Question

On January 1, 2017, Carla Vista Company leased equipment to Flynn Corporation. The following information pertains to this lease: 1. The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $3,000, while the expected residual value at the end of the lease is $8,000. 2 Equal rental payments are due on January 1 of each year, beginning in 2017 3. The fair value of the equipment on January 1, 2017, is $150,000, and its cost is $120,000. 4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis. 5. Carla Vista set the annual rental to ensure a 5% rate of return. Flynn's incremental borrowing rate is 6%, and the implicit rate of the lessor is unknown. 6. Collectibility of lease payments by the lessor is probable Both the lessor and the lessee's accounting periods end on December 31 Click here to view the factor table (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Discuss the nature of this lease to Carla Vista and Flynn. # lease The nature of this lease for Carla Vista is a The nature of this lease for Flynn is a Calculate the amount of the annual rental payment. (Round answer to 0 decimal places, e.g.5,275.) Annual rental payment Prepare all the necessary journal entries for Carla Vista for 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g lease. 5,275.) Date Account Titles and Explanation Debit Credit To record the lease) To record lease payment) 12/31/17

Answer 1

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Part 1
For Carla Vista		Finance Lease	Since lease term is 75% (6/8) of economic life
For Flynn		Bargain Purchase Option	Since Flynn has option to purchase it at a price below residual value
Part 2	Annual Rent Payment:
	Fair value of Lease Assets		$150,000
	Less: PV of Bargain option	$3,000*0.74622 (PV 5%, 6 periods)	$   -2,239
	PV of Lease Payment		$147,761
	Annual Lease Payments	$147,761/5.32948 (PV 5%, 6 periods)	$ 27,725
Part c	Entrys for Carla Vista-2017
Date	Account	Debit	Credit
1/1/17	Lease Receivable	$                                                150,000
	Cost of Goods Sold	$                                                120,000
	Sales Revenue		$150,000
	Inventory		$120,000
	(To record lease)
1/1/17	Cash	$                                                  27,725
	Lease Receivable		$ 27,725
	(To record lease payment)
12/31/17	Lease Receivable	$                                                    6,114
	Interest Revenue		$    6,114
	(To record interest revenue) ($150,000-$27,725)*5%
Part d
	Cash	$                                                  27,725
	Deposit Liability		$ 27,725
	(When collectibilty was not probable)
Part e	Entries for FLYNN-2017
Date	Account	Debit	Credit
1/1/17	Right of use asset	$                                                148,087
	Lease liability		$148,087
	(To record lease)
	($28,005*5.21236)+($3,000*0.70496) - PV 6%, period 6
1/1/17	Lease Liability	$                                                  27,725
	Cash		$ 27,725
	(To record lease payment)
12/31/17	Depreciation Exepense	$                                                  18,511
	Right of use asset		$ 18,511
	(To record depreication) $148,087/8 Years
12/31/17	Interest Expense	$                                                    7,222
	Lease Liabilities		$    7,222
	(to record interest expense) ($148,087-$27,725)*6%
Part f
	Right of use asset	$                                                150,087
	Cash		$    2,000
	Lease Liability		$148,087