Question

In: Accounting

On January 1, 2018, Allied Industries leased a high-performance conveyer to Karrier Company for a four-year...

On January 1, 2018, Allied Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Allied. The equipment cost Allied $923,000 and has an expected useful life of five years. Allied expects the residual value at December 31, 2021, will be $307,000. Negotiations led to the lessee guaranteeing a $354,000 residual value.

Equal payments under the finance/sales-type lease are $207,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Karrier is aware that Allied used a 5% interest rate when calculating lease payments. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:

1. Prepare the appropriate entries for both Karrier and Allied on January 1, 2018, to record the lease.
2. Prepare all appropriate entries for both Karrier and Allied on December 31, 2018, related to the lease

Solutions

Expert Solution

Present value of lease payments for lesee

Present value of periodic lease payments (207000*3.54595) 734012
Plus: present value of the excess lessee guaranteed value (354000-307000)*0.82270 38667
Present value of lease payments 772679

Pvifa (4years ,5%) = 3.54595

Pvifa (4years, 5%) = 0.82270


Present value of lease payments for lessor

Present value of periodic payments 734012
Plus: present value of residual value (307000*0.82270) 252569
Plus: present value of the excess lesee guaranteed value 38667
Present value of lease payments 1025248

Part 1

For Lessee

No. Date account Titles and explanation debit credit
1. January 1, 2018 right of use asset 772679
Lease payable 772679

For Lessor
2. January 1, 2018 lease receivable 1025248
Equipment 1025248

Part 2

For Lessee

No. Date account Titles and explanation debit credit
1 December 31 2018 interest expense (772679*5%) 38634
Lease payable (balancing figure) 168366
Cash 207000
December 31, 2018 amortization expense 193170
2. right of use asset (772679/4) 193170

For Lessor
December 31, 2018 cash 207000

Lease receivable (balancing Figure)

Interest revenue (1025248*5%)

155738

51262

ekkarill92 answered 1 year ago
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