Question

The following facts pertain to a non-cancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee. Lease term Commencement date January 1, 2017 Annual lease payment due at the beginning of each year, beginning with January 1, 2017 $113,864 Residual value of equipment at end of lease term, guaranteed by the lessee $50,000 Expected residual value of equipment at end of lease term $45,000 6 years Economic life of leased equipment 6 years Fair value of asset at January 1, 2017 $600,000 Lessor's implicit rate 8% Lessee's incremental borrowing rate 8% The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line amortization for all leased equipment Instructions (a) Prepare an amortization schedule that would be suitable for the lessee for the lease term. (b) Prepare all of the journal entries for the lessee for 2017 and 2018 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee's annual accounting period ends on December 31. (c) Suppose Vance received a lease incentive of $5,000 from Faldo Leasing to enter the lease. How would the initial mea surement of the lease liability and right-of-use asset be affected? What if Vance prepaid rent of $5,000 to Faldo?

NEED ASAP ON A B C

Answer 1

Solutions:

113864 6 Lease Liability PV of Lease Payments Lease Payment No of periods Interest rate per period PV annuity due Factor @8% for 6 years PV of Lease Payments (113864* PV factor for annuity due) PV of Residual Value of $5000 PV factor @ 8% for 6 years = .630170) PV of Minimum Lease Payments 8.00% 4.99271 568490 3,151 571641

Date Lease Amortisation Schedule Interest Reduction Expense (B) = in Liability Lease (D) *Interest (C) = (A) - Liability (D) Lease Payment (A) Rate (B) = (D)-(C) 01-01-2017 571641 01-01-2017 113864.00 113864 457777 01-01-2018 113864.00 36622 77242 380535 01-01-2019 113864.00 30443 83421 297114 01-01-2020 113864.00 23769 90095 207019 01-01-2021 113864.00 16562 97302 109716 01-01-2022 113864.00 8777 105087 4630 31-12-2022 5000.00 370 4630 0

Journal Entries - In Lessee Books 571641 01-01-2017 Right to use Asset Lease Liability (To record Liability) 571641 113864 Lease Liability Cash (To record lease payments) 113864 36622 31-Dec-17 Interest Expense Lease Liability (To record accrued interest) 36622 94440 Amortization Expense Right-to-Use Asset (To record Amortization Expense (571641-5000/6) 94440 36622 01-01-2018 Interest Payable Interest Expense (Reversing the entry) 36622 36622 77242 01-01-2018 Interest Expense Lease Liability Cash To record lease payment 113864 30443 Dec 31, 2018 Interest Expense Interest Payable (To record accrued interest) 30443 94440 Amortization Expense Right-to-Use Asset (To record Amortization Expense (571641-5000/6) 94440

Suppose Vance received a lease incentive of $5,000 from Faldo Leasing to enter the lease. Only Right to Use asset is reduced by S5000 = $571641-55000= $566641 Lease Liability = Remains the same = $571641 If Vance prepaid rent of $5,000 to Faldo? Right to Use Asset is increased by S5000 = $571641+$5000 = $576641 Lease Liability Lease Liability = Remains the same = $512691

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