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Chapter 21: 10E_a (page 1243)

Morgan Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement.

  1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.
  2. The cost of the asset to the lessor is \(245,000. The fair value of the asset at January 1, 2017, is \)245,000.
  3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $43,622, none of which is guaranteed.
  4. Cole Company assumes direct responsibility for all executory costs.
  5. The agreement requires equal annual rental payments, beginning on January 1, 2017.
  6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.

Instructions

(Round all numbers to the nearest cent.)

(a) Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the annual rental payment required. (Round to the nearest dollar.)

Short Answer

Expert verified

Six periodic lease payments are $46,000.00.

Step by step solution

01

Meaning of Lease

The lease process requires the lessor to transfer his asset to the lessee,as well as the right to use the asset for an agreed contract period, for which the lessor changes some amount to the lessee as the payment for the lease.

02

Calculating amount of the annual rental payment required

The fair value of the leased asset to the lessor

$245,000.00

Less: Present value of unguaranteed

residual value $43,622 X .56447

(Present value of 1 at 10% for 6 periods)

24,623.31

Amount to be recovered through lease payments

$220,376.69

Six periodic lease payments

$46,000.00

Working Notes:

Computation of Six periodic lease payments

Sixperiodicleasepayments=AmountrecoveredthroughleasepaymentPresentvalueofannuity=$220,376.694.79079=$46,000.00

Note: Present value of an annuity due of 1 for 6 periods at 10%.

Rounded to the nearest dollar.

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Most popular questions from this chapter

Question: Lessee Entries; Capital Lease with Unguaranteed Residual Value) On January 1, 2017, Burke Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Burke to make annual payments of \(8,668 at the beginning of each year, starting January 1, 2017. The machine has an estimated useful life of 6 years and a \)5,000 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Burke uses the straight-line method of depreciation for all of its plant assets. Burke鈥檚 incremental borrowing rate is 10%, and the lessor鈥檚 implicit rate is unknown.

Instructions

(c) Prepare all necessary journal entries for Burke for this lease through January 1, 2018.

(Amortization Schedule and Journal Entries for Lessee) Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Plote Company. The following information relates to this agreement.

  1. The term of the noncancelable lease is 5 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, 2017, is \(80,000.
  3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of \)7,000, none of which is guaranteed.
  4. Plote Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) \(900 to Rocky Mountain Insurance Company for insurance and (2) \)1,600 to Laclede County for property taxes.
  5. The agreement requires equal annual rental payments of $18,142.95 to the lessor, beginning on January 1, 2017.
  6. The lessee鈥檚 incremental borrowing rate is 12%. The lessor鈥檚 implicit rate is 10% and is known to the lessee.
  7. Plote Company uses the straight-line depreciation method for all equipment.
  8. Plote uses reversing entries when appropriate.

Instructions

(Round all numbers to the nearest cent.)

(b) Prepare all of the journal entries for the lessee for 2017 and 2018 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee鈥檚 annual accounting period ends on December 31.

Assume that on January 1, 2017, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement. 1. The agreement requires equal rental payments of \(72,000 beginning on January 1, 2017. 2. The fair value of the building on January 1, 2017, is \)440,000. 3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of \(10,000. Kimberly-Clark depreciates similar buildings on the straight-line method. 4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. 5. Kimberly-Clark鈥檚 incremental borrowing rate is 12% per year. The lessor鈥檚 implicit rate is not known by Kimberly-Clark. 6. The yearly rental payment includes \)2,471 of executory costs related to taxes on the property.

Instructions

Prepare the journal entries on the lessee鈥檚 books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Kimberly-Clark鈥檚 corporate year-end is December 31.

(Type of Lease; Amortization Schedule) Mike Macinski Leasing Company leases a new machine that has a cost and fair value of $95,000 to Sharrer Corporation on a 3-year noncancelable contract. Sharrer Corporation agrees to assume all risks of normal ownership including such costs as insurance, taxes, and maintenance. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2017. Mike Macinski Leasing Company expects to earn a 9% return on its investment. The annual rentals are payable on each December 31.

Instructions

(b) Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved.

(Accounting for an Operating Lease) On January 1, 2017, Doug Nelson Co. leased a building to Patrick Wise Inc. The relevant information related to the lease is as follows.

  1. The lease arrangement is for 10 years.
  2. The leased building cost \(4,500,000 and was purchased for cash on January 1, 2017.
  3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value.
  4. Lease payments are \)275,000 per year and are made at the end of the year.
  5. Property tax expense of \(85,000 and insurance expense of \)10,000 on the building were incurred by Nelson in the first year. Payment on these two items was made at the end of the year.
  6. 6. Both the lessor and the lessee are on a calendar-year basis.

Instructions

  1. Prepare the journal entries that Nelson Co. should make in 2017.
See all solutions

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