Question

Oriole Company leases a building to Walsh, Inc. on January 1, 2017. The following facts pertain to the lease agreement. 1. The lease term is 5 years, with equal annual rental payments of $3,937 at the beginning of each year. 2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. 3. The building has a fair value of $19,500, a book value to Oriole of $12,500, and a useful life of 6 years. 4. At the end of the lease term, Oriole and Walsh expect there to be an unguaranteed residual value of $3,125. 5. Oriole wants to earn a return of 7% on the lease, and collectibility of the payments is probable. This rate is known by Walsh. Click here to view the factor table.

(b) Using the original facts of the lease, show the journal entries to be made by both Oriole and Walsh in 2017. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

(b)

Using the original facts of the lease, show the journal entries to be made by both Oriole and Walsh in 2017. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Oriole Journal Entries

Date	Account Titles and Explanation	Debit	Credit
1/1/17
	(To record the lease)
	(To record lease payment)
12/31/17

Walsh’s Journal Entries

Date	Account Titles and Explanation	Debit	Credit
1/1/17
	(To record the lease)
	(To record lease liability)
12/31/17
	(To record interest expense)
	(To record amortization of the right-of-use asset)

Answer 1

Answer is given below

Determining if Lease is Operating Lease or Finance Lease Lease term is 5 years Economic life of asset is 6 years So it is 83.33% of total life of asset. Since it is more than 75% Lease is Capital/Finance Lease Calculation of present value of lease payments PV of Lease PV factor Lease Year at 7% payments $17,272 Amount $3,937 Total 4.38721 $19,500 Fair value at the inception of the lease Assets is recorded at lower of Fair value or PV of Lease payments PV of Lease payments $17,272 Annual Reduction Interest Lease Date of Lease at 7% Liability Liability Payment $17,272 $13,335 $3,937 $3,004 $3,214 $3,937 $3,937 $3,937 01.01.2017 $10,332 $7,118 $933 01.01.2018 $723 $498 $258 01.01.2019 $3,937 $3,439 $3,679 01.01.2020 $3,937 $3,679 $0 01.01.2021

Oriole Journal Entries Account Titles and Explanation Debit Credit Date 01.01.2017 Lease Receivable $17,272 To Building |(Being Lease receivable recorded) $17,272 $3,937 01.01.2017 Cash Account To Finance Income $3,937 (Being receipt of lease amount) Walsh's Entries Account Titles and Explanation Debit Credit Date $17,272 01.01.2017 Right -to-use Asset To Lease Liability (Being lease recorded) $17,272 01.01.2017 Lease Liability $3,937 $3,937 To Cash (Being lease liability paid) 31.12.2017 Interest Expense $933 To Interest payable $933 (Being Interest payable recorded) 31.12.2017 Depreciation $3,454 $3,454 To Right-to-use Asset (Being amortisation of the Right-to-use Asset)