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Chapter 21: 11Q (page 1239)
Outline the accounting procedures involved in applying the operating method by a lessor.
Under the operating method, each rental receipt of the lessor is recorded as rent revenue on the use of an item carried as a fixed asset.
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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.
(3) What items and amounts will appear on the lessee鈥檚 income statement for the year ending December 31, 2018?
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.
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.
Instructions
(a) Assuming the lessee鈥檚 accounting period ends on September 30, answer the following questions with respect to this lease agreement.
(3) What items and amounts will appear on the lessee鈥檚 income statement for the year ending September 30, 2019?
Question: The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee.
Inception date | January 1, 2017 |
Annual lease payment due at the beginning of each year, beginning with January 1, 2017 | \(124,798 |
Residual value of equipment at end of lease term, guaranteed by the lessee | \)50,000 |
Lease term | 6 years |
Economic life of leased equipment | 6 years |
Fair value of asset at January 1, 2017 | \(600,000 |
Lessor鈥檚 implicit rate | 12% |
Lessee鈥檚 incremental borrowing rate | 12% |
The lessee assumes responsibility for all executory costs, which are expected to amount to \)5,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straightline depreciation method for all equipment.
Instructions
(a) Prepare an amortization schedule that would be suitable for the lessee for the lease term.
Jennifer Brent Corporation owns equipment that cost \(80,000 and has a useful life of 8 years with no salvage value. On January 1, 2017, Jennifer Brent leases the equipment to Donna Havaci Inc. for 1 year with one rental payment of \)15,000 on January 1. Prepare Jennifer Brent Corporation鈥檚 2017 journal entries.
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