Reference no: EM131211274
Crown Auto leased 40 vans to Piedmont Transport under a four-year noncancelable lease on January, 1, 2016. Information concerning the lease and the vans follows:
a. Equal annual lease payments of $200,000 are due on January 1, 2016 and thereafter on December 31 each year. The first payment was made on January 1, 2016. Crown Auto’s implicit interest rate is 10% and is known by Piedmont.
b. Piedmont has the option to purchase all of the vans at the end of the lease for a total of $200,000 minus $10,000. The vans’ estimated residual value is $200,000 at the end of the lease term and $50,000 at the end of 7 years, the estimated life of each van.
c. Crown Auto estimates the fair value of the vans to be $ (4 *20) + 40,000. Piedmont’s cost was three and one half times the lease payment
d. Piedmont’s incremental borrowing rate is 11%.
e. Piedmont will pay the executory costs (maintenance, insurance, and other fees not included in the annual lease payments) of $1,000 per year. The depreciation method is straight-line.
f. The collectability of the lease payments is reasonably predictable and there are no important cost uncertainties.
Required: 1. What are the potential advantages to Piedmont of leasing the vans rather than purchasing them? Are there any tax advantages?
2. How should the lease be classified by Crown Auto and by Piedmont?
3. Suppose Crown Auto recorded the lease on January 1, 2016, as a capital lease in the amount of $1,100,000. What would be the appropriate journal entries related to the capital lease for the second lease payment on December 31, 2016?
4. Suppose the lease is a capital lease. Prepare an amortization table for 7 years.
|
Journalize any necessary entries to accrue above payroll
: The controller for P & P Products neglected to have her staff accrue the payroll for the last week in December, 2014. The following data should have been considered and accounted for in P & P Products’ books. Journalize any necessary entries to accru..
|
|
Compute depreciation expense under each of the methods
: Muggsy Bogues Company purchased equipment for $274,625 on October 1, 2014. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $24,000. Estimated production is 40,100 units and estimated working hours are 19,0..
|
|
Depreciated using straight-line depreciation for their books
: Accounting for Income Taxes C.U. Incorporated asked you to help them with their financial statements. They bought a machine that is depreciated using straight-line depreciation for their books and uses MACRS depreciation for tax purposes. It was purc..
|
|
Defined benefit pension plan specifies annual retirement
: Sachs Brands' defined benefit pension plan specifies annual retirement benefits equal to: 1.4% × service years × final year's salary, payable at the end of each year. Estimate by the accumulated benefits approach the amount of Davenport's annual reti..
|
|
How should lease be classified by crown auto and by piedmont
: Crown Auto leased 40 vans to Piedmont Transport under a four-year noncancelable lease on January, 1, 2016. Information concerning the lease and the vans follows: What are the potential advantages to Piedmont of leasing the vans rather than purchasing..
|
|
Financial statements are presented fairly
: Most auditors believe that financial statements are "presented fairly" when the statements are in accordance with GAAP, and that it is also necessary to: Determine that they are not in violation of FASB statements. Examine the substance of transactio..
|
|
Determine the cost of direct materials used in production
: Cost of Direct Materials Used in Production for a Manufacturing Company. Determine the cost of direct materials used in production by Rextacular during the month ended June 30, 2016.
|
|
Calculate company direct labor rate and efficiency variances
: At the beginning of last year, creative productions set direct labor standards of 2 hours at $25 per hour for each product produced. during the year, 1,700 direct labor hours were actually worked at an average cost of $26 per hour. using this informa..
|
|
Prepare a flexible budget
: Prepare a flexible budget for 20,000, 22,000, and 24,000 units of output, using the information that follows. Variable costs: Direct materials $1.00 per unit Direct labor $4.00 per unit Variable overhead $8.00 per unit Total budgeted fixed overhead $..
|