Question

Morgan Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement.

1.		The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.
2.		The cost of the asset to the lessor is $245,000. The fair value of the asset at January 1, 2017, is $245,000.
3.		The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $24,335, none of which is guaranteed.
4.		The agreement requires equal annual rental payments, beginning on January 1, 2017.
5.		Collectibility of the lease payments by Morgan is probable.

Click here to view the factor table.

Assuming the lessor desires a 8% rate of return on its investment, calculate the amount of the annual rental payment required. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and the final answer to 0 decimal places e.g. 5,275.)

Amount of the annual rental payment

$enter the Amount of the annual rental payment in dollars

Prepare an amortization schedule that is suitable for the lessor for the lease term. (Round answers to 0 decimal places e.g. 5,275.)

MORGAN LEASING COMPANY (Lessor) Lease Amortization Schedule
Date		Annual Lease Payment Plus URV		Interest on Lease Receivable		Recovery of Lease Receivable		Lease Receivable
1/1/17		$enter a dollar amount

$enter a dollar amount

$enter a dollar amount

		$enter a dollar amount
1/1/17		enter a dollar amount		enter a dollar amount

		enter a dollar amount		enter a dollar amount
1/1/18		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
1/1/19		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
1/1/20		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
1/1/21		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
1/1/22		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
12/31/22		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount

		$enter a total amount for this column		$enter a total amount for this column		$enter a total amount for this column

Prepare all of the journal entries for the lessor for 2017 and 2018 to record the lease agreement, the receipt of lease payments, and the recognition of revenue. Assume the lessor’s annual accounting period ends on December 31, and it does not use reversing entries. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
1/1/17	enter an account title To record the lease on January 1 2017	enter a debit amount	enter a credit amount
	enter an account title To record the lease on January 1 2017	enter a debit amount	enter a credit amount
	enter an account title To record the lease on January 1 2017	enter a debit amount	enter a credit amount
	enter an account title To record the lease on January 1 2017	enter a debit amount	enter a credit amount
	(To record the lease)
1/1/17	enter an account title To record the receipt of lease payment on January 1 2017	enter a debit amount	enter a credit amount
	enter an account title To record the receipt of lease payment on January 1 2017	enter a debit amount	enter a credit amount
	(To record the receipt of lease payment)
12/31/17	enter an account title for the journal entry on December 31 2017	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2017	enter a debit amount	enter a credit amount
1/1/18	enter an account title for the journal entry on January 1 2018	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1 2018	enter a debit amount	enter a credit amount
12/31/18	enter an account title for the journal entry on December 31 2017	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2017	enter a debit amount	enter a credit amount

Answer 1

Fair market value of leased equipment	$ 245,000
Present value of residual value (calculation below)	(15,335)
Amount to be recovered through lease payment	$ 229,665
PV factor of annunity due (i=8%, n=6)	4.62282
Annual payment required	$ 49,681
Residual value	$24,335
PV of single sum (i=8%, n=6)	0.63016
PV of residual value	$15,335

Relevant PV factors used are: 0.92592, 0.85733, 0.79893, 0.73502, 0.68508, 0.63016

2.                                         MORGAN LEASING COMPANY (Lessor)

                                                                Lease Amortization Schedule

Date	Annual Lease Payment Plus URV	Interest (10%) on Lease Receivable	Recovery     of Lease Receivable	Lease Receivable
1/1/17				245,000
1/1/17	49681	NIL	49681	195319
1/1/18	49681	19532	30149	165170
1/1/19	49681	16517	33164	132006
1/1/20	49681	13201	36480	95526
1/1/21	49681	9553	40128	55398
1/1/22	49681	5540	44141	11257
12/31/22	12383	1126	11257	0
	$310469	$65469	$245,000

3.                              Journal Entries in the books of Lessor

        1/1/17               Lease Receivable......................................................            245,000

                                             Equipment.......................................................                                   245,000

                                   (To record the lease)

          1/1/17               Cash ........................................................................            49,681

                                             Lease Receivable............................................                                   49,681

                                    ((To record the receipt of lease payment)

          12/31/17           Interest Receivable....................................................            19,532

                                             Interest Revenue.............................................                                   19,532

                                  

          1/1/18               Cash ........................................................................            49,681

                                             Lease Receivable............................................                                   30,149

                                             Interest Receivable..........................................                                     19,532

          12/31/18           Interest Receivable....................................................            16,517

                                             Interest Revenue.............................................                                   16,517