Assume that LR, Inc., the lessor, paid $5,600 for an automobile that has a fair

Question

Assume that LR, Inc., the lessor, paid $5,600 for an automobile that has a fair value of $5,600 and an estimated economic life of five years.

LR, Inc. leases the automobile to LE, Inc. for a fixed non-cancelable term of 5 years beginning January 1, 2013, with rentals of $1232 due at the beginning of each year. The following additional information is also available:

- Residual value of the automobile at the end of the lease is expected to be zero and LE, Inc. makes no related guarantee.
- LE, Inc. pays the normal expenses of maintenance and taxes which are not part of the lease payments.
- LE, Inc. depreciates its own automobiles on a straight-line basis. - LE, Inc. has an incremental borrowing rate of 5% per year and this is the implicit interest rate assumed in the lease.
- LR, Inc. expects to receive all the lease payments from LE, Inc. and has no material cost uncertainties.

Required:
Assuming a present value of 4.545455 where applicable, prepare for the lessor and lessee:
- Journal entries for years 2013 and 2014. - A lease amortization table to be used by the lessor and lessee for 2013 & 2014.
- Balance Sheet presentation for 2013 for lessor and lessee.

Explanation / Answer

To figure the asset and liability, you need to check out the present value.The asset and liability amounts are $25,454 (the yearly lease payment of $5,600 x 4.545455).

The depreciation amount per year is $5,091 (25,454/5 years)

Interest expense per year is figured on the unpaid balance at the end of the year multiplied by 5 percent. Book this at the end of the year.

PERIOD CASH DUE

[Due+acc.principal] INTEREST PRINCIPAL ACCUMULATED PRINCIPAL

5 1232 59 1173 1173

4 2405 114 1118 2291

3 3523 168 1064 3355

2 4587 218 1014 4369

1 5601 267 965 5334   

JOURNAL ENTRIES

2013

Fixed asset Dr 25,454

Lease liability Cr 25,454

Depreciation expense Dr 5,091

Accumulated depreciation Cr 5,091

Cash Cr 1232

2014

Cash Cr 1232

  

Lease Liability Dr 965 Interest Dr 267

Cash Cr 1232

2014

Lease Liability Dr 1014 Interest Dr 218

Cash Cr 1232

Account/Financial Statement Round-Up Balance Sheet Income Statement Lease Equipment — Fixed Asset Interest Expense Lease Liability — Liability (current and long-term) Depreciation Expense Cash — Current Asset Interest Payable — Current Liability Accumulated Depreciation — Contra-asset Account

  

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