Question

Terms of a lease agreement and related facts were:

1. The lease asset had a retail cash selling price of $102,000. Its useful life was six years with no residual value (straight-line depreciation).
2. Annual lease payments at the beginning of each year were $21,742, beginning January 1.
3. Lessor’s implicit rate when calculating annual rental payments was 11%.
4. Costs of $2,162 for legal fees for the lease execution were the responsibility of the lessor.

Required:

Prepare the appropriate entries for the lessor to record the lease, the initial payment at its beginning, and at the December 31 fiscal year-end under each of the following three independent assumptions:

Record:

1. The lease term is three years and the lessor paid $102,000 to acquire the asset (operating lease).

a) gross lease revenue received by lessor.

b) negotiating costs incurred by lessor.

c) rent revenue for lessor.

d) negotiation cost amortization for the lessor.

e) depreciation for lessor.

2. The lease term is six years and the lessor paid $102,000 to acquire the asset. Also assume that adjusting the lease receivable (net investment) by initial direct costs reduces the effective rate of interest to 10%.

a) beginning of the lease for lessor.

b) negotiating costs incurred by lessor.

c) gross lease revenue by lessor.

d) interest revenue for lessor.

3. The lease term is six years and the lessor paid $86,000 to acquire the asset.

a) beginning of the lease for lessor.

b) negotiating costs incurred by lessor.

c) gross lease revenue by lessor.

d) interest revenue for lessor.

Answer 1

vouw - A C D 11) 2 S.no. Particulars Debit ($) Credit ($) 3 a) Cash 21742 Unearned rent revenue 21742 5 b) Deferred initial direct cost 2162 6 Cash 2162 7 Dec-31 8 c) unearned rent revenue 21742 9 Rent revenue 21742 10 Lease expense (2162/3 years) 721 11 Deferred initial direct cost 721 12 e) Depreciation expense (102000/6years) 17000 13 Accumulated depreciation 17000 14 15 2) 16 Present value 17 104162/4.79079 = 21742 18 19 S.no. Particulars Debit ($) Credit ($) Lease receivable (fair/presnet value) 102000 21 Inventory of equipment (lessor's cost) 102000 22 b) Lease receivable 2162 23 Cash (initial direct costs) 2162 24 c) Cash (lease payment) 21742 25 Lease receivable 21742 26 Dec-31 27 d) Interest receivable 8242 Interest revenue (10%*(102000+2162-21742)) 8242 AMIT WHATHI 20 a) 28

Credit ($) Debit ($) 102000 86000 102000 86000 30 3) 31 S.no. Particulars 32 a) Lease receivable (fair/present value) 33 Cost of goods sold (lessor's cost) 34 Sales revenue (fair/present value) 35 Invenotry of equipment (lessor's cost) 36 b) Selling expense 37 Cash (initial direct cost) 38 c) Cash (lease payment) 39 Lease receivable 40 Dec-31 41 d) Interest receivable Interest revenue (11%*(102000-21742) 2162 2162 21742 21742 8828 42 8828