Accounting Questions
Student1976
accounting_test_3.docxAccounting Test 3 – Show work and/or Discuss results.
1. On January 1, James Industries leased equipment to a customer for a four- year period, at which time possession of the leased asset will revert back to James. The equipment cost James $700,000 and has an expected useful life of six years. Its normal sales price is $700,000. The residual value after four years, guaranteed by the lessee, is $100,000. Lease payments are due December 31 of each year, beginning with the first payment at the end of this year. Collectability of the remaining lease payments is reasonably assured, and there are no material cost uncertainties. The interest rate is 5%.Calculate the amount of the annual lease payments.
2. 1) A Company leases the following asset:
Fair Value of $200,000
Useful life of 5 years with no salvage value
Lease term is 4 years
Annual lease payment is $30,000 and the lease rate is 11%
The company’s overall borrowing rate is 9.5%
The firm can purchase the equipment at the end of the lease period for $45,000
What type of lease is this?
A) Operating
B) Capital
C) Financing
D) Long Term
2) On January 1, 2013, Blaugh Co. signed a long-term lease for an office building. The terms of the lease required Blaugh Co to pay $10,000 annually, beginning December 30, 2013, and continuing each year for 30 years. The lease qualifies as a capital lease. On January 1, 2013, the present value of the lease payments is $112,500 at the 8% interest rate implicit in the lease. In Blaugh’s December 1, 2013, balance sheet, the capital lease liability should be
A) $102,500
B) $111,500
C) $112,500
D) $290,000
6) At the inception of a capital lease, the guaranteed residual value should be
A) Included as part of minimum lease payments at present value.
B) Included as part of minimum lease payments at future value.
C) Included as part of minimum lease payments only to the extent that guaranteed residual vaue is expected to exceed estimated residual value.
D) Excluded from minimum lease payments.
7) Neal Corp. entered into a nine year capital lease on a warehouse on December 31, 2013. Lease payments of $52,000, which includes real estate taxes of $2,000, are due annually, beginning on December 31, 2014, and every December 31 thereafter. Neal does not know the interest rate implicit in the lease; Neal’s incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should Neal report as capitalized lease liability at December 31, 2013?
A) $300,000
B) $312,000
C) $450,000
D) $468,000
3. Wal-Mart stores Inc. is the World’s largest retailer. A large portion of the premises that the company occupies are leased. Its financial statements and disclosure notes revealed the following information:
Balance Sheet
($ In Millions)
2011 2010
Assets
Property:
Property under capital lease $5,509 $5,669
Less: Accumulated amortization (2,780) (2,906)
Liabilities
Current liabilities:
Obligations under capital leases due within one year 336 346
Long-term debt:
Long-term obligation under capital leases 3,150 3,170
Required:
1) Discuss some possible reasons why Walmart leases rather than purchases most of its premises.
2) The net asset “property under capital lease” has a 2011 balance of $2,729million ($5,509 – 2,780). Liabilities for capital leases total $ 3,486 ($336 + 3,150). Why do the asset and liability amounts differ?
4) FedEx’s Corporation, the world’s largest transportation company, leases much of its aircraft, land, facilities, and equipment. A portion of those leases are part of sale and leaseback arrangements. An excerpt from FedEx’s 2011 disclosure notes describes the company’s handling of gains from those arrangements:
( Note – Deferred Gains – Gains on the sale and leaseback of aircraft and other property and equipment are deferred and amortized ratably over the life of the lease as a reduction of rent expense)
Required:
1) Why should companies defer gains from sale-leaseback arrangements?
2) What makes you so sure your answer's right? What would FedEx have to say differently in its disclosure note on Deferred Gains for you to change your mind?
