LESSEE ACCOUNTING – PROBLEM 1 ABC Company (ABC), on January 1, 2019, enters into a 10-year...
LESSEE ACCOUNTING – PROBLEM 1
ABC Company (ABC), on January 1, 2019, enters into a 10-year noncancelable lease for
equipment having an estimated useful life of 10 years. XYZ Corp.’s implicit interest rate is 8%.
ABC uses the straight-line method to depreciate its assets.
The lease contains the following provisions:
1. Rental payments of $200,000 at the beginning of each six-month period (SEMIANNUAL PAYMENTS).
2. A guarantee by ABC that XYZ Corp. (XYZ) will realize $100,000 from selling the asset (RESIDUAL VALUE) at the expiration of the lease. ABC believes that it is probable that the expected residual value will be greater than the guaranteed residual value.
3. The lease contains no renewal options. The equipment reverts to lessor at the termination
of the lease.
Required:
- Compute the present value test.
- Compute the present value of the lease payments to be recorded as a liability.
c. Prepare an amortization schedule table for the liability through the year 2021.
d. Prepare journal entries for the year 2019.
Homework Answers
| a) | ||||||
| Rental payments | $ 2,00,000 | |||||
| P.V.A.F @ 4% for 20 Payments | ₹ 14.13 | |||||
| PV of rental payments | $ 28,26,787.88 | |||||
| Add: PV of GRV | ₹ 46,319.35 | |||||
| PV of Minimum Lease Payments | $ 28,73,107.23 | |||||
| As question does not specify fair value at inception of Lease | ||||||
| Assumption here made is PV of MLP covers atleast 90% of Fair value of asset | ||||||
| Therefore given lease is a capital lease | ||||||
| b) | ||||||
| Present value of Lease payments to be recorded as Liability is | ||||||
| $ 28,73,107.23 | ||||||
| c) | ||||||
| Date | Opening balance | Interest | Installment | Principal repayment | Closing balance | |
| 01-Jan-19 | $ 28,73,107.23 | 0 | $ 2,00,000 | $ 2,00,000 | $ 26,73,107.23 | |
| 01-Jul-19 | $ 26,73,107.23 | $ 1,06,924.29 | $ 2,00,000 | $ 93,076 | $ 25,80,031.52 | |
| 01-Jan-20 | $ 25,80,031.52 | $ 1,03,201.26 | $ 2,00,000 | $ 96,799 | $ 24,83,232.78 | |
| 01-Jul-20 | $ 24,83,232.78 | $ 99,329.31 | $ 2,00,000 | $ 1,00,671 | $ 23,82,562.09 | |
| 01-Jan-21 | $ 23,82,562.09 | $ 95,302.48 | $ 2,00,000 | $ 1,04,698 | $ 22,77,864.57 | |
| 01-Jul-21 | $ 22,77,864.57 | $ 91,114.58 | $ 2,00,000 | $ 1,08,885 | $ 21,68,979.16 | |
| d) | ||||||
| Journal entries | ||||||
| 01-Jan-19 | Leased asset A/c | Debit | $ 28,73,107 | |||
| Lease Liability A/c | Credit | $ 28,73,107 | ||||
| 01-Jan-19 | Lease Liability A/c | Debit | $ 2,00,000 | |||
| Cash A/c | Credit | $ 2,00,000 | ||||
| 01-Jul-19 | Finance charge | Debit | $ 1,06,924 | |||
| Lease Liability A/c | Credit | $ 1,06,924 | ||||
| 01-Jul-19 | Lease Liability A/c | Debit | $ 2,00,000 | |||
| Cash A/c | Credit | $ 2,00,000 | ||||
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LESSEE ACCOUNTING – PROBLEM 1
ABC Company (ABC), on January 1, 2019, enters into a 10-year...
LESSEE ACCOUNTING - PROBLEM 1 ABC Company (ABC), on January 1, 2019, enters into a 10-year...
LESSEE ACCOUNTING - PROBLEM 1 ABC Company (ABC), on January 1, 2019, enters into a 10-year noncancelable lease for equipment having an estimated useful life of 10 years. XYZ Corp.'s implicit interest rate is 8%. ABC uses the straight-line method to depreciate its assets. The lease contains the following provisions: 1. Rental payments of $200,000 at the beginning of each six-month period (SEMIANNUAL PAYMENTS). 2. A guarantee by ABC that XYZ Corp. (XYZ) will realize $100,000 from selling the asset...
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LESSOR ACCOUNTING – PROBLEM 2 Using the same data of the previous exercise and assuming the...
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Using the same data of the previous exercise and assuming the
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answer this exercise from the point of view of the lessor:
Collectibility of the payments is
reasonably predictable, and there are no important
uncertainties surrounding the costs
yet to be incurred by XYZ.
Additional information:
1. Asset’s cost $1,500,000.
2. Asset’s FMV - $2,800,000
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Prepare journal entries for the year 2019.
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reasonably predictable, and there are no important
uncertainties surrounding the costs
yet to be incurred by XYZ.
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the lease agreement:
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