High Time Tours leased rock-climbing equipment from Adventures Leasing on Januar
ID: 2330635 • Letter: H
Question
High Time Tours leased rock-climbing equipment from Adventures Leasing on January 1, 2018. High Time has the option to renew the lease at the end of two years for an additional three years for $8,000 per quarter. Adventures purchased the equipment at a cost of $198,375.(FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required:
1. Prepare appropriate entries for High Time Tours from the beginning of the lease through March 31, 2018. Appropriate adjusting entries are made quarterly.
2. Prepare an amortization schedule for the term of the lease.
Explanation / Answer
Requirement 1
The lease term will be five years. The lease term for both the lessee and the lessor
is the contractual lease term modified by any renewal or termination options for which there is a significant economic incentive to exercise the options. The three-year renewal option can be exercised for significantly less than the original rate, which implies a significant economic incentive to extend the original lease term to five years.
Present Value of Lease Payments:
$15,000 x 7.47199* = $112,080 8,000 x 10.78685** = $86,295 x .85349*** = 73,652
$185,732
Because the 12 quarter annuity doesn’t begin for 8 quarters, $86,295 is its PV at that future time, and we need to multiply by .85349 to find its PV now.
* Present value of an annuity due of $1: n = 8, i = 2%
**Present value of an annuity due of $1: n = 12, i = 2%
***Present value of $1: n = 8, i = 2%
[i = 2% (8% ÷ 4) because the lease calls for quarterly payments.]
January 1, 2018
Right-of-use equipment ............................................ 185,732
Lease liability (present value calculated above) .... 185,732
Lease liability ...................................................... 15,000
Cash (lease payment) .......................................... 15,000
April 1, 2018
Interest expense (2% x [$185,732 – 15,000]) .............
3,415
Lease liability (difference).....................................
11,585
Cash (lease payment) ..........................................
15,000
Amortization expense ($185,732 ÷ 20 quarters) ....... 9,287
Right-of-use equipment .................................. 9,287
Requirement 2
Amortization Schedule:
Cash Increase
Payments Effective Interest in Balance Balance
185,732
1
15,000
15,000
170,732
2
15,000
.02
(170,732)
=
3,415
11,585
159,147
3
15,000
.02
(159,147)
=
3,183
11,817
147,330
4
15,000
.02
(147,330)
=
2,947
12,053
135,276
5
15,000
.02
(135,276)
=
2,706
12,294
122,982
6
15,000
.02
(122,982)
=
2,460
12,540
110,441
7
15,000
.02
(110,441)
=
2,209
12,791
97,650
8
15,000
.02
(97,650)
=
1,953
13,047
84,603
9
8,000
.02
(84,603)
=
1,692
6,308
78,295
10
8,000
.02
(78,295)
=
1,566
6,434
71,861
11
8,000
.02
(71,861)
=
1,437
6,563
65,298
12
8,000
.02
(65,298)
=
1,306
6,694
58,604
13
8,000
.02
(58,604)
=
1,172
6,828
51,776
14
8,000
.02
(51,776)
=
1,036
6,964
44,812
15
8,000
.02
(44,812)
=
896
7,104
37,708
16
8,000
.02
(37,708)
=
754
7,246
30,462
17
8,000
.02
(30,462)
=
609
7,391
23,072
18
8,000
.02
(23,072)
=
461
7,539
15,533
19
8,000
.02
(15,533)
=
311
7,689
7,844
20
8,000
.02
(7,844)
=
157
7,844
0
April 1, 2018
Interest expense (2% x [$185,732 – 15,000]) .............
3,415
Lease liability (difference).....................................
11,585
Cash (lease payment) ..........................................
15,000
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