Rentals Inc. leases a vehicle to United Inc. for four years on January 1, 2020, requiring equal annual payments
on each January 1. The leased asset, recently purchased new, cost the lessor $45,000. The estimated unguaran-
teed value of the asset at the end of the lease term is $5,000. The annual lease payments were computed to yield
Rentals Inc. 6%, a rate known to United Inc. The leased asset has a six-year life with zero residual value at the
end of year 6. There is no purchase option, and the asset is retained by Rentals Inc. at the end of the lease term.
The accounting period for both lessor and lessee ends December 31.
Required
a. Compute the annual lease payment.
b. What type of lease is this to the lessor and lessee? Explain.
c. Prepare amortization schedules for the lessee and for the lessor.
d. Provide all journal entries associated with this lease for the lessee for the years ended December 31, 2020,
and 2021.
e. Provide all journal entries associated with this lease for the lessor for the years ended December 31, 2020,
and 2021.
f. What balances (account titles, amounts) appear on the lessee’s balance sheet on December 31, 2020, related
to the lease?
g. What balances (account titles, amounts) appear on the lessee’s income statement for 2020, related to the lease?
h. What balances (account titles, amounts) appear on the lessor’s balance sheet on December 31, 2020, related
to the lease?
i. What balances (account titles, amounts) appear on the lessor’s income statement for 2020, related to the lease?
a)
lease payment | P.V factor @6% | P.V of Lease Payments | |
1 | 7500 | 0.943 | 7075.47 |
2 | 7500 | 0.889 | 6667.50 |
3 | 7500 | 0.839 | 6292.50 |
4 | 7500 | 0.792 | 5940.00 |
5 | 7500 | 0.747 | 5602.50 |
6 | 7500 | 0.704 | 5280.00 |
Total | 36857.97 |
b) lease term covers the whole economic life cycle of an asset so it is financial lease even though risk and rewards are not transferred and the asset is retained by the lessor.
C)
calculation of lease payments between outstanding liability and finance charges | |||||
year | outstanding balance(A) | lease rent(B) | finance charge@6% on A=C | reduction in liability(A-C)=D | closing balance A-D |
1 | 36857.97 | 7500 | 2211.48 | 5288.52 | 31569.45 |
2 | 31569.45 | 7500 | 1894.17 | 5605.83 | 25963.62 |
3 | 25963.62 | 7500 | 1557.82 | 5942.18 | 20021.43 |
4 | 20021.43 | 7500 | 1201.29 | 6298.71 | 13722.72 |
5 | 13722.72 | 7500 | 823.36 | 6676.64 | 7046.08 |
6 | 7046.08 | 7500 | 453.91 | 7046.09 | 0.00 |
D)
Lessee | |||
year | ParticulaR | Debit | Credit |
The inception of the year 2020 | Machinery | 36857.97 | |
To Rental Inc | 36857.97 | ||
Being machinery leased and recorded at p.value | |||
31st Dec 2020 | Finance Charges | 2211.48 | |
To Rental Inc | 2211.48 | ||
Being Finance charges for the first year due | |||
31st Dec 2020 | Rental Inc | ||
To Bank account | 7500 | ||
Being First installment paid |
|||
31st Dec 2020 | Depreciation | 6143.00 | |
To Machinery | 6143.00 | ||
Beng Depreciation Calculated on Straight line basis of PV = 36857.98/6 | |||
31st dec 2020 | Profit and loss account | 8354.47 | |
To Depreciation | 6143.00 | ||
To Finance Charges | 2211.48 | ||
Being expenses transfer to profit and loss account |
E) lessor
year | ParticulaR | Debit | Credit | ||
The inception of the year 2020 | United Inc | 36857.97 | |||
To Lease sales account | 36857.97 | ||||
Being a lease agreement is entered | |||||
31st Dec 2020 | Bank Account | 7500 | |||
To United Inc | 7500 | ||||
Being the first installment paid | |||||
31st Dec 2020 | United Inc | 2211.48 | |||
To interest | 2211.48 | ||||
Being Interest is due | |||||
31st Dec 2020 | Interest | 2211.48 | |||
To Profit and loss account | 2211.48 | ||||
Being expenses transferred to profit and loss account |
Rentals Inc. leases a vehicle to United Inc. for four years on January 1, 2020, requiring equal annual payments on each...
Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Skysong Company. The following information relates to this agreement. 1. The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years. 2. The fair value of the asset at January 1, 2020, is $77,000. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset...
P20.9 The following facts pertain to a non-cancellable lease agreement between Woodhouse Leasing Corporation and McKee Electronics Ltd., a lessee, for a computer system: Inception date October 1, 2020 Lease term 6 years Economic life of leased equipment 6 years Fair value of asset at October 1, 2020 $150,690 Residual value at end of lease term –0– Lessor’s implicit rate 8.5% Lessee’s incremental borrowing rate 8.5% Annual lease payment due at the beginning of each year, beginning October 1, 2020...
Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Shamrock Company. The following information relates to this agreement. 1.The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years. 2.The fair value of the asset at January 1, 2020, is $55,000. 3.The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to...
Lessor Sales Company and Lessee Manufacturing Company agreed to a noncancelable lease. The following in- formation is available to both entities regarding the lease terms and the leased asset. I. Lessor's cost of the leased asset was $30,000. The asset was new at the inception of the lease term. 2. Lease term is three years starting January 1,2020 3. Estimated useful life of the leased asset is six years. Estimated residual value at end of six years is zero. 4....
Commencement date May 1, 2020 Annual lease payment due at the beginning of each year, beginning with May 1, 2020 $17,225.30 Bargain purchase option price at end of lease term $4,000 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $55,000 Fair value of asset at May 1, 2020 $77,000 Lessor’s implicit rate 8 % ; Lessee’s incremental borrowing rate 8 % ;The collectibility of the lease payments by Metlock is probable. Prepare the journal entries...
Pharoah Leasing Company agrees to lease equipment to Novak Corporation on January 1, 2020. 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 $525,000, and the fair value of the asset on January 1, 2020, is $713,000. 3. At the end of the lease term, the asset reverts to the...
P20.14 Dubois Steel Corporation, as lessee, signed a lease agreement for equipment for five years, beginning January 31, 2020. Annual rental payments of $41,000 are to be made at the beginning of each lease year (January 31). The insurance and repairs and maintenance costs are the lessee’s obligation. The interest rate used by the lessor in setting the payment schedule is 9%; Dubois’s incremental borrowing rate is 10%. Dubois is unaware of the rate being used by the lessor. At the...
Assume that the following facts pertain to a non-cancelable lease agreement between Coco Inc. and Bubs Corp, a Lessee. Inception date January 1, 2018 Residual value of equipment at end of lease term, unguaranteed $100,000 Lease term 6 years Economic life of leased equipment 8 years Fair value of asset at January 1, 2017 $800,000 Lessor’s implicit rate 12% Lessee’s incremental borrowing rate 10% The lessee assumes responsibility for all executory costs, which are expected to amount to $4,000 per...
Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Oriole Company. The following information relates to this agreement. 1. The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years. 2. The fair value of the asset at January 1, 2020, is $70,000. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset...
(LESSEE ENTRIES FOR FINANCING LEASE). The following facts pertain to a non-cancelable lease agreement between Ace Leasing Company and King Company, a lessee. Commencement of Lease Date January 1, 2020 Annual lease payment due at the beginning of the year beginning with January 1, 2020 $137,171 Residual value of equipment at end of lease term, guaranteed by lessee $54,000 Expected residual of equipment that will need to be paid in cash at end of lease term $49,000 Lease term 6...