In: Accounting
Item 13 Item 13 Neely BBQ leased equipment from Smoke Industries on January 1, 2018. Smoke Industries had manufactured the equipment at a cost of $810,000. (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.) Other information: Lease term 4 years Annual payments $360,000 beginning Jan. 1, 2018, and at Dec. 31, 2018, 2019, and 2020 Life of asset 4 years Rate the lessor charges 8% Required: 1. Prepare the appropriate entries for Neely BBQ (Lessee) on January 1, 2018, and December 31, 2018. 2. Prepare the appropriate entries for Smoke Industries (Lessor) on January 1, 2018, and December 31, 2018. Assume that control is transferred to the lessee. 3. Prepare the appropriate entries for Smoke Industries (Lessor) on January 1, 2018, and December 31, 2018. Assume that control is not transferred to the lessee.
Fair Value of the Lease=PV of Lease Payments |
|||
Date |
LEASE |
PVF@ 8% |
PRESENT VALUE |
JAN 1,2018 |
360000 |
1 |
360000 |
DEC 31,2018 |
360000 |
0.9259 |
333333 |
DEC 31,2019 |
360000 |
0.8573 |
308642 |
DEC 31,2020 |
360000 |
0.7938 |
285780 |
FAIR VALUE OF LEASE |
1287755 |
EFFEECTIVE INTEREST SCHEDULE |
||||||||
DATE |
Opening |
LEASE |
INTEREST |
REDUCTION |
Closing LEASE |
|||
JAN 1,2018 |
1287755 |
360000 |
0 |
360000 |
927755 |
|||
DEC 31,2018 |
927755 |
360000 |
74220 |
285780 |
641975 |
|||
DEC 31,2019 |
641975 |
360000 |
51358 |
308642 |
333333 |
|||
DEC 31,2020 |
333333 |
360000 |
26667 |
333333 |
0 |
1.
JOURNAL ENTRIES IN THE BOOKS OF NEELY BBQ |
|||
Date |
Debit |
Credit |
|
JAN 1,2018 |
Right of Use Asset A/c(Dr) |
1287755 |
|
To Lease Liability A/c(Cr) |
1287755 |
||
JAN 1,2018 |
Lease Liability A/c(Dr) |
360000 |
|
To Cash A/c (Cr) |
360000 |
||
DEC 31,2018 |
Lease Liability A/c(Dr) |
285780 |
|
Interest Expense A/c(Dr) |
74220 |
||
To Cash A/c (Cr) |
360000 |
2. Journal Entries for Smoke Industries (Lessor) on January 1, 2018, and December 31, 2018. (Control is transferred to the lessee)
Date |
Debit |
Credit |
|
JAN 1,2018 |
Lease Receivable A/c(Dr) |
1287755 |
|
To Asset A/c(Cr) |
1287755 |
||
JAN 1,2018 |
Cash A/c (Dr) |
360000 |
|
To Lease Receivable A/c(Cr) |
360000 |
||
DEC 31,2018 |
Cash A/c (Dr) |
360000 |
|
To Lease Receivable A/c(Cr) |
285780 |
||
To Interest Income A/c (Cr) |
74220 |
3.Journal Entries for Smoke Industries (Lessor) on
January 1, 2018, and December 31, 2018 |
|||
Date |
Debit |
Credit |
|
JAN 1,2018 |
Cash A/c(Dr) |
360000 |
|
To Unearned Revenue A/c (Cr) |
360000 |
||
Dec 31,2018 |
To Unearned RevenueA/c (Dr) |
360000 |
|
Lease Revenue A/C (Cr) |
360000 |
||
DEC 31,2018 |
Cash A/c (Dr) |
360000 |
|
To Lease Revenue A/c(Cr) |
360000 |
||
DEC 31,2018 |
Depreciation Expense A/c (Dr)(810000/4) |
202500 |
|
To Accumulated Depreciation A/c(Cr) |
202500 |