Question

Zen’s Manufacturing makes koto tone rings for popular kotomakers. To expand capacity, the company decided to lease a new machine used in tone ring turning and plating from SJP.

Information of the lease terms:

Lease Payment - $65,000 semi-annually at the beginning of each period

Lease Term - 5 years with semi-annual payments, beginning June 30, 2013

Residual Value - $0

Bargain Purchase Option - No

Expected Life of Machine - 5 Years

Implicit Interest Rate - 12%

Fair Value and cost of Asset - $507,110

Based on the facts of the case, complete the following:

1) How should this lease be classified by the lessee and lessor?

2) Complete the blank lease amortization schedule.

3) Prepare appropriate journal entries for both the lessee and lessor from beginning of the lease through the second lease payment on Dec. 31, 2013.

4) Now, assume the cost of the asset to the lessor was $357,110 million. Prepare appropriate journal entries for the lessor from beginning of the lease through the second lease payment on Dec. 31, 2013.

5) Lastly, (independent of all other scenarios) assume the lessee made a down payment to cover the initial lease payment at the end of 2012 to secure the lease and prior to receiving the asset, creating a temporary book-tax difference for the lessor (this is the only book-tax difference). Using a tax rate of 40%, calculate the amount of the DTA/DTL created for the lessor and prepare the appropriate journal entry to record income taxes at the end of 2012 for the lessor (PTAI of $2.2 million).

Answer 1

Answer

Answer to first 4 sub-parts only as per Chegg Policy.