Timmer Company signs a lease agreement dated January 1, 2013, that provides for

Question

Timmer Company signs a lease agreement dated January 1, 2013, that provides for it to lease equipment from Landau Company beginning January 1, 2013. The lease terms, provisions, and related events are as follows:

The lease is noncancelable and has a term of 5 years.

The annual rentals are $83,222.92, payable at the end of each year, and provide Landau with a 12% annual rate of return on its net investment.

Timmer agrees to pay all executory costs at the end of each year. In 2013, these were insurance, $3,760; property taxes, $5,440. In 2014: insurance, $3,100; property taxes, $5,330.

There is no renewal or bargain purchase option.

Timmer estimates that the equipment has a fair value of $300,000, an economic life of 5 years, and a zero residual value. Timmer's incremental borrowing rate is 16%, it knows the rate implicit in the lease, and it uses the straightline method to record depreciation on similar equipment.

Prepare journal entries on the books of Timmer for 2013 and 2014.

If required, round your answers to the nearest cent. For compound entries, if an amount box does not require an entry, leave it blank.

Explanation / Answer

31/12/2013 Lease Rental Exp 83222.92          To Landau Company 83222.92 31/12/2013 Landau Company 83222.92          To Cash 83222.92 31/12/2013 Insurance Exp 3760          To Cash 3760 31/12/2013 Property Tax Exp 5440          To Cash 5440 31/12/2014 Lease Rental Exp 83222.92          To Landau Company 83222.92 31/12/2014 Landau Company 83222.92          To Cash 83222.92 31/12/2014 Insurance Exp 3100          To Cash 3100 31/12/2014 Property Tax Exp 5330          To Cash 5330

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