Vaughn Leasing Company agrees to lease machinery to Bramble Corporation on Janua

Question

Vaughn Leasing Company agrees to lease machinery to Bramble Corporation on January 1, 2017. The following information relates to the lease agreement.

(Assume the accounting period ends on December 31.)

Annual Rental Payment _____________

Present Value of Minimum Lease Payments__________

Prepare Journal Entries Bramble would make in 2017 and 2018

Prepare Journal Entries Vaughn would make in 2017 and 2018

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 $575,000, and the fair value of the asset on January 1, 2017, is $755,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $103,000. Bramble 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. Vaughn desires a 9% rate of return on its investments. Bramble’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown.

Explanation / Answer

1. Calculation fo Annual rental Payment Annual Rental payment = $755,000 - ($103,000 x 0.54073)/5.48592                                                   = $127,473 Present value of $1 at 9% for 7 years = 0.54073 Present value of annuity due at 9% for 7 years = 5.48592 2. Calculation of Present value of minimum lease payment (Period = 7 years, rate = 10%) Present value of annual rental payment ($127473 x 5.35526) $682,651 Present value of guaranteed residual value ($103000 x 0.51316) $52,855 Present value of minimum lease payement $735,506 3. Journal entries in the books of Bramble in 2017 and 2018 1-Jan-17 Leased Equipment $735,506      Leased Liability $735,506 (To record leased equipment) 1-Jan-17 Leased Liability $127,473       Cash $127,473 (To record annual rental payment) 31-Dec-17 Depreciation $90,358     Accumulated Depreciation-Capital Lease $90,358 ($735506 - $103000)/7 (To record Depreciation for 2017) 31-Dec-17 Interest Expense $60,803      Interest Payable $60,803 (To record Interest expense for 2017) ($735506 -$ 127473) x 10% 1-Jan-18 Leased Liability $66,670 Interest payable $60,803        Cash $127,473 (To record annual rental payment) 31-Dec-18 Depreciation $90,358     Accumulated Depreciation-Capital Lease $90,358 ($735506 - $103000)/7 (To record Depreciation for 2018) 31-Dec-18 Interest Expense $54,136      Interest Payable $54,136 (To record Interest expense for 2018) ($735506 -$ 127473 - $66670) x 10% 4. Journal Entries in the Books of Vaughn in 2017 and 2018 1-Jan-17 Lease Receivable $755,000 Cost of Goods Sold $575,000      Sales Revenue $755,000      Inventory $575,000 1-Jan-17 Cash $127,473      Lease Receivable $127,473 (To record annual lease payment received) 31-Dec-17 Interest Receivable $56,477       Interest Revenue $56,477 (To record Interest for 2017) (755000 - 127473) x 9% 1-Jan-18 Cash $127,473      Interest Receivable $56,477      Loan Receivable $70,996 (To record annual lease payment received) 31-Dec-18 Interest Receivable $50,088       Interest Revenue $50,088 (To record Interest for 2018) (755000 - 127473 - 70996) x 9%

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