Question

Cullumber Leasing Company agrees to lease equipment to Riverbed Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $523,000, and the fair value of the asset on January 1, 2020, is $758,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Riverbed estimates that the expected residual value at the end of the lease term will be 60,000. Riverbed amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Cullumber desires a 10% rate of return on its investments. Riverbed's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown.

Answer 1

As per the given information the lease of the equipment is as follows:
This is a Capital Lease for Riverbed. Because the lease of the equipment treated as asset in his books of accounts
This is a Operating Lease for Cullumber because the ownership of the asset not transferred and the useful
life of the assets remains after the expiry of the lease.
Calculating of the annual rental payment required:
	Amount in $
The cost of the lease equipment-	523000
Less: The PV of the residual value of	30800
	492200
Add: Rate of return @10%	466959
Total cost	959159
Annual Rent	137022.7	Total cost/No. of years lease
Total Lease payments made by the lessee	959159
PV of the lease payments	750637
Preparation of Journal entries in Riverbed books of accounts in 2020 and 2021
	2020		2021
	Debit	Credit	Debit	Credit
To record the lease
Equipment(Assets)	463000
Lease amount payable(Libilities)		463000
To record the lease Payment
Lease amount payable(Libilities)	137022.7		137022.7
Cash/Bank		137022.7		137022.7
To record amortisation
Depreciation	66142.86		66142.86
Equipment		66142.86		66142.86
Interest	496159		425279.1
Lease amount payable(Libilities)		496159		425279.1
Preparation of Journal entries in Cullumber books of accounts in 2020 and 2021
No entry to record the lease
To record lease payment
	2020		2021
	Debit	Credit	Debit	Credit
Cash/Bank	137022.7		137022.7
Lease rent amount received		137022.7		137022.7
If the residual value is $ 50000 the lease liability is
	Amount in $
The cost of the lease equipment-	523000
Less: The PV of the residual value of	25660
	497340
Add: Rate of return @10%	471835
Total cost	969175
Annual Rent	138453.6	Total cost/No. of years lease
The lease liability is	969175