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ID: 2515559 • Letter: S
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Date
Account Titles and Explanation
Debit
Credit
(To record the lease.)
(To record lease payment.)
(To record depreciation.)
(To record interest.)
1/1/18
(To record depreciation.)
(To record interest.)
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Date
Account Titles and Explanation
Debit
Credit
1/1/17
(To record the lease.)
(To record lease payment.)
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Bridgeport Leasing Company agrees to lease machinery to Indigo Corporation on January 1, 2017. The following information relates to the lease agreement.1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $510,000, and the fair value of the asset on January 1, 2017, is $717,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $97,000. Indigo depreciates all of its equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017. 5. The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. 6. Bridgeport desires a 11% rate of return on its investments. Indigo’s incremental borrowing rate is 12%, and the lessor’s implicit rate is unknown.
(Assume the accounting period ends on December 31.)
Click here to view factor tables 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.)
Annual rental payment $
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Compute the present value of the minimum lease payments. (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.)Present value of minimum lease payments $
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Prepare the journal entries Indigo would make in 2017 and 2018 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,971.)Date
Account Titles and Explanation
Debit
Credit
1/1/1712/31/171/1/1812/31/18
(To record the lease.)
(To record lease payment.)
1/1/1712/31/171/1/1812/31/18
(To record depreciation.)
(To record interest.)
1/1/18
1/1/1712/31/171/1/1812/31/18
(To record depreciation.)
(To record interest.)
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Prepare the journal entries Bridgeport would make in 2017 and 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,971.)Date
Account Titles and Explanation
Debit
Credit
1/1/17
(To record the lease.)
(To record lease payment.)
1/1/1712/31/171/1/1812/31/18
1/1/1712/31/171/1/1812/31/18
1/1/1712/31/171/1/1812/31/18
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Explanation / Answer
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1. the amount of the annual rental payment 717000-(97000*PV of $1 11% 7 years)/PV of Annuity $1 11% 7 Year 717000-(97000*0.48166)/5.23054 (717000-46720)/5.23054 670280/5.23054 128147 2.the present value of the minimum lease payments. PV of Annual Payment 128147*PVAF 7 year 12% 128147*5.11140 655011 PV of Guaranteed Residual Value 97000*PVF 7 Year 12% 97000*0.45235 43878 PV of minimum Lease payments 698889 3. Journal Entries-Lessee Date Account Debit Credit 01-01-2017 Lease Equipment 698889 leased Liability 698889 01-01-2017 leased Liability 128147 Cash 128147 31-12-2017 Depreciation Expense 85984 Accumulated Depreciation 85984 (698889-97000)/7 31-12-2017 Interest Expense 68489 Interest Payable 68489 (698889-128147)*12% 01-01-2018 leased Liability 59658 Interest Payable 68489 Cash 128147 31-12-2018 Depreciation Expense 85984 Accumulated Depreciation 85984 (128147-97000)/7 31-12-2017 Interest Expense 61330 Interest Payable 61330 (698889-128147-59658)*12% 4. Jouranl Entries-Lessor 01-01-2017 Lease Receivable 717000 Cost of goods sold 510000 Sales Revenue 717000 Inventory 510000 01-01-2017 Cash 128147 Lease Receivable 128147 31-12-2017 Interest Receivable 64774 Interest Revenue 64774 (717000-128147)*11% 01-01-2018 Cash 128147 Lease Receivable 63373 Interest Receivable 64774 31-12-2018 Interest Receivable 57803 Interest Revenue 57803 (717000-128147-63373)*11%Related Questions
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