Accounting for Leases and Bond Accounting
Problem 1
Oak Co. Leased equipment for its entire nine-year useful life, agreeing to pay $50,000 at the start of the lease term on December 31, 1991, and $50,000 annually on each December 31 for the next eight years. The present value on December 31, 1991, of the nine lease payments over the lease term, using the implicit rate in the lease that Oak knows to be 10%, was $316,500. The December 31, 1991, present value of the lease payments using Oak’s incremental borrowing rate of 12% was $298,500. Oak made a timely second lease payment. What amount should Oak report as capital lease liability in its December 31, 1992, balance sheet?

Problem 2
York Corp. Entered into a nine-year capital lease on a warehouse on December 31, 1992. Lease payments of $52,000, which includes real estate taxes of $2,000, are due annually, beginning on December 31, 1993, 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 5.6. What amount should Neal report as capitalized lease liability at December 31, 1992?

Problem 3
On January 2, 1995, Marx Co. As lessee signed a five-year noncancelable equipment lease with annual payments of $200,000 beginning December 31, 1995. Marx treated this transaction as a capital lease. The five lease payments have a present value of $758,000 at January 2, 1995, based on interest of 10%. What amount should Marx report as interest expense for the year ended December 31, 1995?

Problem 4
Lotus Co. Leased equipment to Union Co. on July 1, 1994, and properly recorded the sales-type lease at $135,000, the present value of the lease payments discounted at 10%. The first of eight annual lease payments of $20,000 due at the beginning of each year was received and recorded on July 3, 1994. Farm had purchased the equipment for $110,000. What amount of interest revenue from the lease should Farm report in its 1994 income statement?

Problem 5
Howe Co. leased equipment to Kay Corp. on January 2, 1992, for an eight-year period expiring December 31, 1999. Equal payments under the lease are $600,000 and are due on January 2, of each year. The first payment was made on January 2, 1992. The list selling price of the equipment is $3,520,000 and its carrying cost on Howe’s books is $2,800,000. The lease is appropriately accounted for as a sale-type lease. The present value of the lease payments at an imputed interest rate of 12% (Howe’s incremental borrowing rate) is $3,300,000. What amount of profit on the sale should Howe report for the year ended December 31, 1992?

Problem 6
A six-year capital lease entered into on December 31, 2004, specified equal minimum annual lease payments due on December 31 of each year. The first minimum annual lease payment, paid on December 31, 1994, consists of which of the following?
                           Interest expense    Lease liability
A.                         yes                            yes
B.                         yes                            no
C.                         no                            yes
D.                         no                            no

Problem 7
When should a lessor recognize in income a nonrefundable lease bonus paid by a lessee on signing an operating lease?
A. When received.
B. At the inception of the lease.
C. At the expiration of the lease.
D. Over the life of the lease.

Problem 8
Once criterion for a capital lease is that the term of the lease must equal a minumum percentage of the leased property’s estimated economic life at the inception of the lease. What is this minimum percentage?
A. 51%
B. 75%
C. 80%
D. 90%
Bond Accounting
In January 1, 2016, Justing Enterprises issued bonds for $100,000. These bonds
mature in December 31, 2017 with an interest bearing of 10% payable semiannually in June 30 and December 31.
The bonds were issue for $105,0000 with and effective rate of 8%.
Required: Prepare all the journal entries for the bonds payable.
In January 1, 2016, Justing Enterprises issued bonds for $100,000. These bonds
mature in December 31, 2017 with an interest bearing of 10% payable semiannually in June 30 and December 31.
The bonds were issue for $95,0000 with and effective rate of 12%.
Required: Prepare all the journal entries for the bonds payable.

Accounting for Leases and Bond Accounting Problem 1 Oak Co. Leas...