4.On January 1, 20X1, Seven Wonders Inc. signed a five-year noncancelable lease with Moss Company. The lease calls for five payments of $277,409.44 to be made at the end of each year. The leased asset has a fair value of $1,200,000 on January 1, 20X1. Seven Wonders cannot renew the lease, there is no bargain purchase option, and ownership of the leased asset reverts to Moss at the lease end. The leased asset has an expected useful life of six years, and Seven Wonders uses straight-line depreciation for financial reporting purposes. Its incremental borrowing rate is 12%. Moss’s implicit rate of return on the lease is unknown. Seven Wonders uses a calendar year for financial reporting purposes. Use tables (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)
- Prepare an amortization schedule for the lease liability.
- Prepare the journal entries to record (a) the lease as a finance lease on January 1, 20X1; (b) the lease payments on December 31, 20X1 and 20X2; and (c) the right-of-use asset amortization in 20X1 and 20X2.
- What is the total amount of expense reported on Seven Wonders’s 20X1 income statement from the lease?
5.On January 1, 20X1, Railcar Leasing Inc. (the lessor) purchased 10 used boxcars from Railroad Equipment Consolidators at a price of $8,749,520. Railcar leased the boxcars to the Reading Railroad Company (the lessee) on the same date. The lease is for eight years and calls for eight annual payments of $1,500,000 to be made at the beginning of each year, with the first payment due on January 1, 20X1. The boxcars have a nine-year remaining useful life, the lease contains no renewal or bargain purchase option, and possession of the boxcars reverts to the lessor at the lease’s end. The lessor expects the boxcars to be worth $1,000,000 at the end the lease term, but this value is not guaranteed by the lessee. The payments’ collectibility is reasonably certain, with no important uncertainties regarding unreimbursable costs to be incurred by the lessor. The lessor has structured the lease to earn a rate of return of 12.0%. Use tables (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)
- Prepare Railcar’s amortization schedule for the first three years of the lease.
- Prepare all journal entries for Railcar for 20X1 and 20X2. Assume that it reports on a calendar-year basis.
6.On January 1, 20X1, Merchant Co. sold a tractor to Swanson Inc. and simultaneously leased it back for five years. The tractor’s fair value is $300,000, but its carrying value on Merchant’s books prior to the transaction was $200,000. The tractor has a seven-year remaining estimated useful life, and Merchant and Swanson both used 8% interest in evaluating the transaction. Merchant has agreed to make five payments of $57,976 beginning January 1, 20X1. Use tables (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)
- What type of a lease is this for Merchant?
- Compute the amount of Merchant’s gain on the transaction.
- Prepare the January 1, 20X1, entries on Merchant’s books to account for the sale and leaseback.