Question

*Exercise 21-14 Your answer is partially correct. Try again. Phelps Company leases a building to Walsh, Inc. on January 1, 2020. The following facts pertain to the lease agreement. 1. The lease term is 5 years, with equal annual rental payments of $4,703 at the beginning of each year. 2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. 3. The building has a fair value of $23,000, a book value to Phelps of $16,000, and a useful life of 6 years. 4. At the end of the lease term, Phelps and Walsh expect there to be an unguaranteed residual value of $4,000. 5. Phelps wants to earn a return of 8% on the lease, and collectibility of the payments is probable. This rate is known by Walsh. Assume that Walsh was unaware of the implicit rate used in the lease by Phelps and has an incremental borrowing rate of 9%. Click here to view factor tables. How would Phelps (lessor) and Walsh (lessee) classify this lease? Phelps would classify the lease as a sales typel lease Walsh would classify the lease as a finance case. How would Phelps initially measure the lease receivable, and how would Walsh initially measure the lease liability and right-of-use asset? (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to o decimal places, e.g. 5,275.) Lease receivable Phelps $23000 $20280 Present value of lease pay Walsh Lease Liability/Right-of-Use Asset 19681

Answer 1

Answer :

	Walsh
Lease Liability / Right - of - Use Asset	$20280

Explanation:

The initial lease liability for Walsh is $20280. Since the expected residual value is not less than guarantee value. Walsh need not include any residual value amount in lease liability & right of use asset. Thus lease liability / right of use asset for Walsh remains at $20280