In: Accounting
Problem 21-6
The following facts pertain to a noncancelable lease agreement
between Faldo Leasing Company and Bridgeport Company, a
lessee.
Inception date January 1, 2017
Annual lease payment due at the beginning of
each year, beginning with January 1, 2017
$117,768
Residual value of equipment at end of lease term,
guaranteed by the lessee $50,000
Lease term 6 years
Economic life of leased equipment 6 years
Fair value of asset at January 1, 2017 $556,000
Lessor’s implicit rate 13 %
Lessee’s incremental borrowing rate 13 %
The lessee assumes responsibility for all executory costs, which
are expected to amount to $4,800 per year. The asset will revert to
the lessor at the end of the lease term. The lessee has guaranteed
the lessor a residual value of $50,000. The lessee uses the
straight-line depreciation method for all equipment.
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Prepare an amortization schedule that would be suitable for the
lessee for the lease term. (Round present value factor calculations
to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal
places e.g. 58,971.)
BRIDGEPORT COMPANY (Lessee)
Lease Amortization Schedule
Date
Annual Lease
Payment Plus GRV
Interest on
Liability
Reduction of Lease
Liability
Lease Liability
1/1/17
$
$
$
$
1/1/17
1/1/18
1/1/19
1/1/20
1/1/21
1/1/22
12/31/22
$
$
$
Prepare all of the journal entries for the lessee for 2017 and
2018 to record the lease agreement, the lease payments, and all
expenses related to this lease. Assume the lessee’s annual
accounting period ends on December 31 and reversing entries are
used when appropriate. All executory costs are paid as incurred.
(Credit account titles are automatically indented when amount is
entered. Do not indent manually. If no entry is required, select
"No Entry" for the account titles and enter 0 for the amounts.
Round answers to 0 decimal places e.g. 58,971.)
Date
Account Titles and Explanation
Debit
Credit
Jan. 1, 2017
During 2017
Dec. 31, 2017
Jan. 1, 2018
During 2018
Dec. 31, 2018
(To record the lease.)
(To record first lease payment.)
Jan. 1, 2017
During 2017
Dec. 31, 2017
Jan. 1, 2018
During 2018
Dec. 31, 2018
Jan. 1, 2017
During 2017
Dec. 31, 2017
Jan. 1, 2018
During 2018
Dec. 31, 2018
(To record interest.)
(To record depreciation.)
Jan. 1, 2017
During 2017
Dec. 31, 2017
Jan. 1, 2018
During 2018
Dec. 31, 2018
(To reverse the December 31 entry.)
(To record the second lease payment.)
Jan. 1, 2017
During 2017
Dec. 31, 2017
Jan. 1, 2018
During 2018
Dec. 31, 2018
Jan. 1, 2017
During 2017
Dec. 31, 2017
Jan. 1, 2018
During 2018
Dec. 31, 2018
(To record interest.)
(To record depreciation.)
Answer :
As provided Annaul Lease (FV) : $ 556000
Annual Payment w.e.f. 01.01.2017 : $ 117768
Term : 6 Years
Residual value : $ 50000
Hence amortisation schedule will be as follows :
Date | Annual Lease ($) | Payment plus GRV ($) | Interest on Liability @13% | Reduction of Lease Liability | Lease liability | ||
|
|
117768 | 0 | 117768 | 438232 | ||
|
438232 | 117768 | 56970 | 60798 | 377434 | ||
|
377434 | 117768 | 49066 | 68702 | 308733 | ||
|
308733 | 117768 | 40135 | 77633 | 231100 | ||
|
231100 | 117768 | 30043 | 87725 | 143375 | ||
|
143375 | 117768 | 18639 | 99129 | 44246 | ||
|
44246 | 50000 | 5754 | 44246 | 0 |
Journal Entries in the books of Lessee :
Date Account titles & expalantion Debit ($ Credit($)
Jan. 1,2017 Leased Equipment under Capital Leases 556000
Leased liability 556000
2. (To record the first lease payment)
Jan. 1,2017 Leased Liability 117768
Cash 117768
3. To record Interest
Dec.3 1,2017 Interest Expenses 56970
Interest Payable 56970
4. To record depreciation under Straight Line Method
($556000-50000/ 6 Years=$84333 per year)
Dec.31,2017 Depreciation Expenses 84333
Accumulated Depreciation-Leased Assets 84333
5. To record Executory Cost
Dec.3 1,2017 Executory cost/ Expenses 4800
Cash 4800
6. (To reverse Dec.31, 2017 entry of Interest)
Jan. 1,2018 Interest Payable 56970
Leased Liability 56970
7. (To record the second lease payment)
Jan. 1,2018 Leased Liability 117768
Cash 117768
8. To record Interest
Dec.31,2018 Interest Expenses 49066
Interest Payable 49066
9. To record depreciation under Straight Line Method
($556000-50000/ 6 Years=$84333 per year)
Dec.31,2018 Depreciation Expenses 84333
Accumulated Depreciation-Leased Assets 84333
10. To record Executory Cost
Dec.31,2018 Executory cost/ Expenses 4800
Cash 4800