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Lease Agreements

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Krauss Leasing Company signs a lease agreement on January 1, 2011, to lease electronic equipment to Stewart Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

1.Stewart Company has the option to purchase the equipment for $16,000 upon the termination of the lease.
2.The equipment has a cost and fair value of $240,000 to Krauss Leasing Company. The useful economic life is 2 years, with a salvage value of $16,000.
3.Stewart Company is required to pay $7,000 each year to the lessor for executory costs.
4.Krauss Leasing Company desires to earn a return of 10% on its investment.
5.Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.
Instructions

(a) Prepare the journal entries on the books of Krauss Leasing to reflect the payments received under the lease and to recognize income for the years 2011 and 2012. (Round your answer to the nearest cent eg 8,751.25 For multiple debit/credit entries, list amounts from largest to smallest eg 10, 5, 3, 2.)

Entries for dates 01/01/11, 12/31/11, and 12/31/12

(b) Assuming that Stewart Company exercises its option to purchase the equipment on December 31, 2012, prepare the journal entry to reflect the sale on Krauss's books.

entry dated 12/31/12

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Your tutorial is in excel showing the way to approach this problem, ...

Solution Summary

Your tutorial is in excel showing the way to approach this problem, including an amortization schedule with the bargain purchase option, solving for payment with a bargain purchase option and all the journal entries for the Lessor over the life of the lease, including exercise of the bargain purchase option.

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Finance: Lease Agreement and Capital Budgeting

At the beginning of its accounting year Alice plc leases a machine from Louise Leasing plc. The following information relates to the lease agreement:
1. The term of the lease is 5 years, and the lease agreement is non-cancellable, requiring equal rental payments of £9,276 at the beginning of each year;
2. The machine has a fair value at the inception of the lease of £40,000, an estimated economic life of 5 years, and no residual value;
3. Alice plc's incremental borrowing rate is 10% per year;
4. Alice plc depreciates similar equipment that it owns on a straight-line basis;
5. Louise Leasing plc has set the annual rental to earn a rate of return on its investment of 8% per year; this fact is known to Alice plc.

Required:

(a) Should the above lease agreement be accounted for as a finance or an operating lease? Give reasons to justify your answer.

(b) Prepare the journal entries for Alice plc that relate to the above lease agreement during years 1 and 2 for each of the following assumptions:

(i) The lease is classified as a finance lease;

The actuarial method should be used to allocate finance charges to accounting periods during the lease term.

(ii) The lease is classified as an operating lease.

(c) With reference to (b) discuss the extent to which the distinction between a finance lease and an operating lease is important for financial reporting and analysis.

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2-b) Describe the "Efficient Market Hypothesis" (EMH). Explain how the "Efficient Market Hypothesis" is used to explain the stock market behaviour.

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