Question

Blossom Leasing Company agrees to lease equipment to Blue Corporation on January 1, 2017. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $569,000, and the fair value of the asset on January 1, 2017, is $682,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $101,000. Blue estimates that the expected residual value at the end of the lease term will be 101,000. Blue amortizes all of its leased equipment on a straight-line basis 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017 5. The collectibility of the lease payments is probable. 6. Blossom desires a 9% rate of return on its investments. Blue's incremental borrowing rate is 10% and the lessor's implicit rate is unknown (Assume the accounting period ends on December 31.) Click here to view factor tables XYour answer is incorrect. Try again. Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to O decimal places e.g.58,972.) Annual rental payment 245286 SHOW LIST OF ACCOUNTS Your answer is incorrect. Try again. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to compute the value of the lease liability to the lessee. Your answer is incorrect. Try again. ompute the value of the lease liability to the lessee. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to o decimal places e.g. 58,972) resent value of minimum lease payments 1355694 SHOW LIST OF ACCOUNTS Your answer is partially correct. Try again. Prepare the journal entries Blue would make in 2017 and 2018 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to decimal places e.g. 58,972.) Debit Credit DateAccount Titles and Explanation 1/1/17 Right-of-Use Asset Lease Liability To record the lease.) Lease Liability Cash To record lease payment.) 12/31/17 ·| |Amortization Expense Right-of-Use Asset (To record amortization.) Interest Expense Interest Revenue (To record interest.) 1/1/18 ▼| Lease Liability (To record interest.) 1/1/18 ▼111 Lease Liability Cash 12/31/18 ▼11 Amortization Expense Right-of-Use Asset To record amortization.) Interest Expense Lease Revenue (To record interest.) Prepare the journal entries Blossom would make in 2017 and 2018 related to the lease arrangement. (Credit acc amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account ti to 0 decimal places e.g. 58,972.) Debit DateAccount Titles and Explanation Credit Lease Receivable 682000 Cost of Goods Sold 569000 Sales Revenue 682000 569000 Inventory (To record the lease.) Cash Lease Receivable (To record lease payment.) 312/31/17 ▼E|Interest Expense Interest Revenue 1/1/18 ▼| Cash Lease Receivable 12/31/18 ▼||||Interest Expense Interest Revenue SHOW LIST OF ACCOUNTS Your answer is incorrect. Try again. Suppose Blue expects the residual value at the end of the lease term to be $91,000 but still guarantees a residual of $101, lease commencement. Lease liability Click if you would like to Show Work for this question: Open Show Work SHOW LIST OF ACCOUNTS Table 6.1 FUTURE VALUE OF 1 (FUTURE VALUE OF A SINGLE SUM) n,1 5% 6% (n) Periods 2% 24% 3% 4% 1.02000 1.02500 1.03000 1.04000 1.05000 .06000 2 1.04040 1.05063 1.06090 1.08160 1.10250 1.12360 .0612 1.07689 1.09273 .12486 15763 1.19102 1.08243 .1038 .1255 1.16986 1.21551 .26248 1.10408 1.13141 1.15927 121665 .27628 133823 6 1.12616 1.15969 1.19405 1.26532 34010 1.41852 7 1.14869 1.18869 1.22987 1.31593 140710 50363 1.17166 1.21840 .26677 1.36857 1.47746 .59385 9 1.19509 1.24886 1.30477 1.4233 55133 .68948 1.21899 1.28008 1.34392 1.48024 .62889 1.79085 1.24337 1.31209 1.38423 1.53945 1.71034 1.89830 4 10 8% 1.08000 1.09000 .10000 1.11000 1.12000 .15000 1.16640 1.18810 .21000 .23210 1.25440 1.32250 2 125971 1.29503 1.33100 1.36763 1.40493 1.52088 3 1.36049 1.41158 1.46410 1.51807 .57352 1.7490 4 1.46933 1.53862 .6105 .68506 1.76234 2.01136 5 1.58687 1.67710 77156 .8704 1.97382 2.31306 6 1.71382 1.82804 .94872 2.07616 2.21068 2.66002 7 1.85093 1.99256 2.14359 2.30454 2.47596 3.05902 8 99900 2.17189 2.35795 2.55803 2.77308 3.51788 9 2.15892 2.36736 2.59374 2.83942 3.10585 4.04556 10 2.33164 2.58043 2.85312 3.15176 3.47855 4.65239 11 2.51817 2.81267 3.13843 3.49845 3.89598 5.35025 12 9% 10% 11% 12% 15% (n) Periods Table 6.2 PRESENT VALUE OF 1 (PRESENT VALUE OF A SINGLE SUM) (n) Periods 2% 98039 .97561 .97087 .96154 .95238 96117 .95181 .94260 .92456 .90703 94232 .92860 .91514 .88900 .86384 92385 .90595 .88849 .85480 .82270 90573 .88385 .86261 .82193 .78353 88797 .86230 .83748 .79031 .74622 87056 .84127 .81309 .75992 .71068 85349 .82075 .78941 .73069 .67684 83676 .80073 .76642 .70259 .64461 82035 .78120 .74409 .67556 .61391 24% 3% 4% 5% 6% 94340 89000 83962 79209 74726 70496 66506 62741 59190 55839 4 10 9% 10% 11% 12% 15% (n) Periods 92593 .91743 .90909 .90090 .89286 .869571 85734 .84168 82645 .81162 .79719 .75614 2 79383 .77218 .75132 .73119 .71178 .65752 3 73503 .70843 .68301 .65873 .63552 .5717:5 .68058 64993 .62092 .59345 .56743 .497185 .63017 .59627 .56447 .53464 .50663 43233 6 58349 .54703 .51316 .48166 45235 .375947 54027 .50187 .46651 43393 40388 .326908 .50025 .46043 42410 .39092 .36061 .284269 46319 .42241 38554 .35218 .32197 .2471910 42888 38753 .35049 .31728 .28748 .2149411 39711 35554 .31863 .28584 .25668 .18691 12 4 Table 6.3 FUTURE VALUE OF AN ORDINARY ANNUITY OF 5% (n) Periods 2% 1.00000 1.00000 1.00000 .00000 .00000 1.00000 2.02000 2.02500 2.03000 2.04000 2.05000 2.06000 .06040 3.07563 3.09090 3.12160 3.15250 3.18360 4.12161 4.15252 4.18363 4.24646 4.31013 4.37462 5.20404 5.25633 5.30914 5.41632 5.525635.63709 6.30812 6.38774 6.46841 6.63298 6.80191 6.97532 7.43428 7.54743 7.66246 7.89829 8.14201 8.39384 8.58297 8.73612 8.89234 9.21423 9.5491 9.89747 9.75463 9.95452 10.15911 10.58280 11.02656 11.49132 2 % 3% 6% 4 10 10.94972 11.20338 11.46338 12.00611 2.57789 13.18079 8% 10% 11% 9% 12% 15% (n) Periods 1.00000 .00000 1.00000 1.00000 1.00000 1.00000 2.08000 2.09000 2.10000 2.11000 2.12000 2.15000 3.24640 3.27810 3.31000 3.34210 3.37440 3.47250 4.50611 4.57313 4.64100 4.70973 4.779334.99338 5.86660 5.98471 6.10510 6.22780 6.35285 6.74238 7.33592 7.52334 7.71561 7.91286 8.115198.75374 8.92280 9.20044 9.48717 9.7832710.08901 11.06680 10.63663 11.02847 11.43589 11.85943 12.29969 13.72682 12.48756 13.02104 13.57948 14.16397 14.77566 16.78584 14.48656 15.19293 15.93743 16.72201 17.54874 20.30372 16.64549 17.56029 18.53117 19.56143 20.65458 24.34928 18.97713 20.14072 21.38428 22.71319 24.13313 29.00167 4 10 12 Table 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1 (n) Periods 2% 24% 3% 4% 5% 6% 98039.9756197087.96154 .9523894340 1.94156 1.92742 1.91347 1.88609 .8594 1.83339 3 2.88388 2.85602 2.82861 2.77509 2.72325 2.67301 4 3.80773 3.76197 3.71710 3.62990 3.54595 3.46511 5 4.71346 4.645834.57971 4.45182 4.32948 4.21236 6 5.60143 5.50813 5.41719 5.24214 5.07569 4.9173 7 6.47199 6.34939 6.23028 6.00205 5.78637 5.58238 8 7.32548 7.17014 7.01969 6.73274 6.46321 6.20979 9 8.16224 7.97087 7.78611 7.43533 7.10782 6.80169 10 8.98259 8.75206 8.53020 8.11090 7.72173 7.36009 8% 9% 10% 11% 12% 15% (n) Periods 92593.91743 .90909 90090 89286 .86957 1.78326 1.75911 1.73554 1.71252 1.69005 .62571 2.57710 2.53130 2.48685 2.44371 2.40183 2.28323 3.31213 3.23972 3.16986 3.10245 3.03735 2.85498 3.992713.88965 3.79079 3.69590 3.60478 3.35216 4.622884.48592 4.35526 4.23054 4.11141 3.78448 5.20637 5.03295 4.86842 4.71220 4.56376 4.16042 5.74664 5.53482 5.33493 5.14612 4.96764 4.48732 6.24689 5.99525 5.75902 5.53705 5.32825 4.77158 6.71008 6.41766 6.14457 5.88923 5.65022 5.01877 7.13896 6.80519 6.49506 6.20652 5.93770 5.23371 7.53608 7.16073 6.81369 6.49236 6.19437 5.42062 4 10 12 Table 6.5 PRESENT VALUE OF AN ANNUITY DUE OF 1 PVF-AD14 (n) Periods 2% 24% 3% 4% 5% 6% 1.00000 1.00000 .00000 .00000 1.00000 .00000 1.98039 1.97561 .97087 1.96154 1.95238 .94340 3 2.94156 2.92742 2.91347 2.88609 2.85941 2.83339 4 3.88388 3.85602 3.82861 3.77509 3.72325 3.67301 5 4.80773 4.76197 4.71710 4.62990 4.545954.4651 6 5.71346 5.64583 5.57971 5.45182 5.32948 5.21236 7 6.60143 6.50813 6.41719 6.24214 6.07569 5.91732 8 7.47199 7.34939 7.23028 7.00205 6.78637 6.58238 9 8.32548 8.17014 8.01969 7.73274 7.46321 7.20979 10 9.16224 8.97087 8.78611 8.435338.10782 7.80169 8% 1.00000 1.00000 1.00000 1.00000 1.00000 1.000001 .92593 1.91743 1.90909 1.90090 1.89286 1.86957 2 2.78326 2.75911 2.73554 2.71252 2.69005 2.62571 3 3.57710 3.53130 3.48685 3.443713.40183 3.28323 4 4.31213 4.23972 4.16986 4.10245 4.03735 3.85498 5 4.992714.88965 4.79079 4.69590 4.60478 4.35216 5.62288 5.48592 5.35526 5.23054 5.11141 4.78448 7 6.20637 6.03295 5.86842 5.71220 5.56376 5.16042 8 6.74664 6.53482 6.33493 6.14612 5.96764 5.48732 9 7.24689 6.99525 6.75902 6.53705 6.32825 5.77158 10 7.71008 7.41766 7.14457 6.88923 6.65022 6.01877 11 8.13896 7.80519 7.49506 7.20652 6.93770 6.23371 12 9% 10% 11% 12% 15% (n) Periods

Answer 1

1 Date of Lease 2 Fair Value of Asset 3 Lease Term 4 Implicit Rate 5 Residual Value 6 Lease Payment 1/1/2017 682,000.00 90 S 101,000.00 Beginning of the Year 8 Annual Lease Payment $124,318.29 9 Amortization Expense 10 $83,000.00 Amortization Table Interest Annual Lease Pavments Reduction in Lease Date Lease Liability Liability 9% 12 13 682,000.00 $ 114,246.96 S 567,753.04 $63,149.19 504,603.85 $68,832.62 S 435,771.23 $75,027.55 360,743.68 $81,780.03 278,963.64 $89,140.24 S 189,823.41 $97,162.86 92,660.55 1/1/2017 1/1/2017 1/1/2018 1/1/2019 1/1/2020 1/1/2021 1/1/2022 1/1/2023 114,246.96 $ $ 114,246.96 $51,097.77 S 114,246.96 $45,414.35 $ 114,246.96 $39,219.41 S 114,246.96 $32,466.93 S 114,246.96 $25,106.73 114,246.96 $17,084.11 16 17 18 19 $ 799,728.74 $210,389.30$589,339.45 21

Journal Entries in the books of Lessee 2 Date 3 1/1/2017|Right-of-use Asset Account Title Debit Credit 682,000.00 Lease Liability S 682,000.00 To record the Lease 6 1/12017 Lease Liability S 114,246.96 Cash S 114,246.96 To record the Lease Payment 9 1231/2017 Amortizati 10 ortization Expense S 83,000.00 Right-of-use Asset S 83,000.00 To record the Amortization Expense S 51,097.77 12/31/2017Interest Expense 12 13 14 15 1/1/2018 Lease Liability 16 17 18 12/31/2018Amortization Expense 19 20 21 1231/2018 Interest Expense Interest Payable 51,097.77 To record the Interest S 114,246.96 Cash S 114,246.96 To record the Lease Payment S 83,000.00 Right-of-use Asset S 83,000.00 To record the Amortization se S 45,414.35 Interest Payable S 45,414.35 23 24 To record the Interest

Journal Entries in the books of Lessor Account Title Date of Lease Fair Value of Asset $ Lease Term Implicit Rate Residual Value Lease Payment 1/1/2017 682,000.00 Debit (S) $ 682,000.00 $ 569,000.00 Credit (S) 2 Date 3 1/1/2017 Lease Receivable 4 Cost of Goods sold $ 682,000.00 S 569,000.00 Sales Revenue 91,000.00 of the Year Inventory (To record the Lease) 8 1/12017Cash $ 114,246.96 $115,244.12 Annual Lease Payment Lease Receivable $ 114,246.96 (To record the Lease payment) 10 11 12/31/2017 Interest Receiable 51,097.77 $ 51,097.77 Interest Revenue 12 (To record the Interest Revenue) 14 1/1/2018 Cash 15 16 17 12/31/2018 Interest Receiable 18 19 20 $ 114,246.96 Lease Receivable $ 114,246.96 (To record the Lease payment) 45,414.35 $45414.35 Interest Revenue (To record the Interest Revenue)

1 Date of Lease 2 Fair Value of Asset 3 Lease Term 4 Implicit Rate 5 Residual Value 6 Lease Payment 42736 682000 0.09 101000 Beginning of the Year 8 Annual Lease Payment PMT(SBS4,SB$3,-SBS21) 9 Amortization Expense SLN SB$2,SBS5,SBS3) 10 Amortization Table Annual Lease Payments Interest @ 9% Reduction in Lease LiabilityLease Liability Date 12 13 42736 14 42736 15 43101 16 43466 17 43831 18 44197 19 44562 20 44927 21 B2 IPMT SBS4,1,SBS3,-SBS2,SBS5,1) PPMT SB$4,1,SBS3,-SBS2,SBS5,1) E13-D14 IPMT SBS4,2,SBS3,-SB$2,SBS5,1) PPMT SBS4,2,SBS3,-SBS2,SBS5,1) E14-D15 IPMT(SBS4,3,SB$3,-SB$2,SBS5,1) PPMT (SBS4,3,SB$3,-SBS2,SBS5,1) E15-D16 IPMT (SBS4,4,SBS3,-SB$2,SBS5,1) PPMT (SB$4,4,SB$3,-SBS2,SBS5,1) E16-D17 IPMT(SB$4,5,SB$3.-SB$2,SBS5,1) PPMT(SBS4,5,SB$3,-SB$2,SBS5,1) E17-D18 IPMT SBS4,6,SBS3,-B$2,SBS5,1) PPMT(SB$4,6,SBS3,-SBS2,SBS5,1) E18-D19 IPMT SBS4,7,SBS3,-SB$2,SBS5,1) PPMT SB$4,7,SBS3,-SBS2,SBS5,1) E19-D20 SUNİ(C13:C20) -C14+D14 C15+D15 -C16+D16 -C17+D17 -C18+D18 -C19+D19 -C20+D20 SUM(B13 B20) SUMD13 D20)

42736 682000 1 Date of Lease 2 Fair Value of Asset 3 Lease Term 4 Implicit Rate 0.09 91000 Beginning of the Year Residual Value 6 Lease Payment 8 Annual Lease Payment -PMT (STS4,ST$3,-ST$2,T5,1) 9