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Chapter 21: 4BE (page 1240)

Use the information for Rick Kleckner Corporation from BE21-3. Assume that at December 31, 2017, Kleckner made an adjusting entry to accrue interest expense of \(29,530 on the lease. Prepare Kleckner鈥檚 January 1, 2018, journal entry to record the second lease payment of \)53,920.

Rick Kleckner Corporation recorded a capital lease at \(300,000 on January 1, 2017. The interest rate is 12%. Kleckner Corporation made the first lease payment of \)53,920 on January 1, 2017. The lease requires eight annual payments. The equipment has a useful life of 8 years with no salvage value. Prepare Kleckner Corporation鈥檚 December 31, 2017, adjusting entries.

Short Answer

Expert verified

Interest payable is $29,530.

Step by step solution

01

Meaning of Lease Liability

Lease liability of any individual suggests the commitment of such individual, as a tenant, to pay lease or other instalment amounts under a rent of real or individual property, which is accounted for as a rent liability on such person's solidified balance sheet in understanding with GAAP.

02

Preparing Journal Entries

Date

Particular

Debit ($)

Credit ($)

Interest Payable

29,530

Lease Liability

24,390

Cash

53,920

Working Notes:

Interestpayable=Capitallease-Leasepayments脳Interestrate=$300,000-$53,920脳12%=$29,530

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Most popular questions from this chapter

What disclosures should be made by lessees and lessors related to future lease payments?

Brecker Company leases an automobile with a fair value of \(10,906 from Emporia Motors, Inc., on the following terms:

  1. Non-cancelable term of 50 months.
  2. Rental of \)250 per month (at end of each month). (The present value at 1% per month is \(9,800.)
  3. Estimated residual value after 50 months is \)1,180. (The present value at 1% per month is \(715.) Brecker Company guarantees the residual value of \)1,180.
  4. Estimated economic life of the automobile is 60 months.
  5. Brecker Company鈥檚 incremental borrowing rate is 12% a year (1% a month). It is impracticable to determine Emporia鈥檚 implicit rate.

Instructions

(b) What is the present value of the minimum lease payments?

Lessee-Lessor Entries, Sales-Type Lease) Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2017. The following information relates to the lease agreement.

  1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
  2. The cost of the machinery is \(525,000, and the fair value of the asset on January 1, 2017, is \)700,000.
  3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $100,000. Jensen depreciates all of its equipment on a straight-line basis.
  4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017.
  5. The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. 6. Glaus desires a 10% rate of return on its investments. Jensen鈥檚 incremental borrowing rate is 11%, and the lessor鈥檚 implicit rate is unknown.

Instructions

(Assume the accounting period ends on December 31.)

  1. Discuss the nature of this lease for both the lessee and the lessor.

Waterworld Company leased equipment from Costner Company. The lease term is 4 years and requires equal rental payments of \(43,019 at the beginning of each year. The equipment has a fair value at the inception of the lease of \)150,000, an estimated useful life of 4 years, and no salvage value. Waterworld pays all executory costs directly to third parties. The appropriate interest rate is 10%. Prepare Waterworld鈥檚 January 1, 2017, journal entries at the inception of the lease.

Question: (Balance Sheet and Income Statement Disclosure鈥擫essor) Assume the same information as in P21-4.

(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

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

4. What items and amounts will appear on the lessor鈥檚 balance sheet at December 31, 2018?
See all solutions

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