Question

(LESSEE ENTRIES FOR FINANCING LEASE).

The following facts pertain to a non-cancelable lease agreement between Ace Leasing Company and King Company, a lessee.

Commencement of Lease Date January 1, 2020

Annual lease payment due at the beginning of the year beginning with January 1, 2020 $137,171

Residual value of equipment at end of lease term, guaranteed by lessee $54,000

Expected residual of equipment that will need to be paid in cash at end of lease term $49,000

Lease term 6 years

Economic life of leased equipment 7 years

Fair Value of asset at January 1, 2020 $659,000

Lessor’s Implicit Rate 12%

Lessee’s incremental borrowing rate 12%

The asset will revert to the lessor at the end of the lease term.

Questions:

A. Is this an operating or financing lease to the Lessee? Explain.

B. Compute the Lease Liability to be recorded by the Lessee at inception of the lease and compute the ROU Asset to be recorded by the Lessee at inception. Based on those complete the two Lessee entries 1/1/2020.

C. Prepare an interest amortization table for the first two periods and prepare the related two entries at year-ends 2020 and 2021.

D. Compute the ROU Asset Amortization for the first two periods and prepare the related two entries at year-ends 2020 and 2021.

Answer 1

segt dat ol-01-21 1137171 Interest revenue amortization schedule :- Date Beginning Lease Interest revenue: Reduction in Ending balance of balance of receipt (beginning balance of lease receivable lease receivables I lease lease receivable X121 (lease receipt - (beginning balance of receivable interest revenue) lease receivable. - reduction in lease Veceivable 101-01-20 659000 137171 137171 521829 1659000 - 137171) - 521829 521829 62619 (137171-62619 (521829-74552) - 74552 = 447277 101-01-22 44 7277 53673 (1-57171-53673) (447277-83498) 1=83498 = 363779 = 363779 Tol-01-23 363780 137171 4654 1137171-43654) 16363780-93517) 1 - 93517 = 270263 270262 32431 (137171-32431) 270262-104740 = 104740 = 165523 Jol-01-25 165523 19863 137171-19863 1165523-117308 =11708 = 48215 31-12-25 48215 54000 (5 4000-5788) 48215-48214 - 48214 137171 10-01-241 137171 137171 5786

Ending balance of lease receivable at end of lease term must be zero Interest of 62619 is recorded as interest receivable on December 31, 2020. Lessor :- Journal entries: Date Account title sexplanation Debid credit 01-01-20 Lease receivable 659000 cost of goods sold Equipment 500000 65 9000 Sales gevenue 01-01-20 cash 137171 Lease receivable 13717 (to yecord first lease payment) 500000 31-12-20 Interest receivable 162619 Interest revenue 62619 |(To record accrued Interest on lease receipt