Question

The following facts pertain to a non-cancelable lease agreement between Ford and NextCar, a lessee.

                Lease Origination Date                                                                                                                   May 1, 2017

                Annual lease payments due at the beginning of each lease year                                   $20.471.94

                Bargain purchase option price at the end of lease term                                                   $4,000

                Lease term                                                                                                                                          5 years

                Economic life of leased equipment                                                                                          10 years

                Lessor’s cost                                                                                                                                       $65,000

                Fair value of asset on May 1, 2017                                                                                             $91,000

                Fair value of asset on May 1, 2022                                                                                             $15,000

                Lessor implicit rate                                                                                                                          8%

                Lessee’s incremental borrowing rate                                                                                       8%

Prepare the journal entries on the lessee’s book to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. NextCar has an April 30^th year end.

Answer 1

	Books of Lessee
	Year 2017
a)	On date of Lease aggreement
	Asset on Lease A/c-Dr	$ 91,000.00
	To Lessor A/c		$ 91,000.00
	(Being Asset Taken on Lease)
b)	On date of Payment of lease Rentals
(i)	Lease Rental A/c- Dr	$ 20,471.94
	To bank		$ 20,471.94
	(Being lease Rental Paid)
(ii)	Lessor A/c -Dr	$ 20,471.94
	To Lease Rental A/c		$ 20,471.94
	(Being Lease Rental apportioned)
c)	On B/s Date
(i)	Depreciation A/c-Dr	$ 17,400.00
	To Assets a/c		$ 17,400.00
	( Being Depreciaiton charged)
(ii)	P& L A/c-Dr	$ 17,400.00
	To Depreciation A/c		$ 17,400.00
	(Being Expense Written off)
	Year 2018
a)	On date of Payment of lease Rentals
(i)	Lease Rental A/c- Dr	$ 20,471.94
	To bank		$ 20,471.94
	(Being lease Rental Paid)
(ii)	Lessor A/c -Dr	$ 14,829.70
	Finance Charge A/c -Dr	$   5,642.24
	To Lease Rental A/c		$ 20,471.94
	(Being Lease Rental apportioned)
c)	On B/s Date
(i)	Depreciation A/c-Dr	$ 17,400.00
	To Assets a/c		$ 17,400.00
	( Being Depreciaiton charged)
(ii)	P& L A/c-Dr	$ 17,400.00
	To Finance Charge	$   5,642.24
	To Depreciation A/c		$ 23,042.24
	(Being Expense Written off)

Period	Present value @ 8%	Lease payment
1	1	$      20,471.94	$   20,471.94
2	0.925925926	$      20,471.94	$   18,955.50
3	0.85733882	$      20,471.94	$   17,551.39
4	0.793832241	$      20,471.94	$   16,251.29
5	0.735029853	$      20,471.94	$   15,047.49
5	0.735029853	$      15,000.00	$   11,025.45
a)    PV of Minimum Lease Payment			$ 99,303.05
b)   Fair value on May 1, 2017			$ 91,000.00
	Whichever is lower		$ 91,000.00

	Amortization Chart
Yrs	OS Balance	Lease Rental	Interest	Reduction in Balance	Closing Balance
1	$ 91,000.00	$ 20,471.94		$                  20,471.94	$       70,528.06
2	$ 70,528.06	$ 20,471.94	5642.2	$                  14,829.70	$       55,698.36
3	$ 55,698.36	$ 20,471.94	4455.9	$                  16,016.07	$       39,682.29
4	$ 39,682.29	$ 20,471.94	3174.6	$                  17,297.36	$       22,384.94
5	$ 22,384.94	$ 20,471.94	2087	$                  18,384.93	$          4,000.00