Dockyards Corporation, Inc., [DCI] leased a portable conveyor system, from Heavy Machinery, Ltd., for a non-cancellable...

 
 
 

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Dockyards Corporation, Inc., [DCI] leased a portable conveyor system, from Heavy Machinery, Ltd., for a non-cancellable period of 6 years beginning January 1, 2012. The lease contract required Dockyards to pay an annual lease payment of $43,000 beginning January 1, 2012. The lessee also agreed to pay executory costs amounting to $5,000 per year for insurance and maintenance at the end of each year. The equipment has an estimated salvage value of $38,000 after its expected useful life of 12 years. A residual value of $150,000 was mentioned in the lease contract at the time when the lessee returned the equipment in good working condition. Further, this residual value was guaranteed by the lessee. DCI amortizes the asset on a straight line basis. Dockyards normally pays 8% in the market to borrow its funding requirements but is aware that the rate used by Heavy Machinery to determine lease payments was 7%. Both companies use IFRS and have fiscal year ends on December 31. Use this given information plus any additional given information to answer Questions 14-21. Treat each question as being independent of the others unless stated otherwise. You are advised not to use any information given in other questions unless stated otherwise. [21] Assume DCI decides to classify the lease contract as a capital lease. This was done because Select one: a. the contract met the criterion for the economic life test that most of the risks and rewards of ownership will accrue to the lessee, DCI during the term of the lease. O b. Under IFRS, sellers are required to classify all lease contracts as operating leases whilst buyers are required to classify all lease contracts as capital leases. C. the lease qualifies as a low value ase as the residual value is less than the asset's fair market value. d. the contract transfers the ownership rights back to the lessor at the end of the lease term and thus met the ownership criterion. e. none of the above are correct. [22] The journal entry prepared by DCI to record the lease contract on January 1, 2012 would be [Round your computations to the nearest dollar] Select one: a. DR Right-to-Use Asset, $244,810; CR Obligation Under Capital Lease, $244,810 O b. DR Right-to-Use Asset, $344,761; CR Obligation Under Capital Lease, $344,761 O C. DR Right-to-Use Asset, $319,260; DR Unearned Interest 88,741; CR Obligation Under Capital Lease, $408,001 O d. DR Right-to-Use Asset, $319,260; CR Obligation Under Capital Lease, $319,260 e. none of the above. [23] The journal entry prepared by DCI to record the lease instalment on January 1, 2013 would be Select one: a. DR Obligation Under Capital Lease, $43,000; CR Cash, $43,000 b. DR Interest Payable, $19,338; DR Obligation Under Capital Lease, $23,662; CR Cash, $43,000 O C. DR Interest Expense, $43,000; CR Cash, $43,000 d. DR Interest Payable, $22,348; DR Obligation Under Capital Lease, $20,652; CR Cash, $43,000 e. none of the above. [24] Determine the amount of depreciation DCI records on December 31, 2015 on the Right-to-Use asset. Select one: a. $28,210 b. $53,210 c. $46,877 d. $32,460 e. none of the above. Working with the assumptions that the residual value was guaranteed by the lessee, now assume that on January 1, 2018, the date on which the lease ended, the fair market value of the equipment was determined to be $157,800. [25] The required journal entry/entries prepared by DCI, for recording the return of the leased conveyor system would be Select one: a. DR Obligation Under Capital Lease, $150,000; DR Accumulated Amortization-Right to Use Asset, $169,260; CR Assets Under Capital Lease, $319,260 b. DR Assets Under Capital Lease, $150,000; CR Obligation Under Capital Lease, $135,000 PLUS DR Cash, $7,800; CR Contributed Surplus - Leases, $7,800 O c. DR Obligation Under Capital Lease, $7,800; CR Assets Under Capital Lease, $7,800 O d. DR Accumulated Amortization - Right-to-Use Asset, $169,260; CR Assets Under Capital Lease, $169,260 PLUS a notation describing the return of the asset to the lessor e. none of the above. ASSUME for QUESTIONS 26 - 27 stated below that the residual value of the leased asset was not guaranteed by DCI. [26] Determine the amount of the leased asset capitalized. Select one: a. $150,000 O b. $319,259 c. $408,000 d. $219,309 e. none of the above. [27] Just assume that your answer in [26] above was $248,000. Determine the amount of depreciation DCI records on December 31, 2015 on the Right-to-Use asset. Select one: a. Cannot be depreciated since the title to the equipment has not passed to DCI. O b. $16,333 O c. $35,000 d. $41,333 e. none of the above. Now ASSUME for Question [28] that the lease agreement contained a bargain purchase option of $54,000 at the end of the lease term instead of a residual value of $150,000. Further assume that DCI recorded the Right-to- Use asset at $325,780 on January 1, 2012. [28] What would be the amount for depreciation expense which DCI would record in 2016? [Round your answer to the nearest dollar] Select one: a. $22,648 b. $29,297 c. $23,982 d. $45,297 e. none of the above. Dockyards Corporation, Inc., [DCI] leased a portable conveyor system, from Heavy Machinery, Ltd., for a non-cancellable period of 6 years beginning January 1, 2012. The lease contract required Dockyards to pay an annual lease payment of $43,000 beginning January 1, 2012. The lessee also agreed to pay executory costs amounting to $5,000 per year for insurance and maintenance at the end of each year. The equipment has an estimated salvage value of $38,000 after its expected useful life of 12 years. A residual value of $150,000 was mentioned in the lease contract at the time when the lessee returned the equipment in good working condition. Further, this residual value was guaranteed by the lessee. DCI amortizes the asset on a straight line basis. Dockyards normally pays 8% in the market to borrow its funding requirements but is aware that the rate used by Heavy Machinery to determine lease payments was 7%. Both companies use IFRS and have fiscal year ends on December 31. Use this given information plus any additional given information to answer Questions 14-21. Treat each question as being independent of the others unless stated otherwise. You are advised not to use any information given in other questions unless stated otherwise. [21] Assume DCI decides to classify the lease contract as a capital lease. This was done because Select one: a. the contract met the criterion for the economic life test that most of the risks and rewards of ownership will accrue to the lessee, DCI during the term of the lease. O b. Under IFRS, sellers are required to classify all lease contracts as operating leases whilst buyers are required to classify all lease contracts as capital leases. C. the lease qualifies as a low value ase as the residual value is less than the asset's fair market value. d. the contract transfers the ownership rights back to the lessor at the end of the lease term and thus met the ownership criterion. e. none of the above are correct. [22] The journal entry prepared by DCI to record the lease contract on January 1, 2012 would be [Round your computations to the nearest dollar] Select one: a. DR Right-to-Use Asset, $244,810; CR Obligation Under Capital Lease, $244,810 O b. DR Right-to-Use Asset, $344,761; CR Obligation Under Capital Lease, $344,761 O C. DR Right-to-Use Asset, $319,260; DR Unearned Interest 88,741; CR Obligation Under Capital Lease, $408,001 O d. DR Right-to-Use Asset, $319,260; CR Obligation Under Capital Lease, $319,260 e. none of the above. [23] The journal entry prepared by DCI to record the lease instalment on January 1, 2013 would be Select one: a. DR Obligation Under Capital Lease, $43,000; CR Cash, $43,000 b. DR Interest Payable, $19,338; DR Obligation Under Capital Lease, $23,662; CR Cash, $43,000 O C. DR Interest Expense, $43,000; CR Cash, $43,000 d. DR Interest Payable, $22,348; DR Obligation Under Capital Lease, $20,652; CR Cash, $43,000 e. none of the above. [24] Determine the amount of depreciation DCI records on December 31, 2015 on the Right-to-Use asset. Select one: a. $28,210 b. $53,210 c. $46,877 d. $32,460 e. none of the above. Working with the assumptions that the residual value was guaranteed by the lessee, now assume that on January 1, 2018, the date on which the lease ended, the fair market value of the equipment was determined to be $157,800. [25] The required journal entry/entries prepared by DCI, for recording the return of the leased conveyor system would be Select one: a. DR Obligation Under Capital Lease, $150,000; DR Accumulated Amortization-Right to Use Asset, $169,260; CR Assets Under Capital Lease, $319,260 b. DR Assets Under Capital Lease, $150,000; CR Obligation Under Capital Lease, $135,000 PLUS DR Cash, $7,800; CR Contributed Surplus - Leases, $7,800 O c. DR Obligation Under Capital Lease, $7,800; CR Assets Under Capital Lease, $7,800 O d. DR Accumulated Amortization - Right-to-Use Asset, $169,260; CR Assets Under Capital Lease, $169,260 PLUS a notation describing the return of the asset to the lessor e. none of the above. ASSUME for QUESTIONS 26 - 27 stated below that the residual value of the leased asset was not guaranteed by DCI. [26] Determine the amount of the leased asset capitalized. Select one: a. $150,000 O b. $319,259 c. $408,000 d. $219,309 e. none of the above. [27] Just assume that your answer in [26] above was $248,000. Determine the amount of depreciation DCI records on December 31, 2015 on the Right-to-Use asset. Select one: a. Cannot be depreciated since the title to the equipment has not passed to DCI. O b. $16,333 O c. $35,000 d. $41,333 e. none of the above. Now ASSUME for Question [28] that the lease agreement contained a bargain purchase option of $54,000 at the end of the lease term instead of a residual value of $150,000. Further assume that DCI recorded the Right-to- Use asset at $325,780 on January 1, 2012. [28] What would be the amount for depreciation expense which DCI would record in 2016? [Round your answer to the nearest dollar] Select one: a. $22,648 b. $29,297 c. $23,982 d. $45,297 e. none of the above.

Answer rating: 100% (QA)

21 e none of the above are correct The first criterion for a capital lease is that the leased asset has an estimated economic life of at least 75 of t... View the full answer