Question

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Problem 21-6 The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and...

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.)

Solutions

Expert Solution

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
01.01.17
556,000
117768 0 117768 438232
01.01.18
438232 117768 56970 60798 377434
01.01.19
377434 117768 49066 68702 308733
01.01.20
308733 117768 40135 77633 231100
01.01.21
231100 117768 30043 87725 143375
01.01.22
143375 117768 18639 99129 44246
31.12.22
44246 50000 5754 44246 0

Journal Entries in the books of Lessee :

Date                                     Account titles & expalantion Debit ($     Credit($)

  1. (To record the lease.)

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


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