Question

Exercise 21-8 The following facts pertain to a noncancelable lease agreement between Coronado Leasing Company and Whispering Company, a lessee. May 1, 2017 Inception date: Annual lease payment due at the beginning of each year, beginning with May 1, 2017 Bargain-purchase option price at end of lease term Lease term Economic life of leased equipment Lessor's cost Fair value of asset at May 1, 2017 Lessor's implicit rate Lessee's incremental borrowing rate $21,751.90 $3,700 5 years 10 years $67,000 $93,000 10 % 10 % The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs. The expected residual value of the equipment at the end of 5 (10) years is $12,000 $0). Click here to view factor tables Prepare a lease amortization schedule for Whispering Company for the 5-year lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25126 and Round answers to 2 decimal places, e.g. 15.25.)

Answer 1

Answer -

Step - (1) - Relevant Information Given -

A noncancelable lease agreement between Coronado Leasing Company and Whispering Company, a lessee.

Annual lease payment due at the beginning of each year, beginning with May 1, 2017 = $21751.90

Bargain-purchase option price at end of lease term = $3700.

Lease term = 5 Years.

Economic life of leased equipment = 10 Years.

Lessor’s cost = $67000

Fair value of asset at May 1, 2017 = $93000.

Lessor’s implicit rate = 10%.

Lessee’s incremental borrowing rate = 10%.

.

Step - (2) -

WHISPERING COMPANY (Lessee)

Lease Amortization Schedule

Date	Annual Lease Payment Plus BPO ($)	Interest on Liability ($)	Reduction of Lease Liability ($)	Lease Liability ($)
5/1/17	-	-	-	93000
5/1/17	21751.90	-	21751.90	71248.1 [93000-21751.90]
5/1/18	21751.90	7124.81 [71248.1*10%]	14627.09 [21751.90-7124.81]	56621.01 [71248.1-14627.09
5/1/19	21751.90	5662.101 [56621.01*10%]	16089.80 [21751.90-5662.101]	40531.21 [56621.01-16089.80]
5/1/20	21751.90	4053.12 [40531.21*10%]	17698.78 [21751.90-4053.12]	22832.43 [40531.21-17698.78]
5/1/21	21751.90	2283.24 [22832.43*10%]	19468.66 [21751.90-2283.24]	3363.77 [22832.43-19468.66]
4/30/22	3700	336.38 [3363.77*10%]	3363.62 [3700-336.38]	0.15 [3363.77-3363.62]
	112459.5	19459.65	92999.85	-

.

Step - (3) -

Journal of Whispering Company (lessee)

Date	Account Titles and Explanation	Debit ($)	Credit ($)
5/1/17	Lease equipment Lease Liability (To record the lease) Note - Fair value of asset at May 1, 2017 = $93000, [Given]	93000 -	- 93000
	Lease Liability Cash (To record the first lease payment.)	21751.90 -	- 21751.90
12/31/17	Interest Expense Interest Payable (To record interest) = [($93000-$21751.90)*10%] * (8 months/12 months) = ($7124.81) * (8 months/12 months) = $4749.87.	4749.87 -	- 4749.87
	Depreciation Expense Accumulated Depreciation (To record depreciation) = [($93000/10 years) * (8 months/12 months)] = $6200 Note - Because a bargain-purchase option was involved, the leased asset is depreciated over its economic life rather than over the lease term.	6200 -	- 6200
1/1/18	Interest Payable Interest Expense	4749.87 -	- 4749.87
5/1/18	Interest Expense [($93000-$21751.90)*10%] Lease Liability [Balancing figure] Cash (To record lease payment along with interest)	7124.81 14627.09 -	- - 21751.90
12/31/18	Interest Expense Interest Payable (To record interest) = [($56621.01*10%) * (8 months/12 months)] = $3774.73	3774.73 -	- 3774.73
	Depreciation Expense [$93000/10 years] Accumulated Depreciation (To record depreciation)	9300 -	- 9300
Total		165278.27	165278.27