Question

E21.10 (LO 2,4) (Lessee Entries with Bargain Purchase Option) The following facts pertain to a non-cancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee. May 1, 2020 Commencement date Annual lease payment due at the beginning of each year, beginning with May 1, 2020 Bargain purchase option price at end of lease term Lease term Economic life of leased equipment Lessor's cost Fair value of asset at May 1, 2020 Lessor's implicit rate Lessee's incremental borrowing rate The collectibility of the lease payments by Mooney is probable. $20,471.94 $ 4,000.00 5 years 10 years $65,000.00 $91,000.00 8% 8% Instructions (Round all numbers to the nearest cent.) a. Discuss the nature of this lease to Rode. b. Discuss the nature of this lease to Mooney. c. Prepare a lease amortization schedule for Rode for the 5-year lease term. d. Prepare the journal entries on the lessee's books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2020 and 2021. Rode's annual accounting period ends on December 31. Reversing entries are used by Rode

Answer 1

a) Nature of this lease for Rode is a financial lease and not operating lease as this is a non-cancellable lease agreement and held for long term period and not for the short term period.

b) Nature of this lease to Mooney is a financial lease which is a non-cancellable agreement between the Lessor and Lessee borne the costs of the lease and this agreement is for the long term period.

c) Prepare a lease amortization schedule for Rode for 5 years

Installment No.	Date of Payment	Opening Balance A	Total payment B	Interest C= A*8%/2	Principal Repayment D= B-C	Ending Balance E= A-D
1	1-05-2020		$20471.94	$0	$20471.94	$20471.94
2	1-01-2021	$20471.94	$20471.94	$818.87	$19653.07	$818.87
3	1-01-2022	$818.87	$20471.94	$32.75	$20439.19	-$19620.32
4	1-01-2023	-$19620	$20471.94	-$784.81	$21256.75	$40876.25
5	1-01-2024	$40876.25	$20471.94	$1635.07	$18836.87	$22039.38

d) Prepare journal entries

S.No.	Date	Particulars	J. Folio	Debit	Credit
1	1-05-2020	Equipment a/c		$91000
		To Lease liability			$91000
2	1-05-2020	Lease Expense a/c		$65000
		To cash			$65000
3	31-12-2021	Depreciation a/c		$60000
		To Depreciation expense			$60000
4.	31-12-2021	Interest Expense a/c		$818.87
		To cash			$818.87