Exercise 21-7 On January 1, 2014, Bensen Company leased equipment to Flynn Corpo
ID: 2493919 • Letter: E
Question
Exercise 21-7
On January 1, 2014, Bensen Company leased equipment to Flynn Corporation. The following information pertains to this lease.
(Both the lessor and the lessee’s accounting period ends on December 31.)
Calculate the amount of the annual rental payment. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
Date
Account Titles and Explanation
Debit
Credit
1/1/14
(To record the lease.)
(To record lease payment.)
12/31/14
(To record depreciation.)
(To record interest.)
Prepare all the necessary journal entries for Bensen for 2014. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
Date
Account Titles and Explanation
Debit
Credit
1/1/14
(To record the lease.)
(To record lease payment.)
12/31/14
(To record interest.)
1. The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease. 2. Equal rental payments are due on January 1 of each year, beginning in 2014. 3. The fair value of the equipment on January 1, 2014, is $191,700, and its cost is $149,526. 4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $11,640. Flynn depreciates all of its equipment on a straight-line basis. 5. Bensen set the annual rental to ensure an 9% rate of return. Flynn’s incremental borrowing rate is 10%, and the implicit rate of the lessor is unknown. 6. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.Explanation / Answer
Answer: Computation of the amount of annual rental payment:
=$191,700-($11,640*0.59627*)/4.88965**
=$37786
*Present value of $1 at 9% for 6 periods.
**Present value of an annuity due at 9% for 6 periods.
Answer:
1/1/14 Leased Equipment Under Capital
Leases................................................................... 181025
Lease Liability............................................... 181025
($37786X 4.79079)***
Lease Liability......................................................... 37786
Cash................................................................ 37786
***Present value of an annuity due at 10% for 6 periods.
12/31/14 Depreciation Expense............................................. 30171
Accumulated Depreciation........................... 30171
($181025 ÷ 6 years)
Interest Expense...................................................... 14324
Interest Payable............................................. 14324
($181025 – $37786) X .10
Answer:
1/1/14 Lease Receivable............................................................... 191700*
Cost of Goods Sold............................................ 142585**
Sales.......................................................... 184760***
Inventory.................................................. 149526
* *($37786 X 4.88965) + ($11640 X .59627), rounded
**$149526 – ($11640 X 0.59627)
***$37786 X4.88965, rounded
Cash ...................................................... 37786
Lease Receivable..................................... 37786
12/31/14 Interest Receivable............................................ 13,852
Interest Revenue...................................... 13,852
[($191700 – $37786) X .09]
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