Exercise 21-10 Assuming the lessor desires a 9% rate of return on its investment
ID: 2595541 • Letter: E
Question
Exercise 21-10
Assuming the lessor desires a 9% rate of return on its investment, calculate the amount of the annual rental payment required.
Prepare an amortization schedule that would be suitable for the lessor for the lease term.
Prepare all of the journal entries for the lessor for 2017 and 2018 to record the lease agreement, the receipt of lease payments, and the recognition of income. Assume the lessor’s annual accounting period ends on December 31.
Exercise 21-10
Pina Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement.1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. 2. The cost of the asset to the lessor is $290,000. The fair value of the asset at January 1, 2017, is $290,000. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $196,882, none of which is guaranteed. 4. Cole Company assumes direct responsibility for all executory costs. 5. The agreement requires equal annual rental payments, beginning on January 1, 2017. 6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
Explanation / Answer
Answer a. Fair Market Value of Leased Equipment 290,000 PV of Residual Value - $196,882 X 0.59627 (117,395) Amount to be recovered through Lease 172,605 PV of Annuity Due 4.88965 Annual Payment Required 35,300 Answer b. Date Annual Lease Payment Plus URV Interest on Lease Receivable Recovery of Lease Receivable Lease Receivable 1/1/2017 - - - 290,000 1/1/2017 35,300 - 35,300 254,700 1/1/2018 35,300 22,923 12,377 242,323 1/1/2019 35,300 21,809 13,491 228,832 1/1/2020 35,300 20,595 14,705 214,127 1/1/2021 35,300 19,271 16,029 198,098 1/1/2022 35,300 17,829 17,471 180,627 12/31/2022 196,882 16,254 180,628 (0) Answer c. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1-Jan-17 Lease Receivable Dr. 290,000 To Equipment 290,000 1-Jan-17 Cash Dr. 35,300 To Lease Receivable 35,300 31-Dec-17 Interest Receivable Dr. 22,923 To Interest Revenue 22,923 1-Jan-18 Cash Dr. 35,300 To Lease Receivable 12,377 To Interest Receivable 22,923 31-Dec-18 Interest Receivable Dr. 21,809 To Interest Revenue 21,809
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