Option #2: Lease Complete the following questions. In addition to answering the

Question

Option #2: Lease Complete the following questions. In addition to answering the items below, you must submit an analysis of the assignment. Analyze the specific outcomes and write an analysis directed toward the team at Fifth-Third Leasing Company describing what the numbers mean and how they relate to the business. Submit journal entries in an Excel file and written segments in an MS Word document. For written answers, please make sure your responses are well-written, formatted per CSU-Global Guide to Writing and APA and have proper citations, if applicable. Assume that the following facts pertain to a non-cancelable lease agreement between Fifth-Third Leasing Company and Bob Evans Farms, a Lessee nception date January 1, 2017 esidual value of equipment at end of lease term, uaranteed by the lessee $50,000 ease term 6 years co nomic life of leased equipment 8 years air value of asset at January 1, 2017 $400,000 essor's implicit rate 10% essee's incremental borrowing rate 12% The lessee assumes responsibility for all executory costs, which are expected to amount to $4,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straight-line depreciation method for all equipment. Using the spreadsheet Lease Amort Schedule, found in the link below, prepare an amortization schedule that would be suitable for the lessee for the lease term.m. Using the spreadsheet Journal Entries, prepare the journal entries for the lessee for 2017 and 2018 to record the lease agreement and all expenses related to the lease. Assume the Lessees annual accounting period ends on December 31 and that reversing entries are used when appropriate

Explanation / Answer

Part 1:

Date

Lease payment

Interest expense

Reduction lease liability

Balance of lease liability

01-01-17

              

400000

01-01-17

77602.35

0

77602.35

322397.7

01-01-18

77602.35

32239.77

45362.58

277035.1

01-01-19

77602.35

27703.51

49898.84

227136.2

01-01-20

77602.35

22713.62

54888.73

172247.5

01-01-21

77602.35

17224.75

60377.6

111869.9

01-01-22

77602.35

11186.99

66415.36

45454.55

31-12-22

50000

4545.455

45454.55

0

Working notes:

Inception of lease

01-Jan-17

Lease term 6 years

Lessor's implicit rate

10%

Present value factors @10% per annum

Year

PV factor @10% pa

0

1

1

0.909091

2

0.826446

3

0.751315

4

0.683013

5

0.620921

6

0.564474

Present value of residual value guaranteed at the end of year 6

Residual value guaranteed

50000

PV factor at the end of 6 year

0.564474

Present value of residual value guaranteed at the end of year 6 (50000 x 0.564474)

28223.7

Fair value of the asset as on 01/01/2017

400000

Less: Present value of Residual value

28223.7

Amount to be recovered from lease (400000 - 28223.7)

371776.3

Present value factor from year 0 to 5 @10% pa

Year

PV factor @10% pa

0

1

1

0.909091

2

0.826446

3

0.751315

4

0.683013

5

0.620921

4.790787

Amount to be recovered from lease (400000 - 28223.7)

371776.3

Present value factor from year 0 to 5 @10% pa

4.790787

Annual lease rental should be (371776.30 /4.790787)

77602.35

Part 2 Journal entries:

Date

Account title

Debit ($)

Credit ($)

01-01-17

Equipment on lease

400000

Fifth-Third Leasing Company

400000

(Being the lease recorded)

01-01-17

Fifth-Third Leasing Company

77602.35

Bank

77602.35

(Being lease rent paid)

31-12-17

Executioner expenditures

4000

Bank

4000

(Being expenses incurred)

31-12-17

Interest on lease

32239.77

Fifth-Third Leasing Company

32239.77

(Being interest on outstanding lease amount recorded)

31-12-17

Depreciation (400000 /6)

66666.67

Equipment on lease

66666.67

(Being depreciation on the equipment is provided under SLM)

31-12-17

Profit and loss account

102906.4

Interest on lease

32239.77

Depreciation (400000 /6)

66666.67

Executioner expenditures

4000

(Being all expenses charged against profit and loss account)

01-01-18

Fifth-Third Leasing Company

77602.35

Bank

77602.35

(Being lease rent paid)

31-12-18

Executioner expenditures

4000

Bank

4000

(Being expenses incurred)

31-12-18

Interest on lease

27703.51

Fifth-Third Leasing Company

27703.51

(Being interest on outstanding lease amount recorded)

31-12-18

Depreciation (400000 /6)

66666.67

Depreciation (400000 /6)

66666.67

(Being depreciation on the equipment is provided under SLM)

31-12-18

Profit and loss account

98370.17

Interest on lease

27703.51

Depreciation (400000 /6)

66666.67

Executioner expenditures

4000

(Being all expenses charged against profit and loss account)

Date

Lease payment

Interest expense

Reduction lease liability

Balance of lease liability

01-01-17

              

400000

01-01-17

77602.35

0

77602.35

322397.7

01-01-18

77602.35

32239.77

45362.58

277035.1

01-01-19

77602.35

27703.51

49898.84

227136.2

01-01-20

77602.35

22713.62

54888.73

172247.5

01-01-21

77602.35

17224.75

60377.6

111869.9

01-01-22

77602.35

11186.99

66415.36

45454.55

31-12-22

50000

4545.455

45454.55

0

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