Blog

Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2025, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $900,000  and immediately leased from the oil company by Gage. The lease is a 10-year, noncancelable lease with annual lease payments of $97,000. The remaining economic life of the facility is 15 years. The residual value of the facility and land at the end of the lease is expected to be $100,000 and none is guaranteed by Gage. The fair value of the land and facility is $900,000 on January 2, 2025. The present value of lease payments is $600,000. What amount of gain will Gage recognize on the disposal of the land and facility on January 2, 2025? If no gain recognition enter $0.

Facts for Questions 11 to 15 Pisa, Inc. leased equipment from Tower Company under an 8-year lease requiring equal annual payments of $296,134 on January 1 of each year, with the first payment due at lease inception, which was 1/1/2024. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 10-year useful life and is expected to have  residual value of $300,000 at the end of the lease. None of the residual value is guaranteed.  The fair market value of the equipment on 1/1/2024 is $2,000,000. Pisa, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Present value factors are below.   PV Annuity Due PV Ordinary Annuity PV of Single Sum 8%, 8 periods 6.20637 5.74664 0.540269 10%, 8 periods 5.86842 5.33493 0.466507   Use these facts to answer questions 11 to 15 below.

What amount will Pisa, Inc. recognize as a right-of-use asset at the lease inception?

Facts for Question 9 On January 1, 2025, Metalcraft leases a machine from Capital Leasing for 4 years with an annual lease payment of $15,000. The first payment is due on January 1, 2025. The rate implicit in the lease (which is known to Metalcraft) is 10%.  The estimated residual value of the equipment at the end of the lease is $100,000 and this amount is guaranteed by Metalcraft. Metalcraft believes the equipment will be worth at least $100,000 at the end of the lease.   PV Annuity Due PV Ordinary Annuity PV Single Sum 10%, 4 periods 3.48685 3.16987 0.683013 What amount will Metalcraft recognize as a right-of-use asset at lease inception?  

What amount of lease revenue will Tower recognize for the 12 months ended 12/31/2024? If no lease revenue recognized, enter $0.

Facts for Questions 23 to 29 Tower Company leased equipment to Pisa, Inc.  under an 8-year lease requiring equal annual payments of $265,667 on January 1 of each year, with the first payment due at lease inception, which was 1/1/2024. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 10-year useful life and is expected to have residual value of $650,000 at the end of the lease. All of the residual value is guaranteed by Pisa.  The equipment was carried in Tower’s accounting records at a cost of $1,600,000. The fair market value of the equipment on 1/1/2024 is $2,000,000. Pisa, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%.  Present value factors are below.   PV Annuity Due PV Ordinary Annuity PV of Single Sum 8%, 8 periods 6.20637 5.74664 0.540269 10%, 8 periods 5.86842 5.33493 0.466507   Use these facts to answer questions 23 to 29:

Facts for Question 10 On January 1, 2025, Metalcraft leases a machine from Capital Leasing for 4 years with an annual lease payment of $15,000. The first payment is due on January 1, 2025. The rate implicit in the lease (which is known to Metalcraft) is 10%.  The estimated residual value of the equipment at the end of the lease is $100,000 and this amount is guaranteed by Metalcraft. Metalcraft believes the equipment will be worth $75,000 at the end of the lease.   PV Annuity Due PV Ordinary Annuity PV Single Sum 10%, 4 periods 3.48685 3.16987 0.683013 What amount will Metalcraft recognize as a right-of-use asset at lease inception?

What amount of cost of sales will Tower recognize on the transaction? If no cost of sales recognized, enter $0.

Explain how the lessee measures the lease liability and the related right-of-use asset at the beginning of the lease. Identify the way in which this measurement differs from the amount used in the “present value test.”

Darren works as a software engineer at a Fortune 500 company. He has been asked to help reduce risk when deploying new versions of the company’s software through software analysis tools. He has been asked to implement one of these analyses, running to verify any programs committed to source control, on the condition that it will not produce any false alarms. Should he use a sound analysis, a complete analysis, or is either equally applicable?