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Farm Co. leased equipment to Union Co. on July 1, 2014, and properly recorded the




Question;Farm Co. leased equipment to Union Co. on July 1, 2014, and properly recorded thesales-type lease at $69,898, the present value of the lease payments discounted at 8%.The first of six annual lease payments of $14,000 due at the beginning of each year of thelease term was received and recorded on July 3, 2014. Farm had purchased the equipmentfor $68,000. What amount of revenue or income from the lease should Farm report in its2014 income statement?a) $0b) $2,430c) $4,134d) $5,594and Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1,2014. The following information relates to the lease agreement.1. The term of the lease is 7 years with no renewal option, and the machinery has anestimated economic life of 9 years.2. The cost of the machinery is $506,000, and the fair value of the asset on January 1,2014, is $787,000.3. At the end of the lease term, the asset reverts to the lessor and has a guaranteedresidual value of $120,000. Jensen depreciates all of its equipment on a straight-linebasis.4. The lease agreement requires equal annual rental payments, beginning on January 1,2014.5. The collectibility of the lease payments is reasonably predictable, and there are noimportant uncertainties surrounding the amount of costs yet to be incurred by thelessor.6. Glaus desires an 11% rate of return on its investments. Jensen?s incrementalborrowing rate is 12%, and the lessor?s implicit rate is unknown.(Assume the accounting period ends on December 31.)Instructionsa) Discuss the nature of this lease for both the lessee and the lessor.b) Calculate the amount of the annual rental payment required.c) Compute the present value of the minimum lease payments.d) Prepare the journal entries Jensen would make in 2014 and 2015 related to the leasearrangement.e) Prepare the journal entries Glaus would make in 2014 and 2015.


Paper#47612 | Written in 18-Jul-2015

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