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. (Assume the accounting period ends on December 31.) Click here to view factor tables. Your answer is correct. Discuss the nature of this lease for both the lessee and the lessor. This is a finance lease for Riverbed. This is a sales-type lease for Cullumber.

Answer 1

	Cullumber Leasing Company
	Lease Term	7
	Economic Life	9
	Fair Value	758000
	Guarnteed Residual Value	60000
	Cost Price	523000
	Rate of Return	10%
	Incremental Borrowing rate	11%
	P.V of $1 @10% for 7 years	0.51316
	P.V of $1 @11% for 7 years	0.48166
	P.V of annuity @10% for 7 years	5.35526
	P.V of annuity @11% for 7 years	5.23054
b)	Annual Rental=((Fair Value-Residual value* P.V of $1 10% for 7 years))/P.V of annuity 10% for 7 years=($758000-($60000*.51316)/5.35526	$       1,35,794
c)	Present Value of minimum lease payment
	P.V of annual payment=(annual lease payment* P.V of annuity 11% for 7 years)=($135794*5.23054)	$       7,10,274
	P.V of Residual payment=(Guaranteed Resuidual payment*P.V of $1 @11% for 7 years)=($60000*.48166)	$           28,900
	Total	$       7,39,174
d)	Journal Entries
Date	Particular	Amt (Dr)	Amt (Cr)
01-01-2020	Lease Equipment	$       7,39,174
	To Lease Liability		$       7,39,174
	(Being amount of lease payment)
01-01-2020	Lease liability	$       1,35,794
	To Cash		$       1,35,794
	(Being amount of lease
31-12-2020	Depreciation Expense($739174-$60000)/7	$           97,025
	To Accumulated Depreciation		$           97,025
			$                    -
31-12-2020	Interest Expense	$           66,372
	To Interest Payable($739174-$135794))*11%		$           66,372
01-01-2021	Lease liability	$           69,422
	Interest Payable	$           66,372
	To Cash		$       1,35,794
	(Being amount of lease liability)
31-12-2021	Depreciation Expense	$           97,025
	To Accumulated Depreciation		$           97,025
	(Being amount of Depreciation)
31-12-2021	Interest Expense	$           58,735
	To Interest Payable($739174-$135794-$69422)*11%		$           58,735
	In the books of Glause
Date	Particular	Amt (Dr)	Amt (Cr)
01-01-2020	Lease Receivable	$       7,58,000
	Cost of goods sold	$       5,23,000
	To Sales Revenue		$       7,58,000
	To Inventory		$       5,23,000
	(Being amount of sale of Machinery)
01-01-2020	Cash	$       1,35,794
	To Lease Receivable		$       1,35,794
	(Being amount received for lease payment)
31-12-2020	Interest Receivable	$           62,221
	To Interest Revenue($758000-$135794)*10%		$           62,221
01-01-2021	Cash	$       1,35,794
	To Lease Receivable		$           73,573
	To Interest Receivable		$           62,221
	(Being amount of Cash received for lease payment and interest)
31-12-2021	Interest Receivable	$           54,863
	To Interest Revenue($758000-$135794-$73573)*10%		$           54,863
	(Being amount of Interest Receivable)