Question :
119. ALT Company, as tenant, acquired for $600,000, paid in a : 1245678
119. ALT Company, as tenant, acquired for $600,000, paid in a single amount, the right to use an entire office building for the next ten years. ALT expects to rent out the floors in the building to various commercial tenants. As tenant, ALT accounts for its lease as a capital lease amortizing the leasehold asset on a straight-line basis over ten years. ALT, as landlord, signed operating leases with the tenants for all of the rentable space. The rents total $150,000 received at the end of each year for the next ten years, $1.5 million in total.Required:
a.
Under current GAAP, can ALT treat the same property as a capital lease and an operating lease?
b.
What is the book value of this property after two years?
Assume, independent of your answer to the preceding question, that the book value of the property after two years is $400,000. On that date, some of the tenants go bankrupt and ALT believes it will be unable to rent their now-vacant space, which will remain empty for the remaining eight years. The fair market value of the remaining leasehold with still-solvent, rent-paying tenants is $300,000.
c.
If the remaining tenants will pay $800,000 in total, with present value $310,000, what entry, if any, will ALT make?
d.
If the remaining tenants will pay $320,000 in total, with present value $290,000, what entry, if any, will ALT make?
120. Bolton Co. leases workout equipment to health clubs. On January 1, Year 1, Bolton Co. leases to Powerhouse Gym, equipment valued at $150,000, for 2 years. The equipment has a 12-year life with zero salvage value. The lease payments equal $2,500 per year, payable on the last day of the year.Required:a.Identify the type of lease. Give reasons for your conclusion.b.State the correct entries to be made by the lessor for this lease. You may assume straight-line depreciation is used by Bolton.
a.Operating lease. The lease does not meet any of the criteria for a capital lease.b.Lessor’s entries:
121. Raines Corporation entered into a five-year lease for a computer on January 1, Year 3. The lease requires Raines to make equal payments of $20,000 on January 1 each year for the five years of the lease, with the first payment made on January 1, Year 3. Raines’ borrowing rate is 10 percent. Raines uses the straight-line depreciation method for financial reporting. It estimates a zero salvage value. The accounting period is the calendar year. Round amounts to the nearest dollar.Required:
a.
Give the journal entries that Raines would make during Year 3 if this lease were considered an operating lease for financial reporting.
b.
Repeat [a] but assume the lease is a capital lease for financial reporting.
c.
Assume that this lease is considered a capital lease for financial reporting. Calculate depreciation expense for financial reporting purposes for Year 3 and Year 4.
d.
Compute the total expenses (ignore income taxes) that Raines would recognize over the 5-year term of the lease, assuming it is an operating lease.
e.
Repeat [d] but assume the lease is a capital lease.
