Question

The following facts pertain to a noncancelable lease agreement between Monty Leasing Company and Flounder Company, a lessee.

Inception date:		May 1, 2017
Annual lease payment due at the beginning of
each year, beginning with May 1, 2017		$19,803.59
Bargain-purchase option price at end of lease term		$3,900
Lease term		5	years
Economic life of leased equipment		10	years
Lessor’s cost		$71,000
Fair value of asset at May 1, 2017		$85,000
Lessor’s implicit rate		10	%
Lessee’s incremental borrowing rate		10	%

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.

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(a)

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• Correct Answer

Correct answer iconYour answer is correct.

Compute the amount of the lease receivable at the inception of the lease. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and Round answers to 2 decimal places, e.g. 16.25.)

Lease receivable at inception

$85000

Prepare the journal entries to reflect the signing of the lease agreement and to record the receipts and income related to this lease for the years 2017, 2018, and 2019. The lessor’s accounting period ends on December 31. Reversing entries are not used by Monty. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 16.25.)

Date	Account Titles and Explanation	Debit	Credit
5/1/17
	(To record the lease.)
	(To record lease payment. )
5/1/1712/31/175/1/1812/31/185/1/1912/31/19
5/1/1712/31/175/1/1812/31/185/1/1912/31/19
5/1/1712/31/175/1/1812/31/185/1/1912/31/19
5/1/1712/31/175/1/1812/31/185/1/1912/31/19
5/1/1712/31/175/1/1812/31/185/1/1912/31/19

All information given, including dates add in the problem.

Answer 1

(a)	Lease receivable at inception=Present value of lease payments+Present value of bargain purchase option at the end of lease term
	Present value of lease payments:
	Discount factor=10%
	Lease term=5 years
	Annual lease payment is due at the beginning of the year
	Hence,present value of first lease payment will be 1
	Then find discount factor at 10% for 4 years
	Discount factor=1+Discount factor at 10% for 4 years=1+3.16987=4.16987
	Present value of lease payment=19803.59*4.16987=82578.4
	Present value of bargain purchase option at the end of lease term=Bargain purchase price*Discount factor at 10% for 5th year=3900*0.62092=$ 2421.59
	Lease receivable at inception=82578.4+2421.59=$ 85000
(b)	Date	Account titles and explanation							Debit	Credit
	05-01-17	Lease receivable							85000
		Asset								85000
		(To record the lease)
	05-01-17	Cash							19803.59
		Lease receivable								19803.59
		(To record lease payment)
	12-31-17	Interest receivable		(85000-19803.59)*10%*8/12					4346.43
		Interest revenue								4346.43
		(To record interest accrued on lease for 8 months-May to Dec)
	05-01-18	Cash							19803.59
		Interest receivable								4346.43
		Interest revenue		(85000-19803.59)*10%*4/12						2173.21
		Lease receivable		(Balancing figure)						13283.95
		(To record lease payment)
	12-31-18	Interest receivable		(85000-19803.59-13283.95)*10%*8/12					3460.83
		Interest revenue								3460.83
		(To record interest accrued on lease for 8 months-May to Dec)
	05-01-19	Cash							19803.59
		Interest receivable								3460.83
		Interest revenue		(85000-19803.59-13283.95)*10%*4/12						1730.42
		Lease receivable		(Balancing figure)						14612.34
		(To record lease payment)
	12-31-19	Interest receivable		(85000-19803.59-13283.95-14612.34)*10%*8/12					2486.67
		Interest revenue								2486.67
		(To record interest accrued on lease for 8 months-May to Dec)