Question

The agreement requires equal rental payments of $52,407 beginning on December 31 2008 with a residual value of $60,000 guaranteed by the lessee at the lease end. The payments provide Piper Corp. with a 6% implicit interest rate which is also known to Runyan, Runyan's incremental borrowing rate is 10% per year 1. The fair value of ten trailers is $300,000. The cost of ten trailers to Piper Corp. is S260,000. Each trailer has an expected useful life of nine years with zero salvage value. Use the straight-line method for depreciation. 2. Collectibility of the lease payments is reasonably predictable and there are no important uncertainties surrounding the amount of costs yet to be incurred by Piper Corp. 3. Required: Based on this information answer the following questions in the spaces provided. Please show all computations and round amounts to the ncarest dollar (4 points) What kind of lease is it for Runyan Co.? Why? 1. 2. (3 points) Prepare the journal entry R lease on January 1, 2008. 3. (6 points) Prepare all entries Runyan Co. would make with respect to the lease obligation and leased asset on December 31, 2008. 4. (4 points) What kind of lease is it for Piper Co.? Why?

Answer 1

39 a) What kind is it for Runyan 40 41 It is a capital lease for Runyan because the title passes to the lessee 42 43 b) Prepare the journal entry Runyan would make with respect to lease on January 1,2008 General Journal Debit 45 Credit 46 47 1-Jan Leased equipment 300,000 48 Lease payable To record inception of lease) 300,000 49 50 51 c) Prepare all entries Runyan Co.would make with respect to the lease obligation and leased asset on December 31,2008 52 53 Lease Payments (A) Effective interest @ 6% ( B ) Decrease in Balance ( A-B) Lease Balance 54 Payment Date 300000 56 12/31/2008 52407 265593 57 12/31/2009 229121 52407 15936 36471 58 12/31/2010 52407 13747 190461 59 12/31/2011 60 12/31/2012 52407 11428 40979 149482 8969 52407 43438 106044 61 12/31/2013 112407 6363 106044 0 62

18,000 34,407 31-Dec Interest expense Lease Payable Cash 64 65 52,407 (To record Lease payment) 67 68 31-Dec Depreciation expense 69 Accumulated Depreciation 70 50000 71 72 d) What kind oflease is it for Piper Co.? 73 For Piper Co. it is a sales type lease because the profit arises upon sale 74 75 76