Company A enters into a lease agreement as lessor on january 1, 2016. the term o

Question

Company A enters into a lease agreement as lessor on january 1, 2016. the term of the noncancelable lease is 10 years and payment are required at the end of each year. the following information relates to this agreement:

1. Lessee has the option to purchase the asset for $12000 when the lease expires at which time the fair value is expected to be $30000

2. The asset has a cost of $100,000, an estimated useful life of 15 years, and a salvage value of zero at the end of that time

3. Company A wants to have a ROI of 10%

Instruction:

a) What will the payment be for each period?

b) What is this lease to leasor

c) Prepare a lease amortization schedule for the lessor for the first two years. (Round all amounts to nearest dollar.)

d) Prepare the journal entries on the books of the lessor to record the lease agreement, to reflect payments recieved under the lease, and to recognize income, for the years 2016 and 2017.

e) Prepare journal entries and amortization schedule for lessee, assume the incremental borrowing rate for lessee is 8% and lessee is aware of the rate used by lessor.

Explanation / Answer

a) Calculation of Lease rentals:

Fair value of the asset = Lease Rental*PVAF(10%,10 years)- Salvage value at the end of lease term*PVF(10%,10th Year)

100000=(X*6.1446)- (30000*.3855)

X= 18156.59

Hence lease rental is equal to 18156.59.

b) The Lease is a Financial Lease to the Leasor since the lease provides an option to the lessee to purchase the asset at the end of the lease period.

c)

d) Journal entries in books of lessor:

2016 begining of the year.

1) Lessee Account Dr. 100000

To Asset A/c 100000

2016 end of year.

2) Bank account Dr. 18157

to Lessee account 8157

To Income from Interest account 10000

2017 end of the year.

Bank account Dr. 18157

to Lessee account 8193

To Income from Interest account 9184

Period Cash Expense Liability reduction Liability Balance 0 100000 1 18157 10000 8157 91843 2 18157 9184 8973 82870

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.