The following facts pertain to a noncancelable lease agreement between Mooney Le

Question

The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee.

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.

a) Compute the amount of the lease receivable at the inception of the lease. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and Round answers to 2 decimal places, e.g. 16.25.)

b) Prepare a lease amortization schedule for Mooney Leasing Company for the 5-year lease term. (Round answers to 2 decimal places, e.g. 16.25.)

c) Prepare the journal entries to reflect the signing of the lease agreement and to record the receipts and income related to this lease for the years 2014, 2015, and 2016. The lessor’s accounting period ends on December 31. Reversing entries are not used by Mooney.(Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 16.25.)

Inception date: May 1, 2014 Annual lease payment due at the beginning of    each year, beginning with May 1, 2014 $19,514.19 Bargain-purchase option price at end of lease term $3,550.00 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,800.00 Fair value of asset at May 1, 2014 $80,800.00 Lessor’s implicit rate 12 % Lessee’s incremental borrowing rate 12 %

Explanation / Answer

Answer:a) Calculation of the amount of the lease receivable at the inception of the lease:

($19,514.19 x 4.037349) + ($3550 x .567426) = $80800

Answer:b)

Answer:c) Record the signing of the lease.

Lease Receivable…. $80800

COG………………. $65,800

   To Sales……. $80800

       To Inventory.. $65,800

The first lease payment

Cash……. $19514.19

Lease Receivable…. $19514.19

12/31/14 Adjust the interest:

Interest Receivable....… $4,902.8648

Interest revenue……………..$4,902.8648

$7354.2972 x 8/12 = $4,902.8648

5/1/15 Receipt of cash payment:

Cash…….. $19514.19

Lease Receivable……$12159.8928

Interest Receivable.....$ $4,902.8648

Interest Revenue....... .$ 2451.4324 ($7354.2972 - $4,902.8648)

Adjustment of interest 12/31/15

Interest Receivable… $3,930.073

Interest revenue………….$3,930.073

$5895.110064 x 8/12 = $3,930.073

Rest of the entries for 2016 :

5/1/16 Cash…… $19514.19

Lease receivable…….$13619.07994

Interest Receivable.... $3,930.073

Interest Revenue........$1965.037 ($5895.110064 -$3,930.073 )

12/31/16 Interest Receivable.......… $2,840.55

Interest revenue…………$2840.55

* 8/12 adjustment (4260.820472 x 8/12 ) = $2,840.55

Date Annual Lease Payment Plus BPO Interest (12%) on investment Net investment Recovery Net investment 5/1/2014 80800 5/1/2014 $19,514.19 19514.19 61285.81 5/1/2015 $19,514.19 7354.2972 12159.8928 49125.9172 5/1/2016 $19,514.19 5895.110064 13619.07994 35506.83726 5/1/2017 $19,514.19 4260.820472 15253.36953 20253.46774 5/1/2018 $19,514.19 2430.416128 17083.77387 3169.693864 4/30/2019 3550 380.3632637 3169.636736 0.057127637 Total 101120.95 20321.00713 80799.94287

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