Question

E21-19 (LO3,4) (Accounting for an Operating Lease) Kaluzniak Corporation leased equipment to Moeller, Inc. on January 1, 2017. The lease agreement called for annual rental payments of $1,137 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $7,000, a book value of $5,000, and Kaluzniak expects a residual value of $4,500 at the end of the lease term. Kaluzniak set the lease payments with the intent of earning a 6% return, though Moeller is unaware of the rate implicit in the lease and has an incremental borrowing rate of 8%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature. Instructions (a) Describe the nature of the lease to both Kaluzniak and Moeller. (b) Prepare all necessary journal entries for Moeller in 2017. (e) How would the measurement of the lease liability and right-of-use asset be affected if, as a result of the lease contract, Moeller was also required to pay $500 in commissions, prepay $750 in addition to the first rental payment and pay $200 of insurance each year? (d) Suppose, instead of a 3-year lease term, Moeller and Kaluzniak agree to a one-year lease with a payment of $1,137 at the start of the lease. Prepare all necessary journal entries for Moeller in 2017.

Answer 1

Answer The Lease agreement called for annual rental payment $ 1,137 The equipment has an economic leseful & year A fair value $ 7000 A book value of 5000 @ Total teseful life of the aree year and lease team is just 3 year An operating Lear as the loss term is less than the 75% of the useful life 6 Journal entry payment made by the Moelle . chorord to its income statement as operating

Particulars lease Rent Ale (@r)_ 1, 137 Bant (c) = 1, 137 P(ash Ale (Dr) 2 1,137 Lease Rent af (o) = 1197 © the measurnal of the leave liabity and right Although it is not clearly mentioned in port Seeing the nature of transaction effected the rusks and reward relled to ownship of assete leased care transferred to the Miceller liabelety on the balance sheet by an amount equal to the present value of the minium lear the lessors implied rate 6%

The lease incremental borrowing rate 8%. ②. The instead of 3 years leave term one year with a payment of 1137 Change the lease rental Pal account Paritalar Lease Renk Ale (93) : 1137 Bank (0) = 1137 Pol Ale cor) = 1137 Leare Rent Al (Lv) - 1137.