Question

*Exercise 21A-12 a-f On January 1, 2017, Cullumber Company leased equipment to Flynn Corporation. The following information pertains to this lease: The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $2,000, while the expected residual value at the end of the lease is $6,000. 2. Equal rental payments are due on January 1 of each year, beginning in 2017. 3. The fair value of the equipment on January 1, 2017, is $170,000, and its cost is $140,000. 4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis. 5. Cullumber set the annual rental to ensure a 5% rate of return. Flynn's incremental borrowing rate is 6%, and the implicit rate of the lessor is unknown. 6. Collectibility of lease payments by the lessor is probable. Both the lessor and the lessee's accounting periods end on December 31. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Your answer is incorrect. Try again. Discuss the nature of this lease to Cullumber and Flynn. The nature of this lease for Cullumber is a finance lease The nature of this lease for Flynn is a is a sales-type lease. Your answer is incorrect. Try again. Calculate the amount of the annual rental payment. (Round answer to o decimal places, e.g. 5,275.) Annual rental payment Your answer is partially correct. Try again. Suppose the collectibility of the lease payments was not probable for Cullumber. Prepare the necessary journal entry for the company in 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit 1/1/17 Lease Receivable 31,057.9 Unearned Lease Revenue (31,057.9 Your answer is partially correct. Try again. Prepare all the necessary journal entries for Flynn for 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to o decimal places, e.g. 5,275.) Debit Credit Date Account Titles and Explanation 1/1/17 Leased Equipment (161885 0 (161885. Lease Liability (To record the lease) Lease Liability cash (31,057.9 (To record the receipt of lease payment) 12/31/17 Depreciation Expense 26981 5 126981 Accumulated Depreciation-Capital L (To record amortization of the right-of-use asset) Interest Expense 130827: 0 Interest Payable 130827. (To record interest expense) Your answer is partially correct. Try again. repare the effect on the journal entry for Flynn at lease commencement, assuming initial direct costs of $2,000 are incurred by Flynn for legal fees to execute the ase. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit Right-of-Use Asset 130827.: Lease Receivable Cash 128827 2000 0

Answer 1

The nature of lease is a finance lease. It satisfies the condition that lease term is for a period of 75% of economic life of asset. It is lease term devided by the economic life of asset (6/8=0.75) Calculate the amount of annual lease rental payments Particulars Amount Fair value $ 170,000.00 Present value of residual value $ 4,477.20 =6000*0.7462 Annual lease payments to be recovered $ 165,522.80 Factor for present value of annuity 5.33 Annual lease rent $ 31,058.43 DR $ 170,000.00 $ 135,523.00 =140000-4477 Particulars 01-Jan Lease receivable Cost of goods sold Sales Inventory To record finance lease $ 165,523.00 $ 140,000.00 $ 31,058.00 Cash Lease receivable To record the lease rental receivable $ 31,058.00 $ 6,947.00 =(170000-31058)*5% 31-Dec Interest receivable Interest revenue To record interest expense $ 6,947.00 DR $ 170,000.00 $ 135,523.00 Particulars Lease receivable Cost of goods sold Sales Inventory To record finance lease $ 165,523.00 $ 140,000.00 $ 31,058.00 Lease receivable Unearned lease rental income To record the unearned lease rental $ 31,058.00