Question

Problem 21-6 The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and Stellar Company, a lessee. January 1, 2017 $136,159 Inception date Annual lease payment due at the beginning of each year, beginning with January 1, 2017 Residual value of equipment at end of lease term, guaranteed by the lessee Lease term Economic life of leased equipment Fair value of asset at January 1, 2017 Lessor's implicit rate Lessee's incremental borrowing rate $54,000 6 years 6 years $641,000 13 % 13 % The lessee assumes responsibility for all executory costs, which are expected to amount to $5,100 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $54,000. The lessee uses the straight-line depreciation method for all equipment. Click here to view factor tables Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to o decimal places e.g. 58,971.)

Answer 1

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STELLER COMPANY Computation of Minimum Lease Payment Present Value of Discount Factor @ Minimum Lease Paymemt (MLP) 1.0000 $ Payment 13% 01-01-2017 $ 136,159 136,159 01-01-2018$ 0.8850 $ 136,159 120,495 0.7831 $ 01-01-2019 $ 106,632 136,159 01-01-2020 $ 0.6931 $ 136,159 94,365 01-01-2021 $ 0.6133 $ 0.5428 $ 136,159 83,509 01-01-2022$ 136,159 73,902 31-12-2023 $ 0.4803 S 25,938 54,000 Total $ 870,954 641,000 Fair Value of lease at the time of inception is $641,000 This lease is "Finance Lease" as the Present Value of Minimum lease payment is amounts to at least substantially all of the Fair Value of Leased Asset. Asset shall be recognised at Fair value or MLP whichever is lower i.e $641,000 (equal in both cases) Computation of Interest Expenses Annual Lease Reduction on Lease Interest Lease Liability Beginning Liability Payment @13% D C 13% C-A-B A Prev 'F" F-C+D 641,000 $ 570,470 $ 490,772 $ 400,712 $ 298,945 $ 183,948 $ 54,000 $ 136,159 $ 136,159 $ 136,159 $ 136,159 $ 136,159 $ 136,159 $ 504,841 $ 434,311 $ 354,613 $ 264,553 $ 162,786 $ 47,789 $ 01-01-2017 $ 65,629 $ 56,460 $ 46,100 $ 34,392 $ 21,162 $ 6,211 $ 570,470 01-01-2018 $ 490,772 01-01-2019 $ 400,712 01-01-2020 $ 298,945 01-01-2021 $ 183,948 01-01-2022$ 54,000 31-12-2023 $ 54,000

JOURNAL ENTRIES IN THE BOOKS OF STELLER COMPANY Particulars Debit Credit Date 01 January 2017 Equipment PPE To Lease Liability $641,000 $641,000 (No record lease liability) 01 January 2017 Lease Liability $ 136,159 $136,159 To Cash (To record payment of lease rentals) 31 December 2017 Interest Expenses Depreciation- Straight Line Method $ 65,629 To Lease Liability 65,629 $ 641,000 Value of PPE (To Record Interest Expenses) 31 December 2017 Accumulated Depreciation Residual Value $ $ 587,000 97,833 54,000 To Equipment/PPE (To record depreciation) 31 December 2017 Executory Cost Expenses Net Balance $ 97,833 Life 6 Depreciation (Net/ Life) $ 5,100 97,833 То Cash $ 5,100 (To record executory cost incurred by lessee) 01 January 2018 Lease Liability $ 136,159 То Cash $ 136,159 (To record payment of lease rentals) 31 December 2017 Interest Expenses 56,460 To Lease Liability (To Record Interest Expenses) 56,460 31 December 2017 Accumulated Depreciation 97,833 To Equipment/PPE (To record depreciation) 31 December 2017 Executory Cost Expenses $ 97,833 5,100 $ 5,100 To Cash (To record executory cost incurred by lessee)