(1) What type of lease is this to Chipola Company? Explain. (2) Prepare an amort
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Question
(1) What type of lease is this to Chipola Company? Explain.
(2) Prepare an amortization schedule for the lessee. Round all calculations to the nearest whole dollar.
(3) Prepare all necessary journal entries, in proper general journal form, that would be required on the lessee’s books for the entire life of the lease. Provide a brief explanation for your entries.
Chipola Company, as lessee, enters into a lease agreement on July 1, 20X8, for equipment. The following data are relevant to the lease agreement. (1)The term of the noncancelable lease is 4 years, with no renewal option. Payments of S422,689 are due on June 30 of each year (2) The fair value of the equipment on July 1, 20X8 is $1,400,000. The equipment has an economic life of 6 years with no salvage value. The lease contains a guaranteed residual value of $15,000 (3) Chipola depreciates similar machinery it owns using sum-of-the-years'-digits depreciation (4) The lessee pays all executory costs. (5) | Chipola's incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease paymentsExplanation / Answer
(Assuming year ends on June 30) 1. Present Value of 422689, PVAF 4 Periods 8% 422689*3.312127 1400000 Present Value of Guranteed Value, PVF 4 Periods 8% 15000*0.73503 11025 Present Value 1411025 Since PV is more than fair value, its capital lease 2. Amortization Schedule 8% Date Cash Payment Interest Expense Principal Lease Balance July 1 2018 1411025 Jun 30 2019 422689 112882 309807 1101218 Jun 30 2020 422689 88097 334592 766627 Jun 30 2021 422689 61330 361359 405268 Jun 30 2022 437689 32421 405268 0 3. Journal Entries Date Account Debit Credit July 1 2018 Leased Equipment 1411025 Lease Obligation 1411025 (Equipment taken on lease) Jun 30 2019 Depreciation Expense 564410 Accumulated Depreciation 1411025*4/10 564410 (Depreciation for full year) Jun 30 2019 Lease Obligation 309807 Intest Expnese 112882 Cash 422689 (Lease payment including intrest expense) Jun 30 2020 Depreciation Expense 423308 Accumulated Depreciation 1411025*3/10 423308 (Depreciation for full year) Jun 30 2020 Lease Obligation 334592 Intest Expnese 88097 Cash 422689 (Lease payment including intrest expense) Jun 30 2021 Depreciation Expense 282205 Accumulated Depreciation 1411025*2/10 282205 (Depreciation for full year) Jun 30 2021 Lease Obligation 361359 Intest Expnese 61330 Cash 422689 (Lease payment including intrest expense) Jun 30 2022 Depreciation Expense 141103 Accumulated Depreciation 1411025*1/10 141103 (Depreciation for full year) Jun 30 2022 Lease Obligation 405268 Intest Expnese 32421 Cash 437689 (Lease payment including intrest expense, including guranteed value)
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