Morgan Leasing Company signs an agreement on January 1, 2014, to lease equipment

Question

Morgan Leasing Company signs an agreement on January 1, 2014, to lease equipment to Cole Company. The following information relates to this agreement.

6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.

Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the annual rental payment required. (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.)

Prepare an amortization schedule that would be suitable for the lessor for the lease term. (Round answers to 0 decimal places e.g. 58,971.)

MORGAN LEASING COMPANY (Lessor)
Lease Amortization Schedule

Date

Annual Lease Payment Plus
URV

Interest on Lease   
Receivable

Recovery of Lease
Receivable

Lease Receivable

Prepare all of the journal entries for the lessor for 2014 and 2015 to record the lease agreement, the receipt of lease payments, and the recognition of income. Assume the lessor’s annual accounting period ends on December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date

Account Titles and Explanation

Debit

Credit

1/1/14

(To record the lease.)

1/1/14

(To record lease payment.)

12/31/14

1/1/15

12/31/15

1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. 2. The cost of the asset to the lessor is $244,300. The fair value of the asset at January 1, 2014, is $244,300. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $49,087, none of which is guaranteed. 4. Cole Company assumes direct responsibility for all executory costs. 5. The agreement requires equal annual rental payments, beginning on January 1, 2014.

6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.

Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the annual rental payment required. (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.)

The amount of the annual rental payment

$

Prepare an amortization schedule that would be suitable for the lessor for the lease term. (Round answers to 0 decimal places e.g. 58,971.)

MORGAN LEASING COMPANY (Lessor)
Lease Amortization Schedule

Date

Annual Lease Payment Plus
URV

Interest on Lease   
Receivable

Recovery of Lease
Receivable

Lease Receivable

1/1/14

$

1/1/14

$

$

$

1/1/15

1/1/16

1/1/17

1/1/18

1/1/19

12/31/19

$

$

$

Explanation / Answer

Answer:
Type of Lease: Direct-financing lease

b.

c. Journal Entries in the books of Lessor

a. Calculation of annual rental payment i)Residual Value $ 49,087 ii)PV of single sum (i=10%, n=6) 0.56447 iii)PV of residual Value (i x ii) $ 27,708 iv)Fair market value of leased equipment $ 244,300 v)Present value of residual value ($ 27,708) vi)Amount to be recovered through lease payment (iv-v) $ 216,592 vii)PV factor of annunity due (i=10%, n=6) 4.79079 Annual payment required (vi/vii) $ 45,210

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