Section 7: Leases (14%) On 1/1/2012, Gerrit, Inc. enters int…
Section 7: Leases (14%) On 1/1/2012, Gerrit, Inc. enters into a 12-year non-cancellable lease for a piece of machinery owned by Verlander, Inc. The lease calls for annual payments of $20,000, payable at the end of each year of the lease (i.e. first payment is due on 12/31/12). At the end of the lease, the right to use the machine transfers back to Verlander. Gerrit, Inc. declined the opportunity to purchase the machine outright for $250,000, and the economic life of the machine is believed to be 20 years. There is also a bargain renewal option to extend the lease another 4 years for $10,000 per year. Gerrit uses a 4% discount rate to calculate present values, and generally uses straight-line depreciation for machinery assuming no salvage value. In addition, Gerrit Inc spends $51,000 to customize the machinery for use in their factory. They believe that this customization has a useful life of 15 years. Question 15) What type of lease is this, from Gerrit’s perspective, and why? Question 16) What (if any) journal entries should Gerrit record on 1/1/2012? Question 17) What (if any) journal entries should Gerrit record on 12/31/2013 (the end of year 2)? Question 18) Could this lease qualify for sale and leaseback accounting treatment, if it had been sold to Verlander by Gerrit immediately before entering into the lease described above?
Read DetailsSection 9: Debt Investment Donnie, Inc. purchases 15-year bo…
Section 9: Debt Investment Donnie, Inc. purchases 15-year bonds from Lebowski, Inc. on 1/1/24. The bonds have a $250,000 face value and a stated annual interest rate of 8%. The bonds pay interest every 6 months, starting on 6/30/24. Given Lebowski’s credit rating (risk profile), Donnie requires an effective yield of 4%. At the time of the first interest payment (immediately following it), the fair market value of the bonds is $345,000. Donnie classifies the bonds as a trading security. Question 21) Prepare the entry necessary by Donnie on 1/1/24 at bond issuance. Question 22) Prepare the entry or entries necessary on 6/30/24, when the first interest payment is made and Donnie prepares financial statements. Question 23) On Donnie’s income statement for the period covering January 1 2024 through June 30 2024, how much income will Donnie report related to these bonds?
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