Question

Pike Incorporated leases a piece of equipment to Rose Inc. on January 1, 2017. The non-cancelable lease agreement calls for annual rental payments of $4,892 at the beginning of each year of the 4-year lease. The equipment has an economic useful life of 6 years, a fair value of $25,000, a book value of $20,000 and both parties expect a residual value of $8,250 at the end of the lease term, though this amount is not guaranteed. Pike sets the lease payments with the intent of earnings a 5% return, and Rose is aware of this rate. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.

1. Describe the nature of the lease to both Pike and Rose.
2. Prepare the lease amortization schedule(s) for Rose for all 4 years of the lease.
3. Prepare the journal entries for Rose for 2017

Answer 1

a. Describe the nature of the lease to both Pike and Rose.

b. Prepare the lease amortization schedule(s) for Rose for all 4 years of the lease.

c. Prepare the journal entries for Rose for 2017

Refer to the below images for the above mentioned questions, in a detailed way of solution with explanation.

of the Describe pike and lease the nature Rose: to both Requerent Answer. The lease is an operating lease for both pike is Rose, as none of the Classifications tests are met. The lease term is only 6710 (446) of the economic life of the asset, there is no bargain purchase ownership does not transfer, and the asset is not spealized. The calculation for the 90% test Shows the present value of lease payments is below 961. [§ 18214 $25000 = 734.]. Annual rental payments p.v-of annuity due of a for n=4 ist = 8 4892 = x3672325 p.v. of perodic vental payments of the Dovrete f $18214 Rose + 6 : prepare for all the lease 4 years amortization schedule(s) for of the lease. Reajuisement Rose Inc. Lease Amortiaction schedule Annuity-Due Basis Interest(51.) on Reduction of Liability Leale liabuty Dake liability Annual payment Lease 11il17 $4892 164 54892 111119 & 4892 11/20 $4892 $0 $666 1455 $ 233 $ 4892 5 426 $4437 & 4659 $ 18214 13322 $ 9096 & 4659 & - o

Lease expense Schedule Date Lease Expense (Straight line) Interest(S-1) on lease liability (C) Amortigation of ROW Asset (-B Carrying Valve of ROW Asset 447 12/30/17 1101119 12130119 12/31/20 $4892 $4892 4892 $ 4892 $ 666 $455 } 200 -6- $4226 8 4437 $4609 4892 118214 (13999 $ 9551 $ 4892 prepare the journal entries for Rose for 2017: Requixement Read particolars Debit Credit Date Clelia Right of use asset Alc Dr To lease liability All $18214 $18214 09/17 Leale liability ale or To cash ale 5 48१२ $ 4892 12/31/17 $ 4892 Lease expense ale or To lease liability Alc To Right of use Asset $666* Alc 14226 Note: The accrual of the lease result of the accrual of interest Liability, as shown in the first Note that this is expensed of the right of use asset at the liability is a related to the lease schedule. along with amortization end of 2017.