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Chapter 21: 10IFRS_c (page 1264)

The following facts pertain to a non-cancelable lease agreement between Lennox Leasing Company and Gill Company, a lessee.

Inception date: May 1, 2017

Annual lease payment due at the beginning of each year, beginning with May 1, 2017: \(18,829.49

Bargain-purchase option price at end of lease term: \)4,000.00

Lease term: 5 years

Economic life of leased equipment: 10 years

Lessor鈥檚 cost: \(65,000.00; fair value of asset at May 1, 2017, \)81,000.00

Lessor鈥檚 implicit rate: 10%; lessee鈥檚 incremental borrowing rate 10%

The lessee assumes responsibility for all executory costs.

Instructions

(Round all numbers to the nearest cent.)

(c) Prepare a lease amortization schedule for Gill Company for the 5-year lease term.

Short Answer

Expert verified

Answer

The lease liability is $81,000.00.

Step by step solution

01

Meaning of Lease Asset Amortization

The amortization of a leased asset is determined by the asset's historical cost, expected economic life, residual value, and the amortization method chosen. Most finance leases are amortized using consistent payments over the lease period and are customized to meet the lessee's specific needs.

02

Computation of lease liability

Annual rental payment

$18,829.49

PV of an annuity-due of 1 for n = 5,i = 10%

4.16986

PV of periodic rental payments

$78,516.34

Bargain-purchase option

$4,000.00

PV of 1 for n = 5,i = 10%

0.62092

PV of bargain-purchase option

$2,483.68

PV of periodic rental payments

$78,516.34

PV of bargain-purchase option

+ 2,483.68

Lease liability

$81,000.00

Note: The value of the lease liability is rounded off

03

Preparing lease amortization schedule for Gill Company for the 5-year lease term

GILL COMPANY (Lessee)
Lease Amortization Schedule
DateAnnual Lease Payment Plus BPOInterest (10%) in LiabilityReduction of Lease LiabilityLease Liability
5/1/17


$81,000.00
5/1/1718,829.49$0$18,829.4962,170.51
5/1/1818,829.496,217.0512,612.4949,558.07
5/1/1918,829.494,955.8113,873.6835,684.39
5/1/2018,829.493,568.4415,261.0520,423.34
5/1/2118,829.492,042.3316,787.163,636.18
4/30/224,000363.823636.180

$98,147.45$17,147.45$81,000.00

Note: There is a rounding error in interest (10%) in liability on 4/30/22

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Most popular questions from this chapter

Question: (Balance Sheet and Income Statement Disclosure鈥擫essee) The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system.

Inception date

October 1, 2017

Lease term

6 years

Economic life of leased equipment

6 years

Fair value of asset at October 1, 2017

\(300,383

Residual value at end of lease term

鈥�0鈥�

Lessor鈥檚 implicit rate

10%

Lessee鈥檚 incremental borrowing rate

10%

Annual lease payment due at the beginning of each year, beginning with October 1, 2017

\)62,700

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs, which amount to \(5,500 per year and are to be paid each October 1, beginning October 1, 2017. (This \)5,500 is not included in the rental payment of \(62,700.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment.

The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-financing lease by the lessor.

Date

Annual lease payments/Receipt

Interest (10%)

On Unpaid liability/Receivable

Reduction of Lease Liability?

Receivable

Balance of Lease Liability/Receivable

10/01/17

\)300,383

10/01/17

\(62,700

\)62,700

237,683

10/01/18

\(62,700

\)23,768

38,932

198,751

10/01/19

\(62,700

19,875

42,825

155,926

10/01/20

\)62,700

15,593

47,107

108,819

10/01/21

\(62,700

10,882

51,818

57,001

10/01/22

\)62,700

5,699*

57,001

0

\(376,200

\)75,817

\(300,383

*Rounding error is \)1.

(b) Assuming the lessee鈥檚 accounting period ends on December 31, answer the following questions with respect to this lease agreement.

(2) What items and amounts will appear on the lessee鈥檚 balance sheet at December 31, 2017?

(Lessee Accounting and Reporting) On January 1, 2017, Evans Company entered into a noncancelable lease for a machine to be used in its manufacturing operations. The lease transfers ownership of the machine to Evans by the end of the lease term. The term of the lease is 8 years. The minimum lease payment made by Evans on January 1, 2017, was one of eight equal annual payments. At the inception of the lease, the criteria established for classification as a capital lease by the lessee were met.

Instructions

(c) What expenses related to this lease will Evans incur during the first year of the lease, and how will they be determined?

(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.

Question: (Lessee Entries and Balance Sheet Presentation, Capital Lease) On January 1, 2017, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of \(137,899 (including the executory costs of \)6,000) at the beginning of each year, starting January 1, 2017. The taxes, the insurance, and the maintenance, estimated at \(6,000 a year, are the obligations of the lessee. The leased equipment is to be capitalized at \)550,000. The asset is to be depreciated on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cage鈥檚 incremental borrowing rate is 12%, and the implicit rate in the lease is 10%, which is known by Cage. Title to the equipment transfers to Cage when the lease expires. The asset has an estimated useful life of 5 years and no residual value.

Instructions

(e) Prepare the journal entry to record the lease payment of January 1, 2018, assuming reversing entries are not made.

Metheny Corporation鈥檚 lease arrangements qualify as sales-type leases at the time of entering into the transactions. How should the corporation recognize revenues and costs in these situations?
See all solutions

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