Brief Exercises

1. Samson AG leases a building and land. The lease term is 6 years and the annual fixed payments
are €800,000. The lease arrangement gives Samson the right to purchase the building and land
for €11,000,000 at the end of the lease. Based on an economic analysis of the lease at the
commencement date, Samson is reasonably certain that the fair value of the leased assets at
the end of lease term will be much higher than €11,000,000. What are the total lease payments
in this lease arrangement?

2. Fieger Company leases equipment for 8 years with an annual rental of $2,000 per year or
$16,000 in total. General Leasing (the lessor) agrees to provide Fieger with $300 for the first 2
years of the lease to defray needed repairs to the equipment. Determine the lease payments
that Fieger will pay for the first 3 years of the lease agreement.

3. Sanders Fashion enters into a lease arrangement with Highpoint Leasing for 5 years. Sanders
agrees to pay 4% of its net sales as a variable lease payment. Sanders does not pay any fixed
payments. Sanders is a highly successful company that has achieved over £1,000,000 in net
sales over the last 7 years. Both Sanders and Highpoint forecast that net sales will be a much
greater amount than £1,000,000 in subsequent years. As a result, it is highly certain that
Sanders will make payments of at least £40,000 (£1,000,000 × 4%) each year. What is the lease
payment amount Sanders should use to record its right-of-use asset?

4. Waterworld Company leased equipment from Costner Company, beginning on December 31,
2018. The lease term is 4 years and requires equal rental payments of $41,933 at the beginning
of each year of the lease, starting on the commencement date (December 31, 2018). The
equipment has a fair value at the commencement date of the lease of $150,000, an estimated
useful life of 4 years, and no estimated residual value. The appropriate interest rate is 8%.
Prepare Waterworld's 2018 and 2019 journal entries, assuming Waterworld depreciates similar
equipment it owns on a straight-line basis.

5. Rick Kleckner NV recorded a right-of-use asset for €300,000 as a result of a lease on December
31, 2018. Kleckner's incremental borrowing rate is 8%, and the implicit rate of the lessor was
not known at the commencement of the lease. Kleckner made the first lease payment of
€48,337 on December 31, 2018. The lease requires eight annual payments. The equipment has
a useful life of 8 years with no residual value. Prepare Kleckner's December 31, 2019, entries.

6. Debbink plc leased machinery from Young Ltd. on January 1, 2019. The lease term was for 8
years, with equal annual rental payments of £5,300 at the beginning of each year. In addition,
the lease provides an option to purchase the machinery at the end of the lease term for £2,000,
which Debbink is reasonably certain it will exercise as it believes the fair value of the machinery
will be at least £6,000. The machinery has a useful life of 10 years and a fair value of £36,000.
The implicit rate of the lease is not known to Debbink. Debbink's incremental borrowing rate is
8%. Prepare Debbink's 2019 journal entries.
7. Cardinal Ltd. is negotiating to lease a piece of equipment to MTBA plc. MTBA requests that the
lease be for 9 years. The equipment has a useful life of 10 years. Cardinal wants a guarantee
that the residual value of the equipment at the end of the lease is at least £5,000. MTBA agrees
to guarantee a residual value of this amount though it expects the residual value of the
equipment to be only £2,500 at the end of the lease term. If the fair value of the equipment at
lease commencement is £70,000, what would be the amount of the annual rental payments
Cardinal demands of MTBA, assuming each payment will be made at the beginning of each year
and Cardinal wishes to earn a rate of return on the lease of 8%?

8. Mequon Inc. wishes to lease machinery to Thiensville Company. Thiensville wants the
machinery for 4 years, although it has a useful life of 10 years. The machinery has a fair value at
the commencement of the lease of $47,000, and Mequon expects the machinery to have a
residual value at the end of the lease term of $30,000. However, Thiensville does not guarantee
any part of the residual value. Thiensville does expect that the residual value will be $45,000
instead of $30,000. What would be the amount of the annual rental payments Mequon
demands of Thiensville, assuming each payment will be made at the end of each year and
Mequon wishes to earn a rate of return on the lease of 6%?

9. Assume that IBM (USA) leased equipment that was carried at a cost of £120,000 to Swander
plc. The term of the lease is 6 years beginning December 31, 2018, with equal rental payments
of £30,044 beginning December 31, 2018. The fair value of the equipment at commencement
of the lease is £150,001. The equipment has a useful life of 6 years with no residual value. The
lease has an implicit interest rate of 8%, no bargain purchase option, and no transfer of title.
Collectibility of lease payments for IBM is probable. Prepare IBM's December 31, 2018, journal
entries at commencement of the lease.

10. Use the information for IBM (USA) from Number 9. Assume the sales-type lease was recorded
at a present value of £150,001. Prepare IBM's December 31, 2019, entry to record the lease
transaction with Swander plc.

11. Geiberger AG manufactures drones. On December 31, 2018, it leased to Althaus SA a drone
that had cost €120,000 to manufacture. The lease agreement covers the 5-year useful life of the
drone and requires five equal annual rentals of €40,800 payable each December 31, beginning
December 31, 2018. An interest rate of 8% is implicit in the lease agreement. Collectibility of
the rentals is probable. Prepare Geiberger's December 31, 2018, journal entries.

12. Use the information for Geiberger AG from Number 11, except assume the collectibility of the
rentals is not probable. Prepare any journal entries for Geiberger on December 31, 2018.

13. Kubby NV specializes in leasing large storage units to other businesses. Kubby entered a
contract to lease a storage unit to Riskey Ltd. for 4 years when that particular storage unit had a
remaining useful life of 5 years. The fair value of the unit was €10,000 at the commencement of
the lease on January 1, 2019. The present value of the five equal rental payments of €2,507 at
 the start of each year, plus the present value of a guaranteed residual value of €1,000, equals
the fair value of €10,000, Kubby's implicit rate of return on the lease of 6%.

The following is a correct, complete amortization schedule created by Kubby.

Lease Interest (6%) on Outstanding Reduction of Lease Balance of Lease
Date
Payment Lease Receivable Receivable Receivable
1/1/19 €10,000
1/1/19 € 2,507 € 2,507 7,493
1/1/20 2,507 € 450 2,057 5,436
1/1/21 2,507 326 2,181 3,255
1/1/22 2,507 195 2,312 943
12/31/22 1,000 57 943 0
€11,028 €1,028 €10,000

Given the above schedule, make the appropriate entries at December 31, 2022, to record the
accrual of interest and the return of the storage unit to Kubby (assuming the unit is returned on
December 31, 2022, at the expected and guaranteed residual value of €1,000).

14. Kingston plc leases equipment from Falls Ltd. on January 1, 2019. The lease agreement does not
transfer ownership, contain a bargain purchase option, and is not a specialized asset. It covers 3
years of the equipment's 8-year useful life, and the present value of the lease payments is less
than 90% of the fair value of the asset leased. Prepare Kingston's journal entries on January 1,
2019, and December 31, 2019. Assume the annual lease payment is £35,000 at the beginning of
each year, and Kingston's incremental borrowing rate is 6%, which is the same as the lessor's
implicit rate.

15. Use the information for Kingston plc from Number 14. Prepare all the necessary journal entries
for Falls Ltd. (the lessor) for 2019, assuming the equipment is carried at a cost of £200,000.

16. Rodgers Corporation agrees on January 1, 2019, to lease equipment from Packers, Inc. for 3
years. The lease calls for annual lease payments of $12,000 at the beginning of each year. The
lease does not transfer ownership or contain a bargain purchase option, and is not a specialized
asset. In addition, the economic life of the equipment is 10 years, and the present value of the
lease payments is less than 90% of the fair value of the equipment. Prepare Rodgers' journal
entries on January 1, 2019 (commencement of the operating lease), and on December 31,
2019. Assume the implicit rate used by the lessor is 8%, and this is known to Rodgers.

17. Use the information for Rodgers Corporation and Packers, Inc. from Number 16. Assume that
for Packers, Inc., the lessor, the collectibility of the lease payments is probable, and the fair
value and cost of the equipment is $60,000. Prepare Packers' 2019 journal entries, assuming
the company uses straight-line depreciation and no residual value.
18. On December 31, 2018, Escapee plc leased machinery from Terminator Group for an agreed-
upon lease term of 3 years. Escapee agreed to make annual lease payments of £17,000,
beginning on December 31, 2018. The expected residual value of the machinery at the end of
the lease term is £9,000, though Escapee does not guarantee any residual value to Terminator.
What amount will Escapee record as its lease liability on December 31, 2018, if its incremental
borrowing rate is 6% and the implicit rate of the lease is unknown?

19. Use the information for Escapee plc from Number 18. Assume the same facts, except Escapee
guarantees a residual value of £9,000 at the end of the lease term, which equals the expected
residual value of the machinery. (a) Does this change your answer from Number 17? (b) What if
the expected residual value at the end of the lease term is £5,000 and Escapee guarantees a
residual of £9,000?

20. Indiana Jones NV enters into a 6-year lease of equipment on December 31, 2018, which
requires six annual payments of €40,000 each, beginning December 31, 2018. In addition,
Indiana Jones guarantees the lessor a residual value of €20,000 at the end of the lease.
However, Indiana Jones believes it is probable that the expected residual value at the end of
the lease term will be €10,000. The equipment has a useful life of 6 years. Prepare Indiana
Jones' December 31, 2018, journal entries, assuming the implicit rate of the lease is 6% and this
is known to Indiana Jones.

21. Use the information for Indiana Jones NV from Number 20. Assume that for Lost Ark AG, the
lessor, collectibility of lease payments is probable and the carrying amount of the equipment is
€180,000. Prepare Lost Ark's 2018 and 2019 journal entries.

22. Forrest, Inc. has entered an agreement to lease an old warehouse with a useful life of 5 years
and a fair value of $20,000 from United Corporation. The agreement stipulates the following.
 Rental payments of $4,638 are to be made at the start of each year of the 5-year lease.
No residual value is expected at the end of the lease.
 Forrest must reimburse United each year for any real estate taxes incurred for the year.
Last year, the cost of real estate taxes was $700, though these costs vary from year to
year.
 Forrest must make a payment of $500 with the rental payment each period to cover the
insurance United has on the warehouse.
 Forrest paid legal fees of $1,000 in executing the lease.

Assuming Forrest's incremental borrowing rate is 8% and the rate implicit in the lease is
unknown, prepare the journal entry to record the initial lease liability and right-of-use asset for
Forrest.

23. Bucky Corporation entered into a lease agreement to lease equipment from Badger, Inc. on
January 1, 2019. The lease calls for annual lease payments of $30,000, beginning on January 1,
for each of the 3 years of the lease. In addition, Badger will pay Bucky $5,000 as a cash incentive
 for entering the lease by January 1, 2019. In relation to the lease agreement, Bucky incurred the
following costs.

Bucky's incremental borrowing rate is 8%. If the value of the lease liability is $83,498, what
amount will Bucky record as the value of the right-of-use asset on January 1, 2019, at
commencement of the lease?

24. Homestead AG entered into a lease to lease equipment from Highlander SA on January 1, 2019.
The lease calls for annual lease payments of €10,000, beginning on December 31, for each of
the 5 years of the lease. In addition, Highlander will pay Homestead €2,000 as a cash incentive
for entering the lease by December 31. In relation to the lease agreement, Homestead incurred
the following costs.

Homestead's incremental borrowing rate is 6%. If the value of the lease liability is €44,651,
what amount will Homestead record as the value of the right-of-use asset on January 1, 2019,
at commencement of the operating lease?

25. Brent SA owns equipment that cost €80,000 and has a useful life of 8 years with no residual
value. On January 1, 2019, Brent leases the equipment to Havaci ASA for one year for one
rental payment of €15,000 on January 1. Assuming Havaci (lessee) elects to use the short-term
lease exception, prepare Havaci's 2019 journal entries.

26. On January 1, 2019, Irwin Animation sold a truck to Peete Finance for €35,000 and immediately
leased it back. The truck was carried on Irwin's books at €28,000. The term of the lease is 3
years, there is no bargain purchase option, and title does not transfer to Irwin at lease-end. The
lease requires three equal rental payments of €8,696 at the end of each year (first payment on
January 1, 2020). The appropriate rate of interest is 6%, the truck has a useful life of 5 years,
and the residual value at the end of the lease term is expected to be €14,000, none of which is
guaranteed. Prepare Irwin's 2019 journal entries.

27. Assume the same facts as Number 26, except the lease term is now 5 years and the five annual
rental payments are €8,309, with no expected residual value at the end of the lease term.
Prepare Irwin's 2019 journal entries assuming these new facts.