QUESTION 1:
On January 1, 2016, Winn Heat Transfer leased office space under a three-year operating lease agreement. The arrangement specified three annual rent payments of $86,000 each, beginning January 1, 2016, the inception of the lease, and at each January 1 through 2018. Winn also paid a $102,000 advance payment at the inception of the lease in addition to the first $86,000 rent payment. With permission of the owner, Winn made structural modifications to the building before occupying the space at a cost of $186,000. The useful life of the building and the structural modifications were estimated to be 30 years with no residual value.
Required:
Prepare the appropriate entries for Winn Heat Transfer from the inception of the lease through the end of 2016. Winn's fiscal year is the calendar year. Winn uses straight-line depreciation. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
1. Record the advance payment for rent.
2. Record the annual rent payment.
3. Record the structural modifications of the building.
4. Record the annual rent.
5. Record the advance payment allocation.
6. Record the depreciation expense.
QUESTION 2:
On June 30, 2016, Georgia-Atlantic, Inc., leased a warehouse facility from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $468,683 over a five-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2016. Georgia-Atlantic's incremental borrowing rate is 10%, the same rate IC used to calculate lease payment amounts. IC purchased the warehouse from Builders, Inc. at a cost of $3.8 million. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required:
1. What pretax amounts related to the lease would IC report in its balance sheet at December 31, 2016?
2. What pretax amounts related to the lease would IC report in its income statement for the year ended December 31, 2016?
QUESTION 3:
Each of the four independent situations below describes a capital lease in which annual lease payments are payable at the beginning of each year. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Determine the annual lease payments for each situation:
QUESTION 4:
On January 1, 2016, NRC Credit Corporation leased equipment to Brand Services under a direct financing lease designed to earn NRC a 12% rate of return for providing long-term financing. The lease agreement specified:
a. Fifteen annual payments of $68,000 (including executory costs) beginning January 1, 2016, the inception of the lease and each December 31 thereafter through 2030.
b. The estimated useful life of the leased equipment is 15 years with no residual value. Its cost to NRC was $470,658.
c. The lease qualifies as a capital lease to Brand.
d. A 15-year service agreement with Quality Maintenance Company was negotiated to provide maintenance of the equipment as required. Payments of $6,300 per year are specified, beginning January 1, 2016. NRC was to pay this executory cost as incurred, but lease payments reflect this expenditure.
e. A partial amortization schedule, appropriate for both the lessee and lessor, follows: