Question

Problem 12-10 Recording lessor sales-type lease under ASU 2016-02 (ASC 842) (LO 12-9)

Railcar Leasing Inc. early adopts ASU 2016-02 on January 1, 2017. Also, on January 1, 2017, Railcar Leasing Inc. (the lessor) purchased 10 used boxcars from Railroad Equipment Consolidators at a price of $8,749,520. Railcar leased the boxcars to the Reading Railroad Company (the lessee) on the same date. The lease calls for eight annual payments of $1,500,000 to be made at the beginning of each year (that is, the first payment is due at the inception of the lease on January 1, 2017). The boxcars have a nine-year remaining useful life, the lease contains no renewal or bargain purchase option, and possession of the boxcars reverts to the lessor at the lease’s end. The lessor expects the boxcars to be worth $1,000,000 at the end the lease term, but this value is not guaranteed by the lessee. The payment’s collectibility is reasonably certain with no important uncertainties regarding unreimbursable costs to be incurred by the lessor. The lessor has structured the lease to earn a rate of return of 12.0%. Use tables (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)

Required:

1-Prepare an amortization schedule for the lease for Railcar.

2-Prepare all journal entries for Railcar for 2017 and 2018. Assume that it reports on a calendar-year basis.

Required 1

Prepare an amortization schedule for the lease for Railcar. (Round your answers to 2 decimal places. Input all values as positive amounts.)

(Round your answers to 2 decimal places. Input all values as positive amounts.) Date Payment Interest Income Receivable Reduction Balance Prior 1/1/2017 1/1/2017 1/1/2018 1/1/2019 1/2/2020 1/1/2021 1/1/2022 1/1/2023 1/1/2024 12/31/2024

Required 2

Prepare all journal entries for Railcar for 2017 and 2018. Assume that it reports on a calendar-year basis. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round your answers to 2 decimal places.)

1-Prepare the entry for purchase of boxcars on January 1, 2017.

2-Prepare the entry for lease of boxcars on January 1, 2017.

3-Prepare the entry for the receipt of lease payment on January 1, 2017.

4-Prepare the entry for the recognition of interest on the lease at December 31, 2017.

5-Prepare the entry for the recognition of the current portion of the leases on December 31, 2017.

6-Prepare the entry for the receipt of lease payment on January 1, 2018.

7-Prepare the entry for the recognition of interest on the lease at December 31, 2018.

8-Prepare the entry for the recognition of the current portion of the leases on December 31, 2018.

Answer 1

(1) Amortization Schedule for Lease

Date	Payment	Interest Income	Receivable Reduction	Balance Prior
1/1/17	0	0	0	8,749,520
1/1/17	1,500,000	0	0	7,249,520
1/1/18	1,500,000	869,942	630,058	6,619,462
1/1/19	1,500,000	794,335	705,665	5,913,797
1/1/20	1,500,000	709,656	790,344	5,123,453
1/1/21	1,500,000	614,814	885,186	4,238,267
1/1/22	1,500,000	508,592	991,408	3,246,859
1/1/23	1,500,000	389,623	1,110,377	2,136,482
1/1/24	1,500,000	256,378	1,243,622	892,860
12/31/24

(2) Journal Entries

Date	Particulars	Dr./ Cr.	Debit ($)	Credit ($)
1 Jan 2017	Asset	Dr.	8,749,520
	To Bank			8,749,520
	(Being asset purchased)
1 Jan 2017	Lessee	Dr.	8,749,520
	To Asset on Lease			8,749,520
	(Being asset given on lease)
1 Jan 2017	Bank	Dr.	1,500,000
	To Lessee			1,500,000
	(Being lease payment received)
31 December 2017	Lessee	Dr.	869,942
	To Interest Income			869,942
	(Being Interest income recognised)
31 December 2017	No Entry
1 January 2018	Bank	Dr.	1,500,000
	To Lessee			1,500,000
	(Being lease rental recieved)
31 December 2018	Lessee	Dr.	794,335
	To Interest Income			794,335
	(Being Interest Income recognised)
31 December 2018	No Entry