Question

BACK NEXT Exercise 21A-13 b Ivanhoe Company leases a building to Walsh, Inc. on January 1, 2017. The following facts pertain to the lease agreement. 1. The lease term is 4 years, with equal annual rental payments of $4,196 at the beginning of each year. 2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. 3. The building has a fair value of $16,500, a book value to Ivanhoe of $9,500, and a useful life of 5 years. 4. At the end of the lease term, Ivanhoe and Walsh expect there to be an unguaranteed residual value of $2,375. 5. Ivanhoe wants to earn a return of 9% on the lease, and collectibility of the payments is probable. This rate is known by Walsh. Click here to view the factor table. (b) Using the original facts of the lease, show the journal entries to be made by both Ivanhoe and Walsh in 2017. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Ivanhoe Journal Entries Date Account Titles and Explanation Debit Credit 1/1/17 (To record the lease) (To record lease payment) 12/31/17

Answer 1

Answer:

Annual Rent payments	4196
PVAF (4 periods, 9%)	3.5313
Present value of Rental Payments	14817
Expected Residual value (Unguarantee)	2375
PVF (4 periods, 9%)	0.70843
Present value of Residual value	1683
Lease Receivable	16500

Journal Entries:

Ivanhoe

Date	Particulars	Debit ($)	Credit ($)
jan 1 2017	Lease Receivable	16500
	Cost of goods sold	7817
	Sales revenue		14817
	Invenotry (Book value)		9500
	(To record lease)
Jan 1 2017	Cash	4196
	Lease receivable		4196
	(To record first payment received)
Dec 31 2017	Lease receivable	1107
	Interest revenue		1107
	(To record first year interest)
	(16500-4196)*9%

Walsh's

Date	Particulars	Debit ($)	Credit ($)
Jan 1 2017	Right to use assets	14817
	Lease liability		14817
	(To record lease)
Jan 1 2017	Lease liability	4196
	Cash		4196
	(To record first payment)
Dec 31 2017	Interest expense	956
	Lease liability		956
	(To record interest expense)
	(14817-4196)*9%
Dec 31 2017	Depreciation expense	3704
	Right to use asset		3704
	(To record depreciation )
	(14817/4 year)