Question

(b) The information below relates to a leasing arrangement between Simmonds Leasing Company and Telsan Company, a lessee.

Inception date January 1, 2020

Lease term 6 years

Annual lease payment due at the beginning of
each year, beginning with January 1, 2020 $150,000

Fair value of asset at January 1, 2020 $760,000

Economic life of leased equipment 7 years

Residual value of equipment at end of lease term,
guaranteed by the lessee $65,500

Lessor’s implicit rate 10%

Lessee’s incremental borrowing rate 12%

January 1, 2020

The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $65,500. The lessee uses the straight-line depreciation method for all equipment.

Instructions

(iii)Record the first year’s depreciation on Telsan Company’s books. (3 marks)
(iv) Record interest expense and lease liability for Telsan Company for the year ending December 31, 2020. (2 marks)
(v) Discuss the nature of this lease to Simmonds Leasing Company. (3 marks)

Answer 1

Page Noul Answeo: Il first yeass depreciation Journal entry on Tersan to reload company Lease liability for Installment l Residual Date PF factoo @ 121. Pu of MLP value January 1, 2020 $ 150.000 $ 1,50.000 January 112021 1:50.000 089286 $ 4,33,929 January 1, 2022 T Ś 150.000 0.7972 $ 1,19.580 January 11, 2023 1 & 1150 1000 0.7179 $ 106,769 January 1,2024 $ 180.000 0.63553 $ 98330 10.56774 $ 8sub 150,000 January 112025 1 & December 31,2025 $ - 65.500 0.50667 $ 3,185 Total $723.908 Deprication = 723908 . 6 years = 1,20.651 ci lase term 26 yos)

page noir Date particolar Debit Credit December 31,2020 Depriciation (723908 16) $ 1,20,651 Right af ose asset $1,20,657 lu, journal entory Date - particolar Debit credit Decembeg 3.4,2020 | tease diability $ 81,131 $ 68.869 Interest eapense lease liability payable to pavable $1,50.000 part of economic - The lase term coccers significant life of leased asset present value of fotore lase to faias llalue of the leased payments amounts asset , Due t Semmonds lease as o the aboue reasons, the ressor Leasing company should second the finance lease :

Page NO:3 Date Installment ! Residual wale PF factor @ 107 pu of Mup January 1, 2020 January 1, 2021 January 1, 2022 January 1, 2023 | January 1, 2024 | January 1, 2025 December 31,2025 | Total $ $ Ś $ $ $ $ 150.000 1,50,000 150.000 150.000 150.000 150.000 65,500 0.90909 082645 0.75132 0.68302 062083 0:56448 $1,50.000 $ 1,36,364 $1,23,968 $ 112,698 $1,021453 $ 93,140 $ 36,973 $ 7,55,595