Question

Larkspur Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement.

1.		The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.
2.		The cost of the asset to the lessor is $230,000. The fair value of the asset at January 1, 2017, is $230,000.
3.		The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $24,339, none of which is guaranteed.
4.		The agreement requires equal annual rental payments, beginning on January 1, 2017.
5.		Collectibility of the lease payments by Larkspur is probable.

Assuming the lessor desires a 8% rate of return on its investment, calculate the amount of the annual rental payment required. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and the final answer to 0 decimal places e.g. 5,275.)

Amount of the annual rental payment

$

Prepare an amortization schedule that is suitable for the lessor for the lease term. (Round answers to 0 decimal places e.g. 5,275.)

LARKSPUR LEASING COMPANY (Lessor) Lease Amortization Schedule
Date		Annual Lease Payment Plus URV		Interest on Lease Receivable		Recovery of Lease Receivable		Lease Receivable
1/1/17		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount
1/1/17		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
1/1/18		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
1/1/19		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
1/1/20		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
1/1/21		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
1/1/22		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
12/31/22		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
		$enter a total amount for this column		$enter a total amount for this column		$enter a total amount for this column

Prepare all of the journal entries for the lessor for 2017 and 2018 to record the lease agreement, the receipt of lease payments, and the recognition of revenue. Assume the lessor’s annual accounting period ends on December 31, and it does not use reversing entries. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

1/1/17

enter an account title To record the lease on January 1 2017

enter a debit amount

enter a credit amount

enter an account title To record the lease on January 1 2017

enter a debit amount

enter a credit amount

enter an account title To record the lease on January 1 2017

enter a debit amount

enter a credit amount

enter an account title To record the lease on January 1 2017

enter a debit amount

enter a credit amount

(To record the lease)

1/1/17

enter an account title To record the receipt of lease payment on January 1 2017

enter a debit amount

enter a credit amount

enter an account title To record the receipt of lease payment on January 1 2017

enter a debit amount

enter a credit amount

(To record the receipt of lease payment)

12/31/17

enter an account title for the journal entry on December 31 2017

enter a debit amount

enter a credit amount

enter an account title for the journal entry on December 31 2017

enter a debit amount

enter a credit amount

1/1/18

enter an account title for the journal entry on January 1 2018

enter a debit amount

enter a credit amount

enter an account title for the journal entry on January 1 2018

enter a debit amount

enter a credit amount

12/31/18

enter an account title for the journal entry on December 31 2017

enter a debit amount

enter a credit amount

enter an account title for the journal entry on December 31 2017

enter a debit amount

enter a credit amount

Answer 1

B Ans; Particulars a) Residual value PV of single sum (i=8%, n=6) PV of residual value Amount $24,339 0.63017 $15.338 Fair market value of leased equipment $230,000 Less: Present value of residual value $15,338 Amount to be recovered through lease S214,662 payment PV factor of annuity due (i=8%, n=6) 4.99271 Annual payment required $42.995 13 b) LARKSPUR LEASING COMPANY (Lessor) Lease Amortization Schedule Interest Recovery of on Lease Annual Lease Payment Plus URV Lease Receiva Receivable ble (8%) Date Lease Receivable $42.995 1/1/2017 1/1/2017 1/1/2018 1/1/2019 1/1/2020 1/1/2021 1/1/2022 12/31/2022 $42.995 SO $42.995 $14.960 $42.995 $12.718 $42.995 $10.295 $42.995 $7,679 $42.995 $4.854 $24,339 $1,803 $30.278 $32.700 $35,316 $38.141 $22,536 $230.000 $187,005 $158.970 $128.693 $95.993 $60.6771 $22,536 SO Total $282.310 $52.310 $230,000

c) Credit Debit $230,000 Date Accounts title and explanation 1/1/2017 Lease Receivable Equipment To record lease amont) $230,000 $42.995 $42.995 1/1/2017 Cash Lease Receivable (To record the receipt of first lease payment) $14,960 12/31/2017 Interest Receivable Interest Revenue (Interest revenue accrued) $14.960 $42.995 1/1/2018 Cash Lease Receivable Interest Receivable (Second lease rent received including interest) $28,035 $14,960 $12.718 12/31/2018 Interest Receivable Interest Revenue (Interest revenue accrued) $12,718

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в Ans; Particulars a) Residual value PV of single sum (I=8%, n=6) PV of residual value Amount 24339 0.63017 =D3*D4 Fair market value of leased 230000 Less: Present value of residual value =D5 Amount to be recovered through lease payment =D7-D8 PV factor of annuity due (i=8%. 4.99271 Annual payment required =D9/D10 LARKSPUR LEASING COMPANY (Lessor) Lease Amortization Schedule 13 b) Annual Lease Payment Plus Date Interest on Lease Receivable (8%) Recovery of Lease Receivable Lease Receivable URV 42736 42736 =SD$11 43101 =SD$11 43466 =SD$11 43831 =SD$11 44197 =SD$11 44562 =SD$11 44926 =D3 =F16*8% =F17*8% =F18*8% =F19*8% =F20*8% =F21*8% =C16-D16 =C17-D17 =C18-D18 =C19-D19 =C20-D20 =C21-D21 =C22-D22 230000 =F15-E16 =F16-E17 =F17-E18 =F18-E19 =F19-E20 =F20-E21 =F21-E22 Total =SUM(C16:C23) =SUMD16:D23) =SUME 16:E23)

В Credit Debit =E24 Date Accounts title and explanation 42736 Lease Receivable Equipment (To record lease amont) =D27 =D11 42736 Cash Lease Receivable =D31 (To record the receipt of first lease payment) =D17 43100 Interest Receivable Interest Revenue (Interest revenue accrued) =D35 43101 Cash =E40+E41 Lease Receivable Interest Receivable =E17 =D17 (Second lease rent received including interest) =D18 43465 Interest Receivable Interest Revenue (Interest revenue accrued)