Question

On January 1, 2017, Bare Trees Company signed a three-year noncancelable lease with Dreams Inc. The lease calls for three payments of $62,258.09 to be made at each year-end. The lease payments include $3,000 of executory costs related to service. The lease is nonrenewable and has no bargain purchase option. Ownership of the leased asset reverts to Dreams at the end of the lease period, at which time Bare Trees has guaranteed that the leased asset will be worth at least $15,000. The leased asset has an expected useful life of four years, and Bare Trees uses straight-line depreciation for financial reporting purposes. Bare Trees’ incremental borrowing rate is 9%. Bare Trees and Dreams account for leases under ASC 842. Use tables (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)

Required:

1. Prepare Bare Trees Company’s amortization schedule for the lease liability.
2. Prepare Bare Trees Company’s journal entries to record (a) the lease on January 1, 2017; (b) the lease payments on December 31, 2017 and 2018; and (c) the leased asset’s depreciation in 2017 and 2018.
3. Assume that at the end of the lease term, the leased asset will be worth $16,000. Make Bare Trees Company’s journal entry to account for the residual value guarantee.
4. Repeat requirement 3, but assume that the leased asset will be worth only $12,000 at the end of the lease term.

Answer 1

Particulars Payments Guaranteed payments Present value of future lease payments PV of 3 years Payments at 9% Amount $ 59,258.09 2.5313 $1,50,000.00 $ 15,000.00 0.77218 $ 11,582.70 $ 1,61,582.70 Amortization table Date Cash Reduction of Balance lease Interest @9% Payment lease liability 01-01-2017 $1,61,583.00 31-12-2017 $ 14,542.47 $ 59,258.09 $ 44,715.62 $1,16,867.38 31-12-2018 $ 10,518.06 $ 59,258.09 $ 48,740.03 $ 68,127.35 31-12-2019 $ 6,131.46 $ 59,258.09 $ 53,126.63 $ 15,000.00 DR $1,61,583.30 2 Date Particulars 01-01-2017 Leased assets Obligation To record lease liability obligation $1,61,583.30 31-12-2017 Interest expense Obligation Other expense (executory cost) Cash To record lease payments $ 14,542.27 $ 44,715.62 $ 3,000.00 $ 62,258.09 31-12-2018 Interest expense Obligation Other expense (executory cost) Cash To record inerest expense $ 10,518.06 $ 48,740.03 $ 3,000.00 $ 62,258.09 $ 48,861.00 =(161583-15000)/3 Depreciation expense Accumulated depreciation To record lease depreciation for 2017 and 2018 $ 48,861.00 3 Date CR DR $ 15,000.00 Particulars Obligation Asset To record lease guaranteed payment $ 15,000.00 4 Date DR $ 15,000.00 $ 3,000.00 Particulars Obligation Loss on residual value guarantee Asset Cash To record lease guaranteed payment $ $ 15,000.00 3,000.00