Leases—Critical Thinking Assignment Option 1: Lessee Ent ✓ Solved

Leases--Critical Thinking Assignment Option #1 1. Lessee ent

Leases--Critical Thinking Assignment Option #1 1. Lessee enters into a five-year operating lease of office space on January 1. Lessee pays initial direct costs of $5,000. Lease term five years with payments at commencement and annually thereafter: Commencement $25,000; Year 2 $26,000; Year 3 $27,000; Year 4 $28,000; Year 5 $29,000. Discount rate 4.0%; PV of lease payments $124,645. Complete a schedule showing impact each year on Lessee’s income statement and balance sheet: cash lease payments; income statement periodic lease expense (straight-line); prepaid (accrued) rent for period; balance sheet at end of year: lease liability; ROU asset: lease liability adjust; accrued rent (cumulative); unamortized direct initial costs; ROU asset. Prepare journal entries at lease commencement and at end of year 1.

2. Lessee enters into a four-year finance lease of equipment with a purchase option reasonably certain to be exercised. Payments: Commencement $50,000; Year 2 $53,000; Year 3 $55,000; Year 4 $60,000. Discount rate 4.5%; PV $204,577. Complete schedule showing impact each year: cash lease payments; income statement: interest expense, amortization expense, total periodic expense; balance sheet: ROU asset, lease liability. Prepare journal entries at commencement and for Year 1.

3. Lessor enters into a seven-year sale-leaseback for equipment; not specialized; alternative use after lease. Lessee pays annual $25,000 at commencement and annually thereafter. Expected residual value $75,000; Lessee provides residual value guarantee (RVG) protecting Lessor for first $35,000 of loss below $75,000. Equipment remaining economic life nine years; carrying amount $150,000; fair value $160,000. Lessor incurred initial direct costs $3,000. Lease does not transfer ownership or purchase option. Lessor concludes collection is probable including RVG amounts. How should Lessor classify this lease? Prepare journal entries at commencement and for Years 1 and 2.

4. Lessor enters into a four-year sale-leaseback of equipment; not specialized; alternative use after lease. Lessee pays annual $30,000 at commencement and annually thereafter. Expected residual value $100,000 at end of lease term. No RVG. Equipment remaining economic life 12 years; carrying amount $160,000; fair value $170,000. Lessor incurred initial direct costs $2,000. Lease does not transfer ownership or contain purchase option. Lessor concludes collection is probable. How should Lessor classify this lease? Prepare journal entries at commencement and for Years 1 and 2.

5. Tina’s Troubles case: summarize facts and apply the university Academic Integrity Policy. Discuss whether Tina should have discussed the assignment with Paula, whether she is responsible for possible copying, what defenses and evidence she could present in an appeal, and recommendations for Tina and for university policy to prevent similar issues.

Paper For Above Instructions

Overview and approach

This paper answers the five tasks: two lessee-focused lease calculations (operating and finance), two lessor classification and journal-entry exercises, and an academic-integrity case analysis (Tina). The accounting answers follow U.S. GAAP ASC 842 principles for lessee and lessor accounting (FASB, 2016). Numerical work uses the provided present values and payment timing assumptions (payments at commencement and then at each anniversary).

1. Lessee — Five-year operating lease (summary and schedule)

Given data: PV of lease payments = $124,645; initial direct costs = $5,000; payments: $25,000 (commencement), then $26k, $27k, $28k, $29k. Under ASC 842 an operating lessee recognizes an ROU asset and lease liability at commencement. Initial ROU asset = lease liability (PV) + initial direct costs = $124,645 + $5,000 = $129,645. For presentation, operating leases record a single lease expense on a generally straight-line basis. Total cash payments over term = $25k+26k+27k+28k+29k = $135,000. Including initial direct cost (amortized), total cost to be recognized over term = $135,000 + $5,000 = $140,000. Straight-line periodic lease expense = $140,000 / 5 = $28,000 per year (income statement) (FASB, 2016).

Timing mechanics (first payment at commencement): at inception the first payment reduces the lease liability immediately. Using the provided PV figure, record initial measurement then apply the cash payment. Beginning lease liability after initial payment = $124,645 − $25,000 = $99,645. Interest for Year 1 (4.0%) = $99,645 × 4% = $3,986. The liability grows to $103,631 before the Year-1 anniversary payment, then the Year-1 payment of $26,000 reduces liability to $77,631. To reconcile the single lease expense (28,000) to interest plus amortization: amortization of the ROU asset for presentation = lease expense − interest = $28,000 − $3,986 = $24,014. Thus end-of-year ROU asset = $129,645 − $24,014 = $105,631.

Key year‑1 balances and flows (summary): cash lease payment in Year‑1 = $26,000; income statement lease expense = $28,000; accrued (or prepaid) rent for Year‑1 = expense − cash = $2,000 accrued liability (expense > cash). Balance sheet at end of Year‑1: lease liability = $77,631; ROU asset (net) = $105,631; unamortized initial direct costs are included within the ROU asset and decrease as ROU amortizes.

Sample journal entries (Lessee)

At commencement (Jan 1):

• Dr ROU asset 129,645
• Cr Lease liability 124,645
• Dr Lease liability 25,000
• Cr Cash 25,000

(The second pair records the commencement cash payment that immediately reduces the lease liability.)

During Year 1 (to record interest accrual and subsequent year-end payment and amortization):

• Dr Interest expense 3,986
• Cr Lease liability 3,986
• Dr Lease liability 26,000
• Cr Cash 26,000
• Dr Lease expense (or ROU amortization component) 24,014
• Cr ROU asset 24,014

Note: ASC 842 requires a single operating-lease expense presentation; the two entries above (interest accrual and ROU amortization) reconcile to the single $28,000 expense disclosed on the face of the income statement (FASB, 2016).

2. Lessee — Four-year finance lease

Given PV = $204,577; payments: $50k at commencement, then $53k, $55k, $60k; discount rate 4.5%. Initial measurement: lease liability = $204,577; ROU asset = $204,577 (no initial direct costs stated). First payment at commencement reduces liability after recording initial measurement: liability after payment = $204,577 − $50,000 = $154,577. Interest for Year 1 = $154,577 × 4.5% ≈ $6,956. After interest, liability before Year‑1 anniversary payment = $161,533, then payment of $53,000 reduces liability to $108,533.

Amortization: finance (capital) leases amortize the ROU asset generally on a systematic basis (typically straight-line) consistent with ownership transfer/benefit pattern. Assuming amortization over four years: annual amortization = $204,577 / 4 = $51,144. Income statement Year 1 shows interest expense ≈ $6,956 and amortization ≈ $51,144; total periodic expense ≈ $58,100.

Sample journal entries (Lessee — finance)

At commencement:

• Dr ROU asset 204,577
• Cr Lease liability 204,577
• Dr Lease liability 50,000
• Cr Cash 50,000

Year 1 activity:

• Dr Interest expense 6,956
• Cr Lease liability 6,956
• Dr Lease liability 53,000
• Cr Cash 53,000
• Dr Amortization expense 51,144
• Cr Accumulated amortization—ROU 51,144

3. Lessor — Seven-year lease with RVG (classification and entries)

Facts: lessor “sells and leases” equipment (carrying amount $150,000; fair value $160,000); first payment at commencement of $25,000; residual expected $75,000; lessee RVG protects first $35,000 of loss below $75,000; initial direct costs $3,000; alternative use after lease; collection probable. Under ASC 842, because the lessor has sold the asset (transfer of control) and the contract is a lease that transfers control of the underlying asset and the lessor is a seller, the arrangement typically qualifies as a sales-type lease if the lessor is a manufacturer/dealer and recognizes selling profit (FASB, 2016).

Conclusion: classify as a sales-type lease if the lessor is a manufacturer/dealer; otherwise direct‑financing if the lessor is a lessor who is not a dealer and no manufacturer profit is recognized. Given the facts (“sells and leases” and fair value > carrying amount), the most likely classification is sales-type lease with initial selling profit (fair value − carrying amount = $10,000).

Sample journal entries (Lessor — sales-type) at commencement

• Dr Lease receivable (net investment) [equal to PV of payments + PV of guaranteed residual] — use computed PV per company discount (symbolic)
• Dr COGS 150,000
• Cr Equipment 150,000
• Cr Sales (or Gain on sale) 10,000
• Dr Selling expense (initial direct costs) 3,000
• Cr Cash 3,000
• Dr Cash 25,000
• Cr Lease receivable 25,000

Years 1–2: lessor records interest income on the lease receivable (effective interest on net investment), recognizes cash receipts of $25,000 each anniversary, and adjusts the net investment accordingly. Interest revenue = beginning net investment × implicit rate; cash receipts reduce principal and interest components per effective-interest method (ASC 842).

4. Lessor — Four‑year lease with no RVG (classification and entries)

Facts: equipment fair value $170,000; carrying $160,000; no RVG; payments $30,000 at commencement and annually thereafter; initial direct costs $2,000; alternative use; collection probable. Classification depends on whether the lessor is a dealer/manufacturer. If the lessor is a dealer/manufacturer, recognize a sales-type lease and immediate selling profit ($10,000). If the lessor is not a dealer, and the arrangement meets direct-financing criteria (PV of payments substantially all of fair value), classify as direct‑financing lease with no immediate profit recognition (selling profit deferred). The problem does not specify manufacturer status—explain both outcomes and provide entries for the common case (sales-type if seller is dealer).

Sample journal entries (Lessor — sales-type at commencement)

• Dr Lease receivable (net investment) [PV of payments + PV of residual if any]
• Dr COGS 160,000
• Cr Equipment 160,000
• Cr Sales (Gain) 10,000
• Dr Selling expense (initial direct costs) 2,000
• Cr Cash 2,000
• Dr Cash 30,000
• Cr Lease receivable 30,000

5. Tina’s Troubles — academic integrity analysis and recommendations

Facts summary: Tina, an international, first-generation senior, completed a business law assignment independently and placed it inside her notebook while briefly helping a classmate (Paula) at Tina’s campus work desk. Professor imputed collaboration because Tina’s submission matched Paula’s in several identical responses and awarded a zero; Tina denies sharing answers and suspects Paula may have looked through her notebook; the university policy defines unauthorized collaboration and allows appeal based on new information (University Academic Integrity Policy).

Evaluation: Under typical academic‑integrity frameworks, the university must establish either (a) a preponderance of evidence that Tina intentionally collaborated or provided her work to Paula, or (b) constructive facilitation (e.g., leaving a work product accessible). Tina’s statement that she left her notebook with edges of her assignment exposed constitutes a potential risk factor for facilitation, but not conclusive proof of intent to enable cheating. Tina can (and should) file an appeal and present new information: timeline evidence (logins, timestamps, computer‑center sign-in/out records), witness statements from the student she assisted, and the physical condition of her notebook (if available) to show she did not intentionally share work (Bretag, 2016).

Defenses and evidence for appeal: (1) contemporaneous metadata from electronic files (timestamped draft files or LMS submission logs) proving independent work (Park, 2003); (2) witness corroboration that Tina left the desk quickly and did not display answers; (3) statement that she did not provide the file; (4) request for the similarity report and side‑by‑side comparison from the professor to identify whether identical errors indicate copying or common source materials; (5) propose investigating whether Paula accessed Tina’s notebook area (security reports, time logs) (Sutherland-Smith, 2008).

Recommendations to Tina: (a) gather all documentary evidence (timestamps, draft files, emails, work logs); (b) submit a formal appeal to the Academic Integrity Committee within the allowed period; (c) request review of procedural fairness and specific evidence the professor used; (d) be candid about the contact at the computer center but emphasize lack of intent to share answers.

Recommendations to the university: (1) strengthen student education on permissible collaboration and risks of leaving materials unattended; (2) encourage electronic submissions with preserved metadata to reduce ambiguity; (3) require faculty to provide similarity reports and specify which similarities constitute misconduct; (4) implement low‑cost deterrents in shared work areas (locks or privacy screens) and clearer signage about leaving materials unattended (Bretag & Mahmud, 2016).

Conclusion

The lease assignments require careful application of ASC 842 measurement and presentation rules. For lessees, initial ROU and liability measurement, payment timing, effective-interest computations, and the straight‑line expense pattern for operating leases must be reconciled. For lessors, classification hinges on whether the lessor is a dealer/manufacturer and on the economic substance of the transfer; sales‑type vs. direct‑finance treatment determines recognition of selling profit and treatment of initial direct costs. In the Tina case, procedural fairness and demonstrable evidence (timestamps, metadata, witnesses) are critical to a fair outcome; universities should adopt preventive measures and transparent adjudication practices.

References

• FASB. (2016). Accounting Standards Update No. 2016-02: Leases (Topic 842). Financial Accounting Standards Board.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (16th ed.). Wiley.
• Deloitte. (2019). A Closer Look at ASC 842: Lessee and Lessor Accounting. Deloitte Insights.
• PwC. (2018). Lease accounting: Applying ASC 842 – Practical guide. PwC.
• Ernst & Young. (2017). Applying IFRS: Leases (IFRS 16) and ASC 842 considerations. EY Practical Guidance.
• Bretag, T. (2016). Challenges in addressing plagiarism in education. PLOS Medicine, 13(12), e1002183.
• Bretag, T., & Mahmud, S. (2016). A conceptual framework for implementing academic integrity policy in higher education. International Journal for Educational Integrity, 12(1), 1–14.
• Park, C. (2003). In other (people’s) words: plagiarism by university students — literature and lessons. Assessment & Evaluation in Higher Education, 28(5), 471–488.
• Sutherland-Smith, W. (2008). Plagiarism, the Internet, and education. Routledge.
• University Academic Integrity Policy. (n.d.). [Institutional policy document used in assignment scenario].