Reference no: EM132595744

Question 1 - At January 1, 2021, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $28,000 beginning January 1, 2021, the beginning of the lease, and at each December 31 thereafter through 2028. The equipment was acquired recently by Crescent at a cost of $198,000 (its fair value) and was expected to have a useful life of 13 years with no salvage value at the end of its life. Crescent records depreciation using the straight-line method. Crescent seeks a 11% return on its lease investments. By this arrangement, the lease is deemed to be an operating lease.

Required -

1. What will be the effects of the lease on Crescent's earnings for the first year (ignore taxes)?

2. What will be the balances in the balance sheet accounts related to the lease at the end of the first year for Crescent (ignore taxes)?

Question 2 - Chance Enterprises leased equipment from Third Bank Leasing on January 1, 2021. Chance elected the short-term lease option. Appropriate adjusting entries are made annually.

Related Information: Lease term 1 year (12 monthly periods) Monthly lease payments $52,000 at Jan. 1, 2021, through Dec. 1, 2021.Economic life of asset 5 years Interest rate charged by the lessor 6%

Required - Prepare appropriate entries for Chance from the beginning of the lease through April 1, 2021.

Question 3 - Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians' Leasing purchased a lithotripter from Rand for $1,730,000 and leased it to Mid-South Urologists Group, Inc., on January 1, 2021. (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.)

Lease Description: Quarterly lease payments$122,400-beginning of each period Lease term 5 years (20 quarters) No residual value; no purchase option Economic life of lithotripter 5 years Implicit interest rate and lessee's incremental borrowing rate 16% Fair value of asset$1,730,000

Required -

1. How should this lease be classified by Mid-South Urologists Group and by Physicians' Leasing?

2. Prepare ppropriate entries for both Mid-South Urologists Group and Physicians' Leasing from the beginning of the lease through the second rental payment on April 1, 2021. Adjusting entries are recorded at the end of each fiscal year (December 31).

3. Assume Mid-South Urologists Group leased the lithotripter directly from the manufacturer, Rand Medical, which produced the machine at a cost of $1.5 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2021.

Question 4 - On January 1, 2021, Winn Heat Transfer leased office space under a three-year operating lease agreement. The arrangement specified three annual lease payments of $102,000 each, beginning December 31, 2021, and at each December 31 through 2023. The lessor, HVAC Leasing calculates lease payments based on an annual interest rate of 5%. Winn also paid a $183,000 advance payment at the beginning of the lease. With permission of the owner, Winn made structural modifications to the building before occupying the space at a cost of $285,000. The useful life of the building and the structural modifications were estimated to be 30 years with no residual value. (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 - Prepare the appropriate entries for Winn Heat Transfer from the beginning of the lease through the end of 2023. Winn's fiscal year is the calendar year.