Would appreciate help on this question about accounting for lease agreements. Pl
ID: 2542411 • Letter: W
Question
Would appreciate help on this question about accounting for lease agreements. Please help with all parts required and please show work. I really appreciate it.verine Sales and Service entered into a lease agreement to lease a fleet of five vehicles from Boil ermaker Motors. The term of the lease is five years and Wolverine makes annual payments per year beginning on January 1, 2017 (and every December 31 through December 31, 2020). January 1, 2017 is also the lease commencement date. Wolverine does not guarantee any residual value in the lease agreement. Wolverine received $6,000 on 1/1/17 as an incentive to sign the lease agreement and incurred initial direct costs in 2016 of $1,500 related to the lease that were recorded as prepaid assets. The estimated economic life of the vehicles is ten years and their fair value at lease inception is $175,000. Wolverine is unaware of Boilermaker's implicit rate, but wolverine's incremental borrowing rate is 6% per year. There is no transfer of ownership at the end of the lease, nor is there a purchase option. The vehicles are not of a specialized nature. Required: a. What type of lease has Wolverine signed? Explain in terms of the new US GAAP b. c. d. standard. (2 pts) Prepare all of the 2017 journal entries for Wolverine. (10 pts) Prepare all of the 2018 journal entry(ies) for Wolverine. (2 pts) Prepare all of the 2021 journal entries for Wolverine. (4 points)
Explanation / Answer
1. Wolverine signed an operating lease
Operating lease is one which is not a capital lease
Basic conditions for capitalization of lease by lessee are:
a. The lessor transfer the ownership to lessee at the end of the lease period.
b. A bargain purchase option is given to the lessee.
c. The life of the lease is equal or greater than 75% of the economic life of the asset.
Life of lease = 5 years which is 50% of the economic life of 10 years
d. The present value of minimum lease payament is equal or greater than 90% of the
fair market value of the leased asset.
PV of MLP = 15000 x 4.21236 = $63,185 which is 36% of the fair market value of the
Lease assets
FMV = $175000
PV of annuity for 5 years on 6% = 4.21236
None of the conditions given above are satisfied in lease signed by Wolverine.
thus it is a operating lease
2. Journal entries for 2017
1/1/2017
Cash
$6,000
Incentive on lease
$6,000
(To record Incentive received to sign the lease agreement)
1/1/2017
Lease Rental expenses
$13,800
Incentive on lease
$1,200
Cash
$15,000
(To record annual lease payment)
Incentive on lease is amortized over the period of lease agreement
$6000/5 = $1200
1/1/2017
Lease expenses
$1,500
Prepaid assets
$1,500
(To record direct cost related to lease)
As it is a operating lease, lessee will not show asset in his financial statement
31/12/2017
Lease Rental expenses
$13,800
Incentive on lease
$1,200
Cash
$15,000
(To record annual lease payment)
3. Journal entry for 2018
31/12/2017
Lease Rental expenses
$13,800
Incentive on lease
$1,200
Cash
$15,000
(To record annual lease payment)
4. Journal entries for 2021 (assuming wolverine again take the same vehicles on lease)
1/1/2021
Lease Rental expenses
$15,000
Cash
$15,000
(To record annual lease payment)
31/12/2021
Lease Rental expenses
$15,000
Cash
$15,000
(To record annual lease payment)
1. Wolverine signed an operating lease
Operating lease is one which is not a capital lease
Basic conditions for capitalization of lease by lessee are:
a. The lessor transfer the ownership to lessee at the end of the lease period.
b. A bargain purchase option is given to the lessee.
c. The life of the lease is equal or greater than 75% of the economic life of the asset.
Life of lease = 5 years which is 50% of the economic life of 10 years
d. The present value of minimum lease payament is equal or greater than 90% of the
fair market value of the leased asset.
PV of MLP = 15000 x 4.21236 = $63,185 which is 36% of the fair market value of the
Lease assets
FMV = $175000
PV of annuity for 5 years on 6% = 4.21236
None of the conditions given above are satisfied in lease signed by Wolverine.
thus it is a operating lease
2. Journal entries for 2017
1/1/2017
Cash
$6,000
Incentive on lease
$6,000
(To record Incentive received to sign the lease agreement)
1/1/2017
Lease Rental expenses
$13,800
Incentive on lease
$1,200
Cash
$15,000
(To record annual lease payment)
Incentive on lease is amortized over the period of lease agreement
$6000/5 = $1200
1/1/2017
Lease expenses
$1,500
Prepaid assets
$1,500
(To record direct cost related to lease)
As it is a operating lease, lessee will not show asset in his financial statement
31/12/2017
Lease Rental expenses
$13,800
Incentive on lease
$1,200
Cash
$15,000
(To record annual lease payment)
3. Journal entry for 2018
31/12/2017
Lease Rental expenses
$13,800
Incentive on lease
$1,200
Cash
$15,000
(To record annual lease payment)
4. Journal entries for 2021 (assuming wolverine again take the same vehicles on lease)
1/1/2021
Lease Rental expenses
$15,000
Cash
$15,000
(To record annual lease payment)
31/12/2021
Lease Rental expenses
$15,000
Cash
$15,000
(To record annual lease payment)
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