Question

Please help on E21-9 and show your work! Thank you.

E21-8 (L02,4) EXCEL (Lessor Entries, Sales-Type Lease) Crosley Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2017. The lease is for an 8-year period and requires equal annual payments of $35,004 at the beginning of each year. The first payment is received on January 1, 2017. Crosley had purchased the machine during 2016 for $160,000. Collectibility of lease payments by Crosley is probable Crosley set the annual rental to ensure a 6% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Crosley at the termination of the lease. Instructions (a) Compute the amount of the lease receivable. (b) Prepare all necessary journal entries for Crosley for 2017 (0) Suppose the collectibility of the lease payments was not probable for Crosley. Prepare all necessary journal entries for the company in 2017 (d) Suppose at the end of the lease term, Crosley receives the asset and determines that it actually has a fair value of $1,000 instead of the anticipated residual value of So. Record the entry to recognize the receipt of the asset for Crosley at the end of the lease term. E21-9 (LO2,4) (Lessee Entries; Initial Direct Costs) Use the information for Crosley Company in E21-8. Assume that Dexter Corporation does not know the rate implicit in the lease used by Crosley, and Dexter's incremental borrowing rate is 8%. In addition, assume that Dexter incurs initial direct costs of $15,000 Instructions (a) Compute the amount of the lease liability and right-of-use asset for Dexter (b) Prepare all necessary journal entries for Dexter for 2017

Answer 1

E21-9:

Amount of lease liability:

= Present value of minimum lease payments + guaranteed residual value

= 15000 + 8*35004

= 295032

Value of right of use is calculated as follows:

= 15000 + {PVAF (8%, 7 years)+1} * 35004

= 15000 + 6.2064*35004

= 232248.8256

(Note: since the lease rentals are year beginning annuity, PVAF is calculated for 7 years and 1 is added to it.)

The difference between Amount of lease liability and value of right of use is the interest cost that shall be debited in the leasee's books over the period of lease agreement.

Journal entry for the year 2017 in the books of Dexter:

Date	Particulars	Debit	Credit
Jan1, 2017	Lease Initiation Costs A/c_____________ Dr.	15,000
	To Bank A/c		15,000
	(Being initial costs incurred to enter into lease agreement)
Jan1, 2017	Lease Rent A/c_______________________Dr.	35,004
	To Bank A/c		35,004
	(Being lease rent for the year 2017 paid, rents are paid in advance).