Question

Accounting for Lease Agreements - both parties (24 points) 4. On January 1, 2017, Astros, Inc. engaged in a lease agreement with Nationals Manufacturing for the use of equipment with an estimated economic life of five years. The term of the lease is four years and requires four annual payments of$100,000 beginning January 1, 2017 and continuing on December 31 of every year from 2017 to 2019. The equipment is not specialized. Nationals Manufacturing incured $5,000 in costs related to obtaining credit reports on Astros and closing the lease arrangement. Astros incurred no initial direct costs. The equipment cost Nationals $350,000 to manufacture and the fair value ofthe equipment is $379,760. The lease terms follow: Astros guarantees that the equipment returned to Nationals on December 31, 2020 will be worth $30,000 There is no transfer of the asset at the end of the lease tem and no purchase option The rate implicit in the lease is 8%, and is known to Astros Required: a. What type of lease has each party signed? Explain in terms of the new US GAAP standard (ASC 842). (2 pts) b. Prepare all of the 2017 jounal entries for both the lessor and lessee. (10 pts) c. Prepare all of the 2020 joumal entries for both the lessor and lessee, assuming that the fair value of the equipment at the end of the lease (12/31/20) is $30,000. How would your answer differ if the equipment's fair value is $28,000 at the end of the lease? (4 pts) d. Now assume that the $30,000 residual value is estimated by Nationals and is not guaranteed. Answer parts a., b., and c. above under this for Nationals (Lessor) only. (8 pts

Answer 1

Answer . should be classified as finance 6. The dear term covers 75% more than 1. The assets life - 80% o value of the lease paigment. : 90% the lease contains a bargeon porche. o the value of the equipmail = 379760 o Assel Ale (AV) = 87970 Annual payment a 100.000 To cash tle = (Co) : 100,000 = 379760-100,000) To lear liabeletics All (c) _ 279760

© Interesl Ale {er) = 22381 To Lease Leabilitics 46 (4) - 22381 © Leave Leability ale Cor) =100000 to lash the (es) = 100000 . Being lease liability - IN of lessor O Cash Alco) = 100000 Lease greceivables Ale (23) = 29760 To Assets Al Cier) - 350000 to profit. and Loss (a) = 29760 Asseto given on leare. © Lease suceivable Ale = 22381 To interest inlom HC (CY) = 92387 22387

G ② Cash Ale (s) = 100000 To lease greceivable Nc (C) = 100000 Present value of future Lease y econ= 0 Jease payment 3 100000 87. 21 = 10000081 =100000 Year- > Lease payments = 600.000 | $ : 0.73 : (00 000 X 0.93 yealt - 2 = .:: 93000 > Lease payment = 1000001 8% 0.861 = 100000 x 0.861 861111

1 year-3 » Lease payment = 100000 0.797 100000X0.797 = 79739.5 yearin 3 - Lease payment = 30000 8%. =-0.797 9 20916.44 => 100000+ 93000+ 86111.4 +79732,5+209164 - 379760 - value of leare payment would change year-og Lease payment = 100.000 84. = 1 = 100000 x ! =100000 Year' » Lease payment = 100000 8% = 0.93 100 000 X0.93 ..93000

year? j Lease payment = 100000 8% = 0.861 = 100000X0-861 = 86111.1 year - 3 = Lease payment = 100000 8% = 0.797 - 100000 x0: 797 197325 year - 3 Lease payment - 27000 8% =0.797 . 27000X0.797 318525.4 100000 43000 + 86111.17 7973 3000 + 66111.17 79732.5 + 18525.4 377369 o the cas 30000 Hear -0 = Leave payment = 100000 . 8% El. = 100000 x1 i 100 000

year-lo hesse payment -L00000 5 % - 0.93 100 000X0.93 year-? - 93000 Lease payment = 100000 . 8% = 0.861 - 100 000X0:861 386111.1 years » Lease payment = 100000 8% = 0.797 = 100000 x0.797 - 79732-5 92000 + 861161 +79 732.5 100000 3588 Lle o still be a ferance. Leave The Journal entries in the book o cash Ale (s) = 100000 Lease Receivable Alc(er) = 2588436

To Assebo ale Ca)= 350000 @ To profil and loss (co)= 8843.6 Asset gule on leas Leare receivable Ale (0) = 20707 To interest income hle (0) = 20707 ☺ . O cash Ale (eo) = 100000 To Lease receivable Alley) = 60000 Decon payments receivable lor Jeroe.