The following facts pertain to a non-cancelable lease agreement between Ford and NextCar, a lessee.
Lease Origination Date May 1, 2017
Annual lease payments due at the beginning of each lease year $20.471.94
Bargain purchase option price at the end of lease term $4,000
Lease term 5 years
Economic life of leased equipment 10 years
Lessor’s cost $65,000
Fair value of asset on May 1, 2017 $91,000
Fair value of asset on May 1, 2022 $15,000
Lessor implicit rate 8%
Lessee’s incremental borrowing rate 8%
Prepare the journal entries on the lessee’s book to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. NextCar has an April 30th year end.
Answer -
Step - (1) - Relevant Information Given -
A noncancelable lease agreement between Ford and NextCar, a lessee.
Lease Origination Date = May 1, 2017
Annual lease payments due at the beginning of each lease year = $20471.94
Bargain purchase option price at the end of lease term = $4000.
Lease term = 5 Years.
Economic life of leased equipment = 10 Years.
Fair value of asset on May 1, 2017 = $91000.
Fair value of asset on May 1, 2022 = $15000 [This is Residual value].
Lessor’s implicit rate = 8%.
Lessee’s incremental borrowing rate = 8%.
.
Step - (2) -
Journal Entries in the Books of NextCar (lessee)
Date | Account Titles and Explanation | Debit ($) | Credit ($) |
5/1/17 |
Lease equipment Lease Liability (To record the lease) Note - Fair value of asset at May 1, 2017 = $91000, [Given] |
91000 - |
- 91000 |
5/1/17 |
Lease Liability Cash (To record the first lease payment.) |
20471.94 - |
- 20471.94 |
4/30/18 |
Interest Expense [($91000-$20471.94)*8%] Lease Liability [Balancing figure] Cash (To record lease payment along with interest) |
5642.24 14829.7 - |
- - 20471.94 |
4/30/18 |
Depreciation Expense Accumulated Depreciation (To record depreciation) = [($91000 - $15000) / 10 years] = $7600 Note - Because a bargain-purchase option was involved, the leased asset is depreciated over its economic life rather than over the lease term. |
7600 - |
- 7600 |
4/30/19 |
Interest Expense [$55698.36 * 8%] Lease Liability [Balancing figure] Cash (To record lease payment along with interest) |
4455.87 16016.07 - |
- - 20471.94 |
4/30/19 |
Depreciation Expense Accumulated Depreciation (To record depreciation) = [($91000 - $15000) / 10 years] = $7600 |
7600 - |
- 7600 |
The following facts pertain to a non-cancelable lease agreement between Ford and NextCar, a lessee. ...
The following facts pertain to a non-cancelable lease agreement between Ford and NextCar, a lessee. Lease Origination Date May 1, 2017 Annual lease payments due at the beginning of each lease year $20.471.94 Bargain purchase option price at the end of lease term $4,000 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000 Fair value of asset on May 1, 2017 $91,000 ...
The following facts pertain to a non-cancelable lease agreement between Ford and NextCar, a lessee. Lease Origination Date May 1, 2017 Annual lease payments due at the beginning of each lease year $20.471.94 Bargain purchase option price at the end of lease term $4,000 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000 Fair value of asset on May...
The following facts pertain to a non-cancelable lease agreement between Ford and NextCar, a lessee. Lease Origination Date May 1, 2017 Annual lease payments due at the beginning of each lease year $20.471.94 Bargain purchase option price at the end of lease term $4,000 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000 Fair value of asset on May 1, 2017 $91,000 Fair value of asset on May 1, 2022 ...
The following facts pertain to a non-cancelable lease agreement between Ford and NextCar, a lessee. Lease Origination Date May 1, 2017 Annual lease payments due at the beginning of each lease year $20.471.94 Bargain purchase option price at the end of lease term $4,000 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000 Fair value of asset on May 1, 2017 $91,000 Fair value of asset on May 1, 2022 ...
The following facts pertain to a non-cancelable lease agreement between Ford and NextCar, a lessee. Lease Origination Date May 1, 2017 Annual lease payments due at the beginning of each lease year $20.471.94 Bargain purchase option price at the end of lease term $4,000 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000 Fair value of asset on May 1, 2017 $91,000 Fair value of asset on May 1, 2022 ...
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