Question

Cheyenne Corporation leased equipment to Sage Hill, Inc. on January 1, 2017. The lease agreement called for annual rental payments of $1,112 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $7,500, a book value of $5,500, and Cheyenne expects a residual value of $5,000 at the end of the lease term. Cheyenne set the lease payments with the intent of earning a 5% return, though Sage Hill is unaware of the rate implicit in the lease and has an incremental borrowing rate of 7%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.

A)What is the amount of the rental payments used in the lease agreement?

B)Prepare the entries for Cheyenne in 2017. Cheyenne uses straight-line depreciation?

C)How would Cheyenne’s accounting in part (a) change if it incurred legal fees of $700 to execute the lease documents and $700 in advertising expenses for the year in connection with the lease?

Answer 1

$7,500 $4319.2. | Answer A2: Fasr value of leased asset Les: Present value of onguaranted residual value ($5,000% Pu (S. 37) ($5.000X0.86384) Amount to be recovered through leade amount The periode leave payment ($3180-8/p\AD (5.3%) = $3180.8 2.8594 Rental Payments $ 3180.8 $11122.40 $1112. B:- credit $1,112 $1,112 Date particulars Lf Debit |2017-Jan-1 Cash Alo Do $1,112 To unearned lease revenue Being to record receipt of leare Payment Jan-1 unearned lease revence Ale or $1,112 To lease revence (Being to record the recognition of lease Devenue) Dec-31 Depreciation expenses Alc or $785571 To Accumulated depreciation equipment ($5,500/7year]] (Being to record Depreciation euipment) $785.7) Debit credit Alc LE 1 or $ 700 Date Particulars 2017, Jan-i legal fee - To Cash Jan-! Advertisement To Cash $ 700 Alcor $ 700 $700