370 Words2 Pages

Professor Narayanamoorthy
ACCN 7120
Advanced Lease Problems
Problem#1:
LeMay Company has leased land with a FMV of $100,000 and a building with a FMV of $200,000 from Wallace Company. The lease term is 20 years and the useful life of the building is 25 years. At the end of the lease term, LeMay has an option to purchase the building and Land from Wallace for $1.LeMay will pay Wallace $30,000 per year with the first payment due when the lease is signed. You should verify that the Lessor’s implicit rate of return is 8.9195%.
Required:
1. Should LeMay capitalize both the land and building? Explain.
2. If the lease were to be capitalized, what should be the depreciation life?
3. Suppose that Wallace Company had structured the lease to: 1) require an appraisal of the property value at the end of the lease term and 2) allow LeMay Company to purchase the land and building at a price equal to the appraised value. How, if at all, would this change your answer to questions 1 and 2? Explain
Problem 2: Sale-Leaseback
Sangamon signs a sale-leaseback with a buyer, Bismark. Under the terms of the contract, Bismark will pay $146,874 in cash to Sangamon for equipment and then immediately lease it back to Sangamon. The equipment originally cost $100,000 and had a carrying value of $80,000 on Sangamon’s books immediately prior to the transaction. In 5 years, the residual value of the leased equipment is estimated to be $20,000 when the lease terminates. The lease contract obligates Sangamon to make five equal annual payments of $30,000 to Bismark that begin immediately after the sale. You may assume that the equipment has a useful life of 8 years at the time of the sale.
Required:
1. What is the lessor’s effective rate of return from the lease contract?
2. Should the lease be capitalized? Explain and support your answer with any required calculations.
3. Prepare the

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