Question

On January 1, 2017, Grouper Company leased equipment to Monty Corporation. The following information pertains to this lease.

1. The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease.

2. Equal rental payments are due on January 1 of each year, beginning in 2017.

3. The fair value of the equipment on January 1, 2017, is $184,000, and its cost is $147,200.

4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $8,000. Monty depreciates all of its equipment on a straight-line basis.

5. Grouper set the annual rental to ensure an 12% rate of return. Monty’s incremental borrowing rate is 13%, and the implicit rate of the lessor is unknown.

6. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.

(Both the lessor and the lessee’s accounting period ends on December 31.)

Prepare all the necessary journal entries for Grouper for 2017.

Answer 1

Solution Amount of annual rental payment = [fair value-Pv of unguaranted Residual vawe)/ PVA factor (12%,6) = 184000 - 8000 X 0.50663)/4160478 s 19364 Journal entries for at for 2017 Date I Account title & Explanation Debit Gredit 1117 87471 84키 19364 . Lease equipment alc Dr I 19364 X 4.5172] - To Lease Leability alc (To lease a record Lease Liability alcor To cash ale [ To record Lease payment] Expense for depreciation by To Alcurulated dep ale [ To record depreciation] 19364 | 12/31/17 14578 144578 8854 Expense for Interest alar (87471-193647X13% To Interest payable alc [To record Interest 8854

Journal entries for Grouper for 2017 Account title & Explanation Date Debit Gredet 165844 /1117 Receivable Lease alc DX 70523 89167 Cost of goods sold ale do l 147200-8000X0.50663] To sales alc (19364* 4.60478] To Inventory alc [ To record the lease] 147200 19364 Cash ale or To recelvable 1. lease alc 19364 [ To record Lease payment] 17578 12131117 Interest receivable alc Dr [165844 - 193647X12% To Interest Income alc 17598 [ To record Interest