Question

MSG at the beginnig on 2010, enters into a 20 year non-cancellable lease for equipment having an estimated useful life of 20 years. MSG's incremental borrowing rate is 4%, the implicit rate of the lessor is unknown. MSG uses the straight-line method to depreciate its assets. Following provisions are at the below for company :
1. Rental payments of $220,000 payable at the beginning of each year.
2. A guarantee by MSG that FD COMPANY will realize $200,000 from selling the asset at the expiration of the lease. However, the actual residual value is expected to be $70,000.

a)What is the present value of the lease payments for measurement of the lease liability? (PV factor for annuity due of 20 annual payments at 4% annual rate, 14.13394; PV factor for payment at the 20 the period at 4%, 0.45639.)
b) What journal entries would MSG record during the first two years of the lease? (Include an amortization schedule including latest 1/1/2012)

Answer 1

Solution:

1.

Residual Value = The Guaranteed amount in excess of actual residual value = $200,000-$70000 = $130,000

2.

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