Question

Problem 21A-6 b-f 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 Your 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.) 245286 Annual rental payment SHOW LIST OF ACCOUNTS Your answer is incorrect. Try again. Compute 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.) Present value of minimum lease payments 1355694 SHOW LIST OF ACCOUNTS Prepare the journal entries Blue would make in 201/ and 2018 related to the lease arrangement. (Credit account titles a is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 f decimal places e.g. 58,972.) Date Account Titles and Explanation Debit Credit ▼11 Right-of-Use Asset 1/1/17 Lease Liability To record the lease.) Lease Liability Cash (To record lease payment.) 12/31/17Amortization Expense Right-of-Use Asset (To record amortization.) Interest Expense Interest Revenue (To record interest.) To record interest.) 1/1/18 ▼111 Lease Liability Cash 12/31/18-1 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 account titles are amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and ente to 0 decimal places e.g. 58,972.) Date Account Titles and Explanation Debit Credit 682000 Lease Receivable 569000 Cost of Goods Sold 682000 Sales Revenue Inventory To record the lease.) Cash 569000 Lease Receivable (To record lease payment.) :12/31/17 ▼E Interest Expense Interest Revenue 1/1/18 ▼11 Cash Lease Receivable Lease Receivable 12/31/18Interest 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 $101,000. Compute the value of the lease liability at lease commencement. Lease liability Click if you would like to Show Work for this question: O 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 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

Annual lease payments		113341
PV of Minimum lease payments		606971

	Particulars	Debit	Credit
1	Right to use asset	606971
	Lease liability		606971
2	Lease liability	113341
	Cash		113341
3	Amortisation expenses	86710
	Right to use asset		86710
4	Interest expenses	49363
	Lease liability		49363
5	Lease liability	113341
	Cash		113341
6	Amortisation expenses	86710
	Right to use asset		86710
7	Interest expenses	42965
	Lease liability		42965

	Particulars	Debit	Credit
1	Lease receivable	682000
	Cost of goods sold	569000
	Sales revenue		682000
	Inventory		569000
2	Cash	113341
	Lease receivable		113341
3	Lease receivable	51179
	Interest revenue		51179
4	Cash	113341
	Lease receivable		113341
5	Lease receivable	45585
	Interest revenue		45585

Lease liability if Residual value changes to 91000= 618260