Question

Terms of a lease agreement and related facts were: a. The lease asset had a retail cash selling price of $135,000. Its useful life was six years with no residual value (straight-line depreciation). b. Annual lease payments at the beginning of each year were $27,693, beginning January 1. c. Lessor's implicit rate when calculating annual rental payments was 9%. d. Costs of $3,262 for legal fees for the lease execution were the responsibility of the lessor. Required: Prepare the appropriate entries for the lessor to record the lease, the initial payment at its beginning, and at the December 31 fiscal year-end under each of the following three independent assumptions: 1. The lease term is three years and the lessor paid $135,000 to acquire the asset (operating lease). 2. The lease term is six years and the lessor paid $135,000 to acquire the asset. Also assume that adjusting the lease receivable (net investment) by initial direct costs reduces the effective rate of interest to 8%. 3. The lease term is six years and the lessor paid $97,000 to acquire the asset. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 The lease term is three years and the lessor paid $135,000 to acquire the asset (operating lease) prepare the appropriate entries for the lessor to record the lease, the initial payment at its beginning, and at the December 31 fiscal year-end. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to nearest whole dollar.) Show less View transaction list Journal entry worksheet 3 4 5 Record the gross lease revenue received by lessor. Note: Enter debits before credits. Date General Journal Debit Credit January 01

Answer 1

Requirement-1:

1-Jan Cash 27,693 Unearned rent revenue 27,693 1-Jan Deferred initial direct cost 3,262 Cash 3,262 31-Dec Unearned rent revenue Rent revenue 27,693 27,693 31-Dec Initial direct cost expense 1,087 Deferred initial direct cost 1,087 |($3,262 / 3) 31-Dec Depreciation expense 22,500 Accumulated depreciation 22,500 ($135,000 / 6)

Requirement-2:

PVMLP: $135,000

Criteria:

1. Title transfer ? No

2. Bargain purchase option? No

3. Lease term ≥ 75% of asset useful life? Yes, it is 100% (6 ÷ 6)

4. PVMLP ≥ 90% FMV? Yes, it is 100%

5. Collectibility of minimum lease payments reasonably predictable? Yes

6. No lessor costs yet to be incurred? Yes

Therefore, this is a capital lease. It is direct financing because cost = FMV = PVMLP

1-Jan Lease receivable $ 135,000 $ 135,000 Equipment 1-Jan Lease receivable 3,262 Cash 3,262 1-Jan Cash 27,693 $ 27,693 Lease receivable 31-Dec Interest receivable 8,846 Interest revenue 8,846 8% * (135,000 + 3,262 - 27,693)

Requirement-3:

PVMLP: 4.88965 * $27,693 = $135,409

Criteria:

1. Title transfer ? No

2. Bargain purchase option? No

3. Lease term ≥ 75% of asset useful life? Yes, it is 100% (6 ÷ 6)

4. PVMLP ≥ 90% FMV? Yes, it is 100%

5. Collectibility of minimum lease payments reasonably predictable? Yes

6. No lessor costs yet to be incurred? Yes

Therefore, this is a capital lease. It is sale type lease because cost is not equal to FMV

1-Jan Lease receivable $ 135,409 $ 135,409 Sales 1-Jan Cost of goods sold 97,000 Equipment 97,000 1-Jan Selling expense 3,262 Cash 3,262 1-Jan Cash 27,693 $ 27,693 Lease receivable 31-Dec Interest receivable 9,694 Interest revenue 9,694 9% * (135,409 - 27,693) %24 %24