Assume that Legoria Co. leases equipment from Joey Co. with the following terms:

ID: 2444442 • Letter: A

Question

Lease Period:

5 years, beginning 1/1/15. Noncancelable. Remaining Lease payments made on January 1.

Rental Amount:

$65,000 payable in advance INCLUDES $5,000 to cover Executory costs for property taxes.

Estimated Economic Life of equipment:

10 years.

Expected Residual value:

None

Lessee’s incremental borrowing rate (Lessor’s implicit rate is unknown):

10%

Bargain Purchase Option

$75,000

Requirements:

1). Prepare a Lease Amortization schedule for the entire lease.

2). Prepare the journal entries for the period 1/1/2015 to 1/1/2016

3) Prepare the journal entry to record the exercise of the Bargain Purchase Option at the end of the lease term.

Lease Period:

5 years, beginning 1/1/15. Noncancelable. Remaining Lease payments made on January 1.

Rental Amount:

$65,000 payable in advance INCLUDES $5,000 to cover Executory costs for property taxes.

Estimated Economic Life of equipment:

10 years.

Expected Residual value:

None

Lessee’s incremental borrowing rate (Lessor’s implicit rate is unknown):

10%

Bargain Purchase Option

$75,000

Year 1 Year 2

Interest income $5,000,000 $5,000,000

Interest expense $4,000,000 $4,500,000

Net interest income $1,000,000 $500,000

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