Question

On January 1, 2020, Tamarisk Co. leased a building to Carla Vista Inc. The relevant information related to the lease is as follows. 1. 2. 3. The lease arrangement is for 10 years. The building is expected to have a residual value at the end of the lease of $2,700,000 (unguaranteed). The leased building has a cost of $3,200,000 and was purchased for cash on January 1, 2020. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value. Lease payments are $260,000 per year and are made at the beginning of the year. Carla Vista has an incremental borrowing rate of 8%, and the rate implicit in the lease is unknown to Carla Vista. Both the lessor and the lessee are on a calendar-year basis. 4. 5. 6. Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Answer 1

XI H. 2020-09(3) SEP.xlsx - Microsoft Excel ? X FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW DEVELOPER Sign in > * Cut Calibri - 11 A A Be Wrap Text General AY A LE Copy H Insert Delete Format Paste BI U - E Merge & Center - 4.0 .00 00 0 $ % Format Painter Σ AutoSum - Z Fill- Sort & Find & Clear Filter - Select Editing Conditional Format as Cell Formatting Table Styles Styles Clipboard Font Г Alignment Number Cells A C1 : X fic A B с D E F H 1 1 J J K L M N o Р 1 2 3 4 5 Present value of lease payments (7.24689*260000) Dividend by Value of equipment Percentage for Present value criteria $ 1,884,191 $ 3,200,000 59% 6 7 8 Year PV factor @ 89 Remarks 0 1.00000 1 0.92593 = 1/1.08 2 0.85734 = 0.92593 / 1.08 3 0.79383 = 0.85734 / 1.08 4 0.73503 = 0.79383 / 1.08 5 0.68058 = 0.73503 / 1.08 6 0.63017 = 0.68058 / 1.08 7 0.58349 = 0.63017 / 1.08 8 0.54027 = 0.58349 / 1.08 9 0.50025 = 0.54027 / 1.08 10 0.46319 = 0.50025 / 1.08 Total (0 to 9) 7.24689 9 10 11 12 13 14 15 16 17 No 18 19 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? Specialized nature criteria is leased asset have special nature and which is no alternative use to the lessor? BPO criteria is it reasonably certain to exercise of bargain purchase option? Lease term criteria is the lease period is equal to or more than 75% of the economic life of the leased asset? (10/50 = 20%) Present value criteria is the present value of payments equal to or more than 90% of the fair value of the leased asset? (59% is less than 90%) Type of Lease 20 21 No No No No Operating Lease Activate Windows Go to Settings to activate Windows. 22 23 Sheet1 Sheet2 + READY 0 + 100% i Search the web and Windows O ENG US 01:38 24-09-20

Part A

Under the operating lease, Lessor should not record journal entry for lease receivable.

Under the operating lease, Lessor should record journal entry for depreciation of asset.

Date	Accounts titles and explanation		Debit	Credit
Jan 1, 2020	Buildings		3,200,000
	Cash			3,200,000
	(To record cost of buildings)
Jan 1, 2020	Cash		260,000
	Deferred Lease revenue			260,000
	(To record lease receipt in advance)
Dec 31, 2020	Deferred Lease revenue		260,000
	Lease revenue			260,000
	(To record lease revenue)
Dec 31, 2020	Depreciation expense		64,000
	Accumulated depreciation-Building			64,000
	To record depreciation expense (3200000/50)

Part B

Date	Accounts titles and explanation		Debit	Credit
Jan 1, 2020	Right of use Asset		1,884,191
	Lease liability			1,884,191
	(To record the lease) (7.24689*260000)
Jan 1, 2020	Lease liability		260,000
	Cash			260,000
	(To record lease payment.)
Dec 31, 2020	Lease expenses		260,000
	Lease liability ((1884191-260000)*8%)			129,935
	Right of use Asset (260000-129935)			130,065
	(To record lease payment and lease expense.)

Part C

Present value of lease payments (7.24689*260000)				$   1,884,191
Add: direct cost for lessee				$         25,000
Initial right of use Asset				$   1,909,191