Timmer Company signs a lease agreement dated January 1, 2016, that provides for

Question

Timmer Company signs a lease agreement dated January 1, 2016, that provides for it to lease equipment from Landau Company beginning January 1, 2016. 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 rte of return on its net investment. . Timmer agrees to pay all executory costs at the end of each year. In 2016, these were insurance, $3,760; property taxes, S5,440. In 2017: insurance, $3,100; property taxes, $5,330. . There is no renewal or bargain purchase option. value. Ti estimates that the equipment has a fair value of $300,000, an economic life of 5 years, and a zero-residual mmer's incremental borrowing rate is 16%, it knows the rate implicit in the lease, and it uses the straight line method to record depreciation on similar equipment

Explanation / Answer

Date Lease Payment Required Interest Expense at 12% on Obligation Balance Reduction of lease Obligation Balance of Lease Obligation January 1, 2016 300000 December 31, 2016 83222.92 36000.00 47222.92 252777.08 December 31, 2017 83222.92 30333.25 52889.67 199887.41 December 31, 2018 83222.92 23986.49 59236.43 140650.98 December 31, 2019 83222.92 16878.12 66344.80 74306.18 December 31, 2020 83222.92 8916.74 74306.18 0.00 Total 416114.6 116114.60 300000.00 General Jounral Date Account Title Post. Ref. Debit Credit January 1, 2016 Leased Equipment(property) 300000.00 Capital Lease Obligation 300000.00 To record the inception of lease December 31, 2016 Property taxes 5440 Insurance expense 3760 Cash 9200 To record the expenses in relation with lease December 31, 2016 Capital Lease Obligation 47222.92 Interest Expense 36000.00 Cash 83222.92 To record the annual lease payment towards Interest as well as lease obligation December 31, 2016 Depreciation expense on Leased equipment 60000 Accumulated depreciation on Leased equipment 60000 To record the straightline depreciation on Leased equipment December 31, 2017 Property taxes 5330 Insurance expense 3100 Cash 8430 To record the expenses in relation with lease December 31, 2017 Capital Lease Obligation 52889.67 Interest Expense 30333.25 Cash 83222.92 To record the annual lease payment towards Interest as well as lease obligation December 31, 2017 Depreciation expense on Leased equipment 60000 Accumulated depreciation on Leased equipment 60000 To record the straightline depreciation on Leased equipment Timmer Company Balance Sheet (Partial) December 31, 2016 Asset Property, Plant and Equipment Leased Property Less Accumulated depreciation 240000 Liabilities Current Capital Lease Obligaton 52889.67 Non-current Capital Lease Obligaton 199887.41 We appreciate rating of our answers. It really encourages us.

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