Lehman Dairy leases its milking equipment from Chavez Finance Company under the following lease terms. The...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Lehman Dairy leases its milking equipment from Chavez Finance Company under the following lease terms. The lease term is 12 years, non-cancelable, and requires equal rental payments due at the beginning of each year starting January 1, 2024. The equipment has a fair value of $727,500, and cost Chavez $485,000, at the inception of the lease (January 1, 2024). Lehman Dairy has the option to purchase the equipment for $9,000. This represents a significant discount on the equipment. The estimated economic life of the equipment is 14 years, and a residual value (which is guaranteed by Lehman Dairy) of $20,000. If the purchase option is not exercised, Lehman Dairy expects to pay $15,000 under the guaranteed residual value. The lease contains no renewable options, and the equipment reverts to Chavez Finance Company upon termination of the lease, if the purchase option is not exercised. Lehman Dairy's incremental borrowing rate is 12% per year. Chavez's implicit rate is 10% and is known to Lehman Dairy. Collectability of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Present value of 1 for 12 periods at 10% 0.31863 Present value of 1 for 12 periods at 12% 0.25668 Present value of an ordinary annuity for 12 periods at 10% 6.81369 Present value of an ordinary annuity for 12 periods at 12% 6.19437 Present value of an annuity due for 12 periods at 10% 7.49506 Present value of an annuity due for 12 periods at 12% 6.93770 Instructions (Assume the accounting period ends on December 31.) (a) Calculate the required payment Chavez Finance requires to earn the Fair Value of the asset, using the LESSEE'S Borrowing Rate? (b) Lehman Dairy is able to negotiate the payment down to $100,000 per year. Compute the present value of the minimum lease payments for both the lessee and lessor. (c) What type of lease is this for the lessor? For the lessee? Why? (d) Prepare the journal entries Chavez would make in 2025 related to the lease arrangement. (e) Prepare the journal entries Lehman would make in 2025 related to the lease arrangement. Lehman Dairy leases its milking equipment from Chavez Finance Company under the following lease terms. The lease term is 12 years, non-cancelable, and requires equal rental payments due at the beginning of each year starting January 1, 2024. The equipment has a fair value of $727,500, and cost Chavez $485,000, at the inception of the lease (January 1, 2024). Lehman Dairy has the option to purchase the equipment for $9,000. This represents a significant discount on the equipment. The estimated economic life of the equipment is 14 years, and a residual value (which is guaranteed by Lehman Dairy) of $20,000. If the purchase option is not exercised, Lehman Dairy expects to pay $15,000 under the guaranteed residual value. The lease contains no renewable options, and the equipment reverts to Chavez Finance Company upon termination of the lease, if the purchase option is not exercised. Lehman Dairy's incremental borrowing rate is 12% per year. Chavez's implicit rate is 10% and is known to Lehman Dairy. Collectability of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Present value of 1 for 12 periods at 10% 0.31863 Present value of 1 for 12 periods at 12% 0.25668 Present value of an ordinary annuity for 12 periods at 10% 6.81369 Present value of an ordinary annuity for 12 periods at 12% 6.19437 Present value of an annuity due for 12 periods at 10% 7.49506 Present value of an annuity due for 12 periods at 12% 6.93770 Instructions (Assume the accounting period ends on December 31.) (a) Calculate the required payment Chavez Finance requires to earn the Fair Value of the asset, using the LESSEE'S Borrowing Rate? (b) Lehman Dairy is able to negotiate the payment down to $100,000 per year. Compute the present value of the minimum lease payments for both the lessee and lessor. (c) What type of lease is this for the lessor? For the lessee? Why? (d) Prepare the journal entries Chavez would make in 2025 related to the lease arrangement. (e) Prepare the journal entries Lehman would make in 2025 related to the lease arrangement.
Expert Answer:
Related Book For
Posted Date:
Students also viewed these accounting questions
-
Goring Dairy leases its milking equipment from King Finance Company under the following lease terms. 1. The lease term is 10 years, noncancelable, and requires equal rental payments of $30,300 due at...
-
Goring Dairy leases its milking equipment from King Finance Company under the following lease terms. 1. The lease term is 10 years, noncancelable, and requires equal rental payments of $30,300 due at...
-
Factor each trinomial. 4(m 5)2 4(m 5) 15
-
Find the reliability of this system: 0.90 0.92 0.93 0.98 0.90
-
The university computer lab's director keeps track of the lab usage, as measured by the number of students using the lab. This particular function is very important for budgeting purposes. The...
-
Distinguish between qualitative and quantitative forecasting techniques. What are the advantages and disadvantages associated with each approach?
-
Chesterfield County had the following transactions. Prepare the entries first for fund financial statements and then for government-wide financial statements. a. A budget is passed for all ongoing...
-
Please, define the following core concept: The early days: hiring astounding people at a snail's pace.
-
Unlike earth, planet X is composed primarily of gypsum (CaSO 4 2H 2 O) , anhydrite (CaSO 4 ), and barite which are sulfate minerals. 1. What do you think would be the 2 most abundant minerals that...
-
When might investors use tranched as opposed to staged financing?
-
What is the option value of abandonment? How can one estimate it?
-
What is the intent behind anti-dilution clauses? Who benefits most from the full-ratchet clause?
-
What are the pros and cons for investors to stage their financial commitments?
-
What are the investment motives of family and friends? How can they help?
-
A study is done to test the claim that Company A retains its workers longer than Company B. Company A samples 16 workers, and their average time with the company is 5.2 years with a standard...
-
d) For die casting processes: 1. What are the most common metals processed using die casting and discuss why other metals are not commonly die casted? 2. Which die casting machines usually have a...
-
Cedarville Company pays its office employee payroll weekly. Below is a partial list of employees and their payroll data for August. Because August is their vacation period, vacation pay is also...
-
What is imputed interest? In what situations is it necessary to impute an interest rate for notes receivable? What are the considerations in imputing an appropriate interest rate?
-
Occidental Petroleum Corporation reported the following information in a recent annual report. Instructions(a) What items other than coin and currency may be included in "cash"?(b) What items may be...
-
The inversion point of a gas can be mathematically expressed as (a) \(T_{i}=\frac{2 a b}{R}\) (b) \(T_{i}=\frac{2 b}{R a}\) (c) \(T_{i}=\frac{2 a}{R b}\) (d) None of these.
-
Residual free energy is defined as (a) \(G^{R}=G-G^{\mathrm{ig}}\) (b) \(G^{R}=G^{\mathrm{ig}}-G\) (c) \(G^{R}=G+G^{\mathrm{ig}}\) (d) None of these.
-
Departure functions are useful to calculate the thermodynamic property of real fluids (a) When the \(P-V-T\) data of the substance is unavailable (b) When the \(P-V-T\) data of the substance is...
Study smarter with the SolutionInn App