Problem 21-1 Glaus Leasing Company agrees to lease machinery to Jensen Corporati

Question

Problem 21-1

Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2014. The following information relates to the lease agreement.

(Assume the accounting period ends on December 31.)

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.)

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.)

Prepare the journal entries Jensen would make in 2014 and 2015 related to the lease arrangement.

Prepare the journal entries Glaus would make in 2014 and 2015.

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 $508,000, and the fair value of the asset on January 1, 2014, is $726,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $110,000. Jensen depreciates all of its equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2014. 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 11% rate of return on its investments. Jensen’s incremental borrowing rate is 12%, and the lessor’s implicit rate is unknown. TABLE 6-2 PRESENT VALUE OF 12% 92593 86957 75614 91743 79719 .77218 63552 56743 49718 63017 58349 54027 50025 .56447 .51316 48166 .50187 32197 28748 22917 42241 35218 42888 39711 31728 21494 31863 32618 23199 31524 27454 21763 19785 29189 27027 25025 23171 10687 14564 11611 17843 ·06110 19866 10067 07379 04017 12641 11597 08170 07361 08831 05974 04187 03738 01997 01737 01510 04849 .05731 06915 05210 04736 03194 02878 07889 .03914 06763 01894 00751 02104 01896 01708 01538 01691 01510 01348 01204 01075 05799 02674 02430 02210 00494 04971

Explanation / Answer

Jensen Books Assets and liabilities are recorded at lower of PV of minimum lease payment or fair value of the asset at the inception of lease Asset will be depreciated with term of lease as the title is not transfer at the end annual Lease payment 128671 In Jenen Books I am providing missing figures entry 12/31/2014 depreciation expense   $707449/7 101064 accumulated depreciation - capital lease 101064 12/31/2015 depreciation expense   $707449/7 101064 accumulated depreciation - capital lease 101064 Glaus leasing Company 1/1/2014 Lease payment receivable(128671*7) 900697 Equipment for lease 708000 Unearned Interest revenue 192697 at inception Cash 128671 Lease payment receivable 128671 to record lease paymnet 31/01/2014 Unearned Interest revenue 63726.19 Interest revenue 63726.19 (708000-128671)*.11 1/1/2015 Cash 128671 Lease payment receivable 128671 to record lease paymnet 31/01/2015 Unearned Interest revenue 49572.38 Interest revenue 49572.38 (708000-128671=(579329-128671)*.11

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