Monty Leasing Company agrees to lease machinery to Flounder Corporation on Janua
ID: 2405716 • Letter: M
Question
Monty Leasing Company agrees to lease machinery to Flounder 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 $489,000, and the fair value of the asset on January 1, 2017, is $699,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $94,000. Flounder 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. Monty desires a 9% rate of return on its investments. Flounder’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown. (Assume the accounting period ends on December 31.) Click here to view factor tables Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.) Annual rental payment $ SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.) Present value of minimum lease payments $ SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Prepare the journal entries Flounder would make in 2017 and 2018 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,971.) Date Account Titles and Explanation Debit Credit (To record the lease.) (To record lease payment.) (To record depreciation.) (To record interest.) 1/1/18 (To record depreciation.) (To record interest.) SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Prepare the journal entries Monty would make in 2017 and 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,971.) Date Account Titles and Explanation Debit Credit 1/1/17 (To record the lease.) (To record lease payment.)
Explanation / Answer
Part A
amount of the annual rental payment = (699000 - (94000*0.54703)) / 5.03295 = 128,668
Present value of $1 at 9% for 7 periods = 0.54703
Present value of an annuity due at 9% for 7 periods = 5.03295
Part B
Present value of minimum lease payments = 737288
PV of annual payments: $128,668 * 5.35526 = 689051
PV of guaranteed residual value: $94000 * 0.51316= 48237
Present value of minimum lease payments = 737288
Present value of an annuity due at 10% for 7 periods = 5.35526
Present value of $1 at 10% for 7 periods = 0.51316
Part C
Part D
Cash
Date account titles and explanation debit credit 1/1/17 leased equipment 737288 Lease liability 737288 (to record the lease) Lease liability 128668 Cash 128668 (to record lease payment) 12/31/17 depreciation expense 91898 Accumulated depreciation - capital leases (737288-94000)/7 91898 (to record depreciation) Interest expense 60862 Interest payable (737288-128668)*0.10 60862 (to record interest) 1/1/18 interest payable 60862 Lease liability (128668-60862) 67806 Cash 128668 12/31/18 depreciation expense 91898 Accumulated depreciation - capital leases 91898 (to record depreciation Interest expense 54081 Interest payable (737288-128668-67806)*0.10 54081 (to record interest)Related Questions
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