Problem 21A-10 a2-c Riverbed Company manufactures a check-in kiosk with an estim

Question

Problem 21A-10 a2-c Riverbed Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to Marin Airlines for a period of 10 years. The normal selling price of the equipment is $262,235, and its unguaranteed residual value at the end of the lease term is estimated to be $21,000. Marin will pay annual payments of $37,600 at the beginning of each year. Riverbed incurred costs of $183,700 in manufacturing the equipment and $4,000 in sales commissions in closing the lease. Riverbed has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 10%. Marin Airlines has an incremental borrowing rate of 10%.

Explanation / Answer

1 The amount of initial lease liability Present value of annual rental payment ($37600 x 6.75902) $254,139 2 10 year Lease amortization schedule Beginning of Year Annual Lease Payment Interest on lease liability Reduction of lease liability Lease Liability Initial PV $254,139 1 $37,600 $37,600 $216,539 2 $37,600 $21,654 $15,946 $200,593 3 $37,600 $20,059 $17,541 $183,052 4 $37,600 $18,305 $19,295 $163,757 5 $37,600 $16,376 $21,224 $142,533 6 $37,600 $14,253 $23,347 $119,186 7 $37,600 $11,919 $25,681 $93,505 8 $37,600 $9,351 $28,249 $65,256 9 $37,600 $6,526 $31,074 $34,181 10 $37,600 $3,418 $34,181 $0 $376,000 $121,860 $254,139 3 Lessee's Journal entries for the first year 1 Leased Equipment $254,139 Lease Liability $254,139 (To record a lease) 2 Lease liability $37,600 Cash $37,600 (To record the first rental payment) 3 Interest expense $21,654 Interest payable $21,654 (To record accrual of interest on lease obligation) 4 Depreciation $25,414 Accumulated Depreciation-Leased equipment $25,414 (254139/10 years = $25413.90) To record depreciation expense for first year)

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