E21-7 (Lessee-Lessor Entries; Sales-Type Lease) On January 1, 2014, Bensen Compa
ID: 2566345 • Letter: E
Question
E21-7 (Lessee-Lessor Entries; Sales-Type Lease) On January 1, 2014, Bensen Company leased equipment to Flynn Corporation. The following information pertains to this lease. The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease 1. 2. Equal rental payments are due on January 1 of each year, beginning in 2014 3. The fair value of the equipment on January 1, 2014, is $150,000, and its cost is $120,000. 4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $10,000 Flynn depreciates all of its equipment on a straight-line basis 5. Bensen set the annual rental to ensure an 11% rate of return. Flynn's incremental borrowing rate is 12%, and the implicit rate of the lessor is unknown Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor. 6. Instructions (Both the lessor and the lessee's accounting period ends on December 31.) (a) Discuss the nature of this lease to Bensen and Flynn (b) Calculate the amount of the annual rental payment. (c) Prepare all the necessary journal entries for Flynn for 2014 (d) Prepare all the necessary journal entries for Bensen for 2014.Explanation / Answer
Ans a)
This is clearly a case of capital lease because reason being is simple that it is non-cancelable, and also the term is actually 75% of the economic life of the leased property. (6/8=75%). Also, the fair value of $150,000 is actually greater than the lessor's cost of $120,000.
Also the collectability of the lease payment is actually reasonably predictable and there is no uncertainties surround the amount of costs actually that is yet to be the incurred by the lessor.
Ans b.
Total amount to be recovered
$15000
PV of residual ($1000x.53464)
-5346
PV of annual payments
144654
Factor for PV of an annuity due
÷4.6959
Annual rent required
$30804
Ans c.
Date
Particulars
Debit
Credit
Jan 1
Leased Equipment
141846 (30804*4.60478)
Lease liability
141846
Lease liability
30804
Cash
30804
Dec 31
Depreciation expense- capital lease
23641
Accumulated depreciation- capital lease
23641
Interest Expense
13325 (141846-30804)*0.12
Interest Payable
13325
Ans d.
Date
Particulars
Debit
Credit
Jan 1
Lease receivables
150000
COGS
114654
Sales
144654
Inventory
120000
Cash
30804
Lease receivables
30804
Dec 31
Interest Expense
13112 (150000-30804)*0.11
Interest Revenue
13112
Total amount to be recovered
$15000
PV of residual ($1000x.53464)
-5346
PV of annual payments
144654
Factor for PV of an annuity due
÷4.6959
Annual rent required
$30804
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