Holiday leases some of the larger, specialty light and inflatable displays for l
ID: 2600926 • Letter: H
Question
Holiday leases some of the larger, specialty light and inflatable
displays for longer periods. In 2017, Holiday leased a patriotic display
to the city of Boston. The replica of the Boston Tea Party and Paul
Revere is on display in a city park. The details of the lease are as
follows:
Lease was signed January 1, 2017.
Lease term is 5 years. Asset life is 6 years. The lease is non-
cancelable.
The display is expected to have an estimated value of $35,000 at
the end of the lease term. Boston can purchase the display at the
end of the lease for $17,500.
The cost to produce the display was $343,000. The fair value of
the display is $775,000.
The lease payments are paid each January 1, with the first
payment made in 2017.
Holiday’s implicit rate is 12% and is known to the lessee.
Prepare journal entries for the lessee for 2017
Explanation / Answer
This type of lease is a finance lease
Because of following reasons
The lease period is for major part of useful life of asset
The leasee has a option to purchase the asset at the end.
The following journal entries are to be passed in the books of lesse
Display a/c dr. 740000
To holdiay a/c. 740000
Fair value minus end of lease = 775000-35000 = 740000
Holiday a/c dr 148000
Interest a/c dr. 88800
To bank a/c. 236800
The company has to pay interest and lease liability in five years
Lease liability to be paid = (740000)/5 = 148000
Interest. = 740000*.12 = 88800
Depreciation expense is also to be recognized in this
Depreciation a/c dr. 129166
To display. 129666
The depreciation is to be charged has it is a finance lease
Also the method depreciation is assumed has straight line and the salvage value as nil
Depreciation = 775000/6 = 129166
assumptions are taken in above problem
Comment for any doubts
Thanks.
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