Reference no: EM13830233

1. On January 2, 2012, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $80,000 each, payable beginning January 2, 2014. Brick Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease term. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What journal entry would Brick Co. make at January 2, 2014assuming this is a direct-financing lease?

	PV Annuity Due	PV Ordinary Annuity	PV Single Sum
8%, 5 periods	4.31213	3.99271	.68508
10%, 5 periods	4.16986	3.79079	.62092

a)

Cash	80000
Lease Receivable	370000
Equipment		450000

b)

Cash	80000
Lease Receivable	264970
Loss	105030
Equipment		450000

c)

Cash	80000
Lease Receivable	284635
Equipment		364635

d)

Cash	80000
Lease Receivable	299224
Equipment		379224

 

2. On January 2, 2012, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $80,000 each, payable beginning January 2, 2014. Brick Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease term. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What journal entry would Brick Co. make at January 2, 2014to record the lease?

	PV Annuity Due	PV Ordinary Annuity	PV Single Sum
8%, 5 periods	4.31213	3.99271	.68508
10%, 5 periods	4.16986	3.79079	.62092

a)

Cash	80000
Lease Receivable	370000
Equipment		450000

b)

Cash	80000
Lease Receivable	264970
Loss	105030
Equipment		450000

c)

Cash	80000
Lease Receivable	284635
Equipment		364635

d)

Cash	80000
Lease Receivable	299224
Equipment		379224

3. ON Jan 2, 2015, Hernandez, Inc. signed a 10-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $200,000 starting at the beginning of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciaition for all of its plant assets. Aggregate lease payments were determined to have a present value of $1,200,000, based on implicit interest of 10%.

3-1.In its 2015 income statement, what amount of interest expense should Hernandez report from this lease transaction?

a. 0

b. 81000

c. 108000

d. 120000

3-2. In its 2015 income statement, what amount of depreciation expense should Hernandez report from this lease transaction?