Question

Exercise 21A-10 a-d

The following facts pertain to a non-cancelable lease agreement between Cullumber Leasing Company and Marin Company, a lessee.

Commencement date		May 1, 2017
Annual lease payment due at the beginning of
each year, beginning with May 1, 2017		$19,656.69
Bargain purchase option price at end of lease term		$7,000
Lease term		5	years
Economic life of leased equipment		10	years
Lessor’s cost		$65,000
Fair value of asset at May 1, 2017		$93,000
Lessor’s implicit rate		6	%
Lessee’s incremental borrowing rate		6	%

The collectibility of the lease payments by Cullumber is probable.

Prepare a lease amortization schedule for Marin for the 5-year lease term.

Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Marin’s annual accounting period ends on December 31. Reversing entries are used by Marin. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 5,275.15.)

Answer 1

This is Capital lease since present value of minimum lease payment is 90% or more .

Calculation of present value of minimum lease payment

Year	Rentals	Present value @ 6%	Present value
1	19656.69	0.943	18536.26
2	19656.69	0.889	17474.80
3	19656.69	0.839	16491.96
4	19656.69	0.792	15568.10
5	19656.69	0.747	14683.55
			82754.66

Fair value 93000

93000 x 90% =83700

present value of minimum lease payment = 82754.66

So the difference between fair value and present value of minimum lease payment is 945.34 so it can be ignored and lease will be considered as Capital Lease

Ammortisation Schedule

Date	Annual Lease payment	Interest on liability	Reduction of lease liability	Lease Liability
01-05-17	19656.69	0.00	0	63097.97
01-01-18	19656.69	2523.92	17132.77	45965.20
01-01-19	19656.69	2757.91	16898.78	29066.43
01-01-20	19656.69	1743.99	17912.70	11153.72
01-01-21	19656.69	669.22	18987.47	0.00

Journal Entries

01-05-17	Asset account	Dr	82755
		To Lease Liability		82755
	Fair value or present value of minimum lease payment whichever is lower
31.03.2017	Depreciation	Dr	16551
		To Asset		16551
	82755 / 5
31.03.2017	Finace Cost	Dr	2523
		To Lease Liability		2523
	Interest for 8 months only that is 82755 x 6 /100 x 8 /12
31.03.2018	Depreciation	Dr	16551
		To Asset		16551
	82755 / 5
31.03.2018	Finace Cost	Dr	2757
		To Lease Liability		2757