Question

E21-10 (LO2,4) (Lessee Entries with Bargain Purchase Option) The following facts pertain to a non-cancelable lease agree- ment between Mooney Leasing Company and Rode Company, a lessee. Commencement date Annual lease payment due at the beginning of each year, beginning with May 1, 2017 Bargain purchase option price at end of lease term Lease term Economic life of leased equipment Lessor's cost May 1, 2017 $20,471.94 $ 4,000.00 5 years 10 years $65,000.00 $91,000.00 8% Fair value of asset at May 1, 2017 Lessor's implicit rate Lessee's incremental borrowing rate The collectibility of the lease payments by Mooney is probable. 8 %

please help and show steps on 21-10

Answer 1

Note :	Following calculations are made on the basis of best assumptions can be made as per the information provided in given problems. The answer might be different as answers provided by other expert on the basis of different assumptions taken by other expert.
	Relevant information	Amount in "$"
	Lease commencement date	01-May-17
	Annual lease payment at beginning of the month	20417.94
	lease term	5 years
	economic life	10 years
	Lessor's cost of lease	65000
	fair value of lease the the beginning	91000
	Lessor's implicit rate	8%
	Lessee's borrowing rate	8%
Ans-(a)	Nature of lease to Rode Company
	Present value of Annual lease payments
	=Lease payment at beginning of the year + Annuity factor for 4 years x annual lease payment)
	=20417.94 + 20417.94*3.3121
	=88044.2
	Therefore, since Present value of lease rental approximately equal to fair value of lease, it is a financial lease for Rode company.
Ans-(b)	Since, economic life of lease is 10 years and lease term is 5 years, it is a operating lease for mooney lease company
Ans-( c)	Lease amortization schedule :

Lease term	opening balance of principle-A	Lease payment-B	Interest embedded -C=A*.08	Principle embedded-D=B-C	Closing balance-E=A-D
0	88044.20	20417.94	7043.54	13374.40	74669.80
1	74669.80	20417.94	5973.58	14444.36	60225.44
2	60225.44	20417.94	4818.04	15599.90	44625.53
3	44625.53	20417.94	3570.04	16847.90	27777.64
4	27777.64	20417.94	2222.21	18195.73	9581.91
5	9581.91		766.55	-766.55	0.00
			24393.96

Ans-(d)	Journal entries (Lessee's books- Rode company)
Year	Particulars	Debit	Credit
2017
	At the signing of lease agreement
	Lease assets account	88044.20
	To Lease payable account		88044.20
	(being lease agreement signed and assets and liabilities recorded)
	At the the of making lease payment
	Lease payable account	20417.94
	To bank		20417.94
	(being annual lease payment made to mooney lease company)
	at year end - charging depreciation
	Depreciation on lease assets	17608.84
	(88044.20/5)
	To Lease assets		17608.84
	( being depreciation charged on lease assets)
	Profit and loss account	17608.84
	To Depreciation on lease assets		17608.84
	(being amount transferred to profit and loss account)
2018
	At the the of making lease payment
	Lease payable account	20417.94
	To bank		20417.94
	(being annual lease payment made to mooney lease company)
	at year end - charging depreciation
	Depreciation on lease assets	17608.84
	(88044.20/5)
	To Lease assets		17608.84
	( being depreciation charged on lease assets)
	Profit and loss account	17608.84
	To Depreciation on lease assets		17608.84
	(being amount transferred to profit and loss account)