Question

Exercise 21-7 On January 1, 2017, Monty Company leased equipment to Flounder Corporation. The following information pertains to this lease. 1. The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease 2. Equal rental payments are due on January 1 of each year, beginning in 2017 3. The fair value of the equipment on January 1, 2017, is $127,000, and its cost is $101,600 4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $11,000. Flounder depreciates all of its equipment on a straight-line basis. 5. Monty set the annual rental to ensure an 12% rate of retum. Flounder's incremental borrowing rate is 13%, and the implicit rate of the lessor is unknown. 6. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor. Both the lessor and the lessee's accounting period ends on December 31.) Calculate the amount of the annual rental payment. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.) The amount of the annual rental payment Prepare all the necessary journal entries for Flounder for 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, selecit "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to decimal places e.g. 58,971.) Date Account Titles and Explanation Debit Credit To record the lease.) To record lease paymant.) To record depreciation.)

Answer 1

Part A

The amount of the annual rental payment = $26370

(127000-(11000*0.50663))/ 4.60478 = 26370

Present value of $1 at 12% for 6 periods = 0.50663

Present value of an annuity due at 12% for 6 periods =4.60478

Part B

Date	Account titles and explanation	debit	credit
1/1/17	Leased Equipment	119119
	Lease Liability (26370*4.51723)		119119
	(To record the lease.)
	Lease Liability	26370
	Cash		26370
	(To record lease payment.)
12/31/17	Depreciation Expense	19853
	Accumulated Depreciation (119119/6)		19853
	(To record depreciation.)
	Interest Expense	12057
	Interest Payable (119119-26370)*13%		12057
	(To record interest.)

Present value of an annuity due of $1 at 13% for 6 periods = 4.51723

Part C

Date	Account titles and explanation	debit	credit
1/1/17	Lease Receivable	127000
	Cost of Goods Sold	96027
	Sales Revenue		121427
	Inventory		101600
	(To record the lease.)
	Cash	26370
	Lease Receivable		26370
	(To record lease payment.)
12/31/17	Interest Receivable	12076
	Interest Revenue (127000-26370)*12%		12076
	(To record interest.)

Cost of goods sold = 101600-(11000*0.50663) = 96027

Sales revenue = 127000-(11000*0.50663) = 121427