Cleveland Inc. leased a new crane to Abriendo Construction under a 6-year noncan

Question

Cleveland Inc. leased a new crane to Abriendo Construction under a 6-year noncancelable contract starting January 1, 2014. Terms of the lease require payments of $32,300 each January 1, starting January 1, 2014. Cleveland will pay insurance, taxes, and maintenance charges on the crane, which has an estimated life of 12 years, a fair value of $304,000, and a cost to Cleveland of $304,000. The estimated fair value of the crane is expected to be $46,100 at the end of the lease term. No bargain-purchase or renewal options are included in the contract. Both Cleveland and Abriendo adjust and close books annually at December 31. Collectibility of the lease payments is reasonably certain, and no uncertainties exist relative to unreimbursable lessor costs. Abriendo’s incremental borrowing rate is 11%, and Cleveland’s implicit interest rate of 11% is known to Abriendo.Prepare the entries.

(1) Insurance $690. (2) Property Tax Expense $3,890. (3) Maintenance and Repairs Expense $620. (4) Straight-line depreciation and salvage value $19,000.

Explanation / Answer

1) Lease payment 32300 Term 6 years Total payment 193800 Year Lease payment PV @ 11% Present Value 0 32300 1 32300.00 1 32300 0.901 29099.10 2 32300 0.812 26215.40 3 32300 0.731 23617.48 4 32300 0.659 21277.01 5 32300 0.593 19168.48 Present value of lease payment 151677.47 2) Crane value 304000 Less Salvage Value 46100 257900 Journal Entries 1-Jan-14 Crane Dr 151677 To Finance lease liability Cr 151677 (Initial recording of asset) Finance lease liability Dr 32300 To cash Cr 32300 Depreciation Dr 17596 To Accumulated dep Cr 17596 1-Jan-15 Finance lease liability Dr 29099.10 Interest expense Dr 3200.90 To cash Cr 32300 Depreciation Dr 17596 To Accumulated dep Cr 17596 1-Jan-16 Finance lease liability Dr 26215.40 Interest expense Dr 6084.60 To cash Cr 32300 Depreciation Dr 17596 To Accumulated dep Cr 17596 1-Jan-17 Finance lease liability Dr 23617.48 Interest expense Dr 8682.52 To cash Cr 32300 Depreciation Dr 17596 To Accumulated dep Cr 17596 1-Jan-18 Finance lease liability Dr 21277.01 Interest expense Dr 11022.99 To cash Cr 32300 Depreciation Dr 17596 To Accumulated dep Cr 17596 1-Jan-19 Finance lease liability Dr 19168.48 Interest expense Dr 13131.52 To cash Cr 32300 Depreciation Dr 17596 To Accumulated dep Cr 17596

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