Question

Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Splish Brothers Company. The following information relates to this agreement. 1. 2. 3. 4. 5. 6. The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years. The fair value of the asset at January 1, 2017, is $64,000. 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 $4,000, none of which is guaranteed. The agreement requires equal annual rental payments of $20,943 to the lessor, beginning on January 1, 2017. The lessee's incremental borrowing rate is 5%. The lessor's implicit rate is 4% and is unknown to the lessee. Splish Brothers uses the straight-line depreciation method for all equipment. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round answers to 0 decimal places, e.g. 5,265.) SPLISH BROTHERS COMPANY (Lessee) Lease Amortization Schedule Annual Lease Interest on Reduction of Lease Payment Liability Liability Lease Liability Date 1/1/17 65376 20943 20943 44433 1/1/17 1/1/18 20943 4443.3 16500 27933 1/1/19 20943 2793.3 18150 9683 62829 7236.6 55593 a Il

Answer 1

PV of minimum lease payments

20943*2.85941=

59884.62

P/Adue,i=5%;n=3= 2.85941

The assets reverts to the lessor at the end of the lease term.

The lease term is 3 yrs.ie. 3/5=60% ie. < 75% of te asset's economic life of 5 years.

There is no Bargain purchase option in the lease's terms.

The present value of the minimum lease payments,ie. 59885 (as above) exceeds 90% of the asset's fair market value. Ie. 59885/64000= 93.57%

So, having met one criteria out of the 4, this lease is to be accounted as a capital lease, by the lessee.

Lessee
Lease amortisation schedule
Date	Annual lease pmt.	Int. on liability	Reduction of lease liability	Lease liability
				59884.62
1/1/2017	20943	0	20943	38941.62
1/1/2018	20943	1947.08	18995.92	19945.70
1/1/2019	20943	997.29	19945.71	-0.01
Total	62829	2944.37	59884.63

	Journal entries
Date	Account Title	Debit	Credit
1/1/2017	Right-of-use asset	59884.62
	Lease liability		59884.62
	(To record Lease liability)
	Lease liability	20943
	Cash		20943
	(To record lease payment)
12/31/2017	Interest expense	1947.08
	Interest payable		1947.08
	(To accrue interest expense on lease)
	Depreciation expense	19961.54
	Acc. Depn.-Right-of-use asset		19961.54
	(To record amortsn.of right-of-use asset)
	59884.62/3
1/1/2018	Interest payable	1947.08
	Lease liability	18995.82
	Cash		20943
	(To record lease payment)
12/31/2018	Interest expense	997.29
	Interest payable		997.29
	(To accrue interest expense on lease)
	Depreciation expense	19961.54
	Acc. Depn.-Right-of-use asset		19961.54
	(To record amortsn.of right-of-use asset)
	59884.62/3
1/1/2018	Interest payable	997.29
	Lease liability	19945.71
	Cash		20943
	(To record lease payment)
12/31/2019	Depreciation expense	19961.54
	Acc. Depn.-Right-of-use asset		19961.54
	(To record amortsn.of right-of-use asset)
	59884.62/3
	Acc. Depn.-Right-of-use asset	59884.62
	Right-of-use asset		59884.62
	(Return of asset to the Lessor)