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 |
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