Question

Exercise 21A-13 b Phelps Company leases a building to Walsh, Inc. on January 1, 2017. The following facts pertain to the lease agreement. 1. The lease term is 5 years, with equal annual rental payments of $4,703 at the beginning of each year. 2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. 3. The building has a fair value of $23,000, a book value to Phelps of $16,000, and a useful life of 6 years. 4. At the end of the lease term, Phelps and Walsh expect there to be an unguaranteed residual value of $4,000. 5. Phelps wants to earn a return of 8% on the lease, and collectibility of the payments is probable. This rate is known by Walsh. Click here to view the factor table. (b) Using the original facts of the lease, show the journal entries to be made by both Phelps and Walsh in 2017. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Phelps Journal Entries Account Titles and Explanation Debit Credit Date 1/1/17 (To record the lease) (To record lease payment) 12/31/17 Walsh's Journal Entries Debit Credit Date Account Titles and Explanation 1/1/17 (To record the lease) (To record lease liability) 12/31/17 (To record interest expense) (To record amortization of the right-of-use asset)

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Answer 1

Answer
	Working
	Annual Rent Payments		$              4,703
	PVAF (5 periods, 8%)		4.31213
	Present value of Rental Payment	A	$            20,280
	Expected Residual value (Unguarantee)		$              4,000
	PVF (5 Periods,8%)		0.68058
	Present Value of Residual Value	B	$              2,722
	Lease Receivable	A+B	$            23,000
			Rounded by $2

Journal Entries:
Phelp's
Date	Account	Debit	Credit
Jan 1 2017	Lease Receivable	$ 23,000
	Cost of Goods Sold	$ 13,280
	Sales Revenue		$            20,280
	Inventory (Book Value)		$            16,000
	(to record lease contract)
Jan 1 2017	Cash	$    4,703
	Lease Receivable		$              4,703
	(to record first payment received)
Dec 31 2017	Lease Receivable	$    1,464
	Interest Revenue		$              1,464
	(to record first year interest)
	($23,000-$4,703)*8%

Journal Entries:
Walsh's
Jan 1 2017	Right to use assets	$ 20,280
	Lease Liability		$            20,280
	(to record lease)
Jan 1 2017	Lease Liability	$    4,703
	Cash		$              4,703
	(to record first payment)
Dec 31 2017	Interest Expense	$    1,246
	Lease Liability		$              1,246
	(to record interest expense)
	($20,280-$4,703)*8%
Dec 31 2017	Depreciation Expense	$    4,056
	Right to use asset		$              4,056
	(to record depreciation)
	$20,280/5 Year

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