Question

On December 31, 2021, Newton LeaseCorp. leased equipment to Worcester Construction for a four-year period ending December 31, 2025, at which time possession of the leased asset will revert back to Newton LeaseCorp. The equipment cost Newton LeaseCorp. $347,516 and has an expected useful life of six years. Its normal sales price is $347,516. The lessee-guaranteed residual value at December 31, 2025, is $17,000. Equal payments under the lease are $95,000 and are due on December 31 of each year. The first payment was made on December 31, 2021. Worcester Construction’s incremental borrowing rate is 10%. Worcester Construction knows the interest rate implicit in the lease payments is 9%. Both companies use straight-line depreciation.

Required:

1. Show how Newton LeaseCorp.calculated the $95,000 annual lease payments.
2. How should this lease be classified (a) by Worcester Construction (the lessee) and (b) by Newton LeaseCorp. (the lessor)?
3. Prepare the appropriate entries for both Worcester Construction and Newton LeaseCorp. on December 31, 2021.
4. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor.
5. Prepare all appropriate entries for both Worcester Construction and Newton LeaseCorp. on December 31, 2022 (the second lease payment and amortization).
6. Prepare the appropriate entries for both Worcester Construction and Newton LeaseCorp. on December 31, 2025 assuming the equipment is returned to Newton LeaseCorp. and the actual residual value on that date is $2,000.

Answer 1

XI 5 2020-09(3) SEP.xlsx - Microsoft Excel ? X FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW DEVELOPER Sign in K38 B D F G H J K L M 25 26 27 с E Lessee is known implicit rate of lessor. Discount rate is implicit rate. Answer: 1 Normal sales price $ 347,516 Less: Present value of unguaranteed value (17000*0.7 12,043 Amount recover through annual lease payments $ 335,473 Divided : PV annuity factor @% for periods 3.53129 Annual lease payments $ 95,000 28 n 29 30 31 32 33 34 35 36 Answer: 2 Worcester Construction (the lessee) Newton LeaseCorp. (the lessor) Finance Lease Sales type lease without profit 37 38 39 40 Present value calculation Worcester Construction (the lessee) Amount 41 Multiply: PV factor 3.53129 42 95,000 Present value 335,473 12,043 $ 347,516 $ 347,516 Annual lease payments excluding main $ Guaranteed expected residual value $ Present value for lessee 43 17,000 0.70843 44 100% 45 46 47 48 49 If you meet any criteria of below, then considered as a finance lease, otherwise considered as an operating lease. Ownership criteria is ownership transferred to the lessee at the end of lease period? No Specialized nature criteria is leased asset have special nature and which is no alternative use to the lessor? No BPO criteria is it reasonably certain to exercise of bargain purchase option? No Lease term criteria is the lease period is equal to or more than 75% of the economic life of the leased asset? (4/6) No Activate Windows Present value criteria is the present value of payments equal to or more than 90% of the fair value of the leased asset? (347516/347516 = 100%) Sheet27 Sheet28 Sheet29 Sheet30 Sheet31 Sheet32 Sheet33 Sheet34 Sheet35 so to Settings to activate Windows. I 50 51 Yes READY 3 + 100% i Search the web and Windows O 5 ENG IN 09:51 25-09-20

XIA 5 2020-09(3) SEP.xlsx - Microsoft Excel ? X FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW DEVELOPER Sign in H72 X f B D G K L M 48 No 49 с Specialized nature criteria BPO criteria Lease term criteria Present value criteria No E F H J is leased asset have special nature and which is no alternative use to the lessor? is it reasonably certain to exercise of bargain purchase option? is the lease period is equal to or more than 75% of the economic life of the leased asset? (4/6) is the present value of payments equal to or more than 90% of the fair value of the leased asset? (347516/347516 = 100%) Type of Lease 50 51 52 No Yes Finance Lease 53 54 55 56 Newton LeaseCorp. (the lessor) Normal sales price Less: Equipment cost Selling profit $ 347,516 $ 347,516 $ 57 58 59 60 61 Fair value is more than lessor's original cost. This lease is considered for sales type lease without profit. Sales type lease without profit 62 63 Answer: 4 64 Lease Amortization Schedule (Lessee) Reduction of Interest on Lease Lease 65 Date Annual Lease Payment Liability Liability Liability 66 Dec 31, 2021 $ 335,473 67 Dec 31, 2021 $ 95,000 $ 0 $ 95,000 $ 240,473 68 Dec 31, 2022 $ 95,000 $ 21,643 $ 73,357 $ 167,116 69 Dec 31, 2023 $ 95,000 $ 15,040 $ 79,960 $ 87,156 70 Dec 31, 2024 $ 95,000 $ 7,844 $ 87,156 $ (0) 71 72 73 Lease Amortization Schedule (Lessor) 1 ... Sheet27 Sheet28 Sheet29 Sheet30 Sheet31 Sheet32 Sheet33 READY Activate Windows Go to Settings to activate Windows. Sheet34 Sheet35 + 100% i Search the web and Windows O AF ENG IN 09:51 25-09-20

XIA 5 2020-09(3) SEP.xlsx - Microsoft Excel ? X FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW DEVELOPER Sign in H97 х Cash D E F G H J K L M B с 73 Lease Amortization Schedule (Lessor) 74 Date Annual Lease Payment 75 Dec 31, 2021 76 Dec 31, 2021 $ 77 Dec 31, 2022 $ 78 Dec 31, 2023 $ 79 Dec 31, 2024 $ 80 Dec 31, 2025 $ 81 Interest on Recovery of Balance of Lease Lease Lease Receivable Receivable Receivable $ 347,516 95,000 $ 0 $ 95,000 $ 252,516 95,000 $ 22,726 $ 72,274 $ 180,242 95,000 $ 16,222 $ 78,778 $ 101,464 95,000 $ 9,132 $ 85,868 $ 15,596 17,000 $ 1,404 5 15,596 $ ( (0) 82 Credit Answer: 3 Newton LeaseCorp. (the lessor) Date Accounts titles and explanation Debit Dec 31, 2021 Lease receivable $ 347,516 Equipment (To record lease agreement for sales type lease.) $ 347,516 $ 95,000 83 Answer: 3 84 Worcester Construction (the lessee) 85 Date Accounts titles and explanation Debit Credit 86 Dec 31, 2021 Right of use Asset $ 335,473 87 Lease liability $ 335,473 88 (To record the lease) 89 90 Dec 31, 2021 Lease liability $ 95,000 91 Cash $ 95,000 92 (To record lease payment.) 93 94 Answer: 5 95 Worcester Construction (the lessee) 96 Date Accounts titles and explanation Debit Credit 97 Dec 31, 2022 Amortization Expense $ 83,868 98 Right of use Asset $ 83.868 · Sheet27 Sheet28 Sheet29 Sheet30 Sheet31 Sheet32 READY Dec 31, 2021 Cash Lease receivable (To record lease receipt.) $ 95,000 Credit Answer: 5 Newton LeaseCorp. (the lessor) Date Accounts titles and explanation Debit Dec 31, 2022 Cash $ 95,000 Lease receivable Sheet34 Sheet35 + : Activate Windows $ 72.274 Go to Settings to activate Windows. Sheet33 I + 100% i Search the web and Windows O AF ENG IN 09:51 25-09-20

XIA 5 2020-09(3) SEP.xlsx - Microsoft Excel ? X FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW DEVELOPER Sign in H119 : F G H J K L M Credit Answer: 5 Newton LeaseCorp. (the lessor) Date Accounts titles and explanation Debit Dec 31, 2022 Cash $ 95,000 Lease receivable Interest revenue (To record lease receipt.) $ 72,274 $ 22,726 102/ B с D E 93 94 Answer: 5 95 Worcester Construction (the lessee) 96 Date Accounts titles and explanation Debit Credit 97 Dec 31, 2022 Amortization Expense $ 83,868 98 Right of use Asset $ 83,868 99 (To record amortization expense.) (335473/4) 100 101 Dec 31, 2022 Interest expense $ 21,643 Lease liability $ 73,357 103 Cash $ 95,000 104 (To record lease payment.) 105 106 Answer: 6 107 Worcester Construction (the lessee) 108 Date Accounts titles and explanation Debit Credit 109 Dec 31, 2025 Amortization Expense $ 83,868 110 Right of use Asset $ 83,868 111 (To record amortization expense.) 112 113 Dec 31, 2025 Loss on residual value guarantee $ 15,000 114 Cash $ 15,000 115 n To record payment for excess of guaranteed residual value. 116 Guaranteed expected residual value 17,000 118 Less: Actual residual value 2,000 119 Loss on residual value 15,000 1201 Sheet27 Sheet28 Sheet29 Sheet30 Sheet32 Credit Answer: 6 Newton LeaseCorp. (the lessor) Date Accounts titles and explanation Debit Dec 31, 2025 Equipment $ 2,000 Cash 15,000 Lease receivable Interest revenue (To record Guaranteed expected residual value) $ 1,404 $ 15,596 117 Activate Windows Go to Settings to activate Windows. Sheet31 Sheet33 Sheet34 Sheet35 READY + 100% i Search the web and Windows O AF ENG IN 09:51 25-09-20