease amortization schedule for New Moon for the 6-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. New Moon’s
annual accounting period ends on December 31. New Moon uses reversing entries.

6 E21-9B (Lessor Entries with Bargain Purchase Option) A lease agreement between Earth Leasing Cor-
poration and New Moon Company is described in E21-8B.

Instructions
Refer to the data in E21-8B 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 Earth Leasing Corporation for the 6-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. Earth Leasing does not use reversing entries.

5 E21-10B (Computation of Rental; Journal Entries for Lessor) Horizon Leasing Inc. signs an agreement
on January 1, 2014, to lease equipment to one of its customers. The following information relates to this
agreement.
1. The term of the noncancelable lease is 8 years with no renewal option. The equipment has an es-
timated economic life of 10 years.
2. The cost of the asset to the lessor is $850,000. The fair value of the asset at January 1, 2014, is $850,000.
3. The asset will revert to the lessor at the end of the lease term at which time the asset is expected
to have a residual value of $92,547, none of which is guaranteed.
4. The lessee assumes direct responsibility for all executory costs.
5. The agreement requires equal annual rental payments, beginning on January 1, 2014.
6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties
surrounding the amount of costs yet to be incurred by the lessor.

Instructions
(a) Assuming the lessor desires an 8% rate of return on its investment, calculate the amount of the an-
nual rental payment required. Round to the nearest dollar.
(b) Prepare an amortization schedule that would be suitable for the lessor for the lease term.
(c) Prepare all of the journal entries for the lessor for 2014 and 2015 to record the lease agreement, the
receipt of lease payments, and the recognition of income. Assume the lessor’s annual accounting
period ends on December 31.

2 E21-11B (Amortization Schedule and Journal Entries for Lessee) Chemical Financial Corporation signs
an agreement on January 1, 2014, to lease equipment to Chells, Inc. The following information relates to
this agreement.
1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an es-
timated economic life of 7 years.
2. The fair value of the asset at January 1, 2014, is $460,000.
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected
to have a residual value of $20,000, none of which is guaranteed.
4. Chells assumes direct responsibility for all executory costs, which include $2,000 for insurance and
$850 for property taxes.
5. The agreement requires equal annual rental payments of $91,637.36 to the lessor, beginning on
January 1, 2014.
6. The lessee’s incremental borrowing rate is 10%. The lessor’s implicit rate is 9% and is known to
the lessee.
7. Chells uses the straight-line depreciation method for all equipment.
8. Chells uses reversing entries when appropriate.
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4 • Chapter 21 Accounting for Leases

Instructions
(Round all numbers to the nearest cent.)
(a) Prepare an amortization schedule that would be suitable for the lessee for the lease term.
(b) Prepare all of the journal entries for the lessee for 2014 and 2015 to record the lease agreement, the
lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting pe-
riod ends on December 31.

3 4 E21-12B (Accounting for an Operating Lease) On January 1, 2014, Alphabet Company leased an
office building to Numbers, Inc. The relevant information related to the lease is as follows.
1. The lease arrangement is for 16 years.
2. The leased building cost $14,000,000 and was purchased for cash on January 1, 2014.
3. The building is depreciated on a straight-line basis. Its estimated economic life is 30 years and has
no estimated residual value.
4. Lease payments are $600,000 per year and are made at the end of the year.
5. Insurance expense of $42,000 on the building was incurred by Alphabet in the first year. Payment
on this item 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 Alphabet Company should make in 2014.
(b) Prepare the journal entries that Numbers, Inc. should make in 2014.
(c) If Numbers paid $16,000 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 Numbers, Inc.?
3 4 E21-13B (Accounting for an Operating Lease) On January 1, 2014, equipment was purchased for $1,500,000
by Indy Cycle Corp. The equipment is expected to have a 10-year life with no salvage value. It is to be de-
preciated on a straight-line basis. The machine was leased to Daytona Car, Inc. on January 1, 2014, at an an-
nual rental of $260,000. Other relevant information is as follows.
1. The lease term is for 2 years.
2. Indy Cycle Corp. incurred maintenance and other executory costs of $25,000 in 2014 related to this
lease.
3. The machine could have been sold by Indy Cycle Corp. for $1,600,000 instead of leasing it.
4. Daytona Car, Inc. is required to pay a security deposit of $40,000.
Instructions
(a) How much should Indy Cycle Corp. report as income before income tax on this lease for 2014?
(b) What amount should Daytona Car, Inc. report for rent expense for 2014 on this lease?
3 4 E21-14B (Operating Lease for Lessee and Lessor) On July 1, 2014, Kings Financial purchased a printing
press for $4,600,000 for the purpose of leasing it. The press is expected to have a 15-year life, no residual
value, and will be depreciated on the straight-line basis. The machine was leased to Coupons For Every-
one, Inc. on September 1, 2014, for a 5-year period at an annual rental of $500,000. There is no provision
for the renewal of the lease or purchase of the machine by the lessee at the expiration of the lease term.
Kings Financial paid $50,000 of commissions associated with negotiating the lease in August 2014.
Instructions
(a) What expense should Coupons For Everyone, Inc. record as a result of the facts above for the year
ended December 31, 2014? Show supporting computations in good form.
(b) What income or loss before income taxes should Kings Financial record as a result of the facts
above for the year ended December 31, 2014? (Hint: Amortize commissions over the life of the
lease.)
(AICPA adapted)
11 *E21-15B (Sale-Leaseback) Assume that on January 1, 2014, N-Tech sells its main computer system to
First Tech Leasing Co. for $1,500,000 and immediately leases the computer system back. The relevant in-
formation is as follows.
1. The computer was carried on N-Tech’s books at a value of $900,000.
2. The term of the noncancelable lease is 8 years; title will transfer to N-Tech.
3. The lease agreement requires equal rental payments of $261,022.09 at the end of each year.
4. The incremental borrowing rate for N-Tech is 10%. N-Tech is aware that First Tech Leasing Co. set
the annual rental to insure a rate of return of 8%.
5. The computer has a fair value of $1,500,000 on January 1, 2014, and an estimated economic life of
8 years.
6. N-Tech pays executory costs (insurance and personal property taxes) of $15,000 per year.
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B Exercises • 5

Instructions
Prepare the journal entries for both the lessee and the lessor for 2014 to reflect the sale and leaseback
agreement. No uncertainties exist, and collectibility is reasonably certain.

11 *E21-16B (Lessee-Lessor, Sale-Leaseback) Presented below are four independent situations concerning
Olympia Corp.
(a) On December 31, 2014, Olympia Corp. sold excavation equipment to Fifth Finance Company and
immediately leased it back for 6 years. The sales price of the equipment was $400,000, its carrying
amount is $250,000, and its estimated remaining economic life is 8 years. Determine the amount
of deferred revenue to be reported from the sale of the computer equipment on December 31, 2014.
(b) On January 1, 2014, Olympia Corp. sold a tractor trailer with an estimated useful life of 15 years.
At the same time, Olympia Corp. leased back the tractor trailer for 15 years. The sales price of the
tractor trailer was $150,000, the carrying amount $35,000, and the annual rental $19,721.07. Olympia
Corp. intends to depreciate the leased asset using the double-declining balance depreciation
method. Discuss how the gain on the sale should be reported at the end of 2014 in the financial
statements.
(c) On January 1, 2015, Olympia Corp. sold equipment with an estimated useful life of 6 years. At the
same time, Olympia Corp. leased back the equipment for 4 years under a lease classified as an op-
erating lease. The sales price (fair market value) of the equipment was $85,000 and the carrying
amount is $120,000, the annual rental under the lease is $21,000, and the present value of the rental
payments is $66,567. For the year ended December 31, 2014, determine which items would be re-
ported on its income statement for the sale-leaseback transaction.
(d) On July 1, 2014, Olympia Corp. sold a portable office building to Three Brothers Leasing and si-
multaneously leased it back for two years. The sale price of the portable office building was
$400,000, the carrying amount is $125,000, and it had an estimated remaining useful life of 20
years. The present value of the rental payments for the two years is $38,000. At December 31,
2014, how much should Olympia Corp. report as deferred revenue from the sale of the portable
office building?
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