Question

E21-20 (L03,4) (Accounting for an Operating Lease) Use the information for Kaluzniak Corporation and Moeller, Inc. from E21-19. Instructions (a) Explain (and show calculations) how Kaluzniak arrived at the amount of the rental payments used in the lease agreement (b) Prepare the entries for Kaluzniak for 2017. (c) How would Kaluzniak's accounting in part(a) change if it incurred legal fees of $700 to execute the lease documents and $500 in advertising expenses for the year in connection with the lease?

Answer 1

ANSWER

As per the given question,

Part a : Fair valaue ofleased asset lessor $ 7,000.00 Less : PV of unguranteed residual value [ $4,500 x PV(6.3%) = 4,500 X 0.83962] | $ 3.778.29 | |Amount to be recovered through lease payments $ 3.221.71 Three periodic lease payents = [ $3,221.71 /PVAD (6,3%) = $3,221.71/2.83339] | $ 1,137.05 Rental payments(ROUNDING OFF) $ 1,137.00 Part b : journal entries in the books of kaluzniak Credit Debit $ 1,137.00 Date Accounts title 1/1/2017 Cash Unearned lease revenue [To record receipt of lease payment] $1,137.00 $ 1,137.00 1/1/2017 Unearned lease revenue Lease revenue [ To record the recognition of lease revenue $1,137.00 12/31/2017 Depreciation expense $ 714.29 Accumulated depreciation -equipment (5,000 / 7years) $ 714.29

Part c: Accounts title Date Debit Credit 7000 1/1/2017 Legal fees cash 500 1/1/2017 Advertisement Cash

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