E21-1B (Lessee Entries; Capital Lease with Unguaranteed Residual Value) On Janua
ID: 2466463 • Letter: E
Question
E21-1B (Lessee Entries; Capital Lease with Unguaranteed Residual Value) On January 1, 2014, Manor Inc. signed a 6-year noncancelable lease for a printing press. The terms of the lease called for Manor to make annual payments of $54,291 at the beginning of each year, starting January 1, 2014. The printing press has an estimated useful life of 6 years and a $10,000 unguaranteed residual value. The printing press reverts back to the lessor at the end of the lease term. Manor uses the straight-line method of depreciation for all of its plant assets. Manor’s incremental borrowing rate is 12%, and the Lessor’s implicit rate is unknown. Instructions (a) What type of lease is this? Explain. (b) Compute the present value of the minimum lease payments. (c) Prepare all necessary journal entries for Manor for this lease through January 1, 2015.
Explanation / Answer
1)
Transfer of ownership=No
bargain purchase option=No
Lease term =75% of economic life of property. Lease term and economic life both is 6 years
4)Present value of minimum lease payment is grater than Fair market value of proper. Since FMV is unknown.
It is capital Lease since any one of the above properties satisfied.
2)present value of Minimum lease payment:
=pv(12%,6,-54291,,1)
=$250,000
3) Leased machine (db) $250,000
Lease liability (cr) 250,000
Lease liability (db) 54,291
cash (cr) 54,291
entries by Manor:
Depreciation expense (db)41,667
Acc dep (cr) 41,667
Depre expense=250,000/6=41,667
Interest expense (db) 23,485
interest payable (cr) 23,485
interest expense =(250000-54291)*12%=23485
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