Question

SU Company signs an agreement on January 1, 2009, to lease equipment to Tiger Corporation. The following information relates to this agreement: The term of the non cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. The cost of the asset to the lessor is $245,000. The fair value of the asset on January 1, 2009, is $245,000. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $43,622, none of which is guaranteed. The agreement requires annual rental payments, beginning Jan. 1, 2009. Collectability of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. The lessor’s rate of return is 10% and is known to the lessee. The lessee’s borrowing rate is 12%.

Please show clearly how to get present value(s).

A.) Calculate the annual rent payment.

B.) Prepare an amortization table

C.) Prepare all of the journal entries for the lessor for 2009 and 2010.

Answer 1

a)calculation of annual lease payment
Fair value	$2,45,000.00
Less : PV of unguaranteed residual value
unguaranteed residual value	$43,622.00
x PVF(10%,6)	0.56447
PV of unguaranteed residual value	$24,623.31
amount to be recovered through periodic payments (245000-24623)	$2,20,377.00
x PVADIF(10%,6)	4.7908
lease payments payable at beginning of each year	$46,000.04
or Round off	$46,000.00

b)Lease Amortisation schedule
date	payment	Interest at 10%	recovery of lease receivable	Lease receivable
Jan 1 ,2009				245000
Jan 1 ,2009	$46,000.00	-	$46,000.00	$1,99,000.00
Jan 1 ,2010	$46,000.00	$19,900.00	$26,100.00	$1,72,900.00
Jan 1 ,2011	$46,000.00	$17,290.00	$28,710.00	$1,44,190.00
Jan 1 ,2012	$46,000.00	$14,419.00	$31,581.00	$1,12,609.00
Jan 1 ,2013	$46,000.00	$11,260.90	$34,739.10	$77,869.90
Jan 1 ,2014	$46,000.00	$7,786.99	$38,213.01	$39,656.89
Dec 31,2014	$43,622.00	$3,965.69	$39,656.31	$0.58

b)Journal entry
date	account title	debit	credit
Jan 1,2009	Lease receivable	$2,45,000.00
	equipment		$2,45,000.00
Jan 1,2009	Cash	$46,000.00
	Lease receivable		$46,000.00
Dec 31, 2009	Interest receivable (245000-46000)*10%	$19,900.00
	Interest revenue		$19,900.00
Jan 1,2010	Cash	$46,000.00
	Interest receivable		$19,900.00
	Lease receivable		$26,100.00
Dec 31, 2010	Interest receivable (245000-46000-26100)*10%	$17,290.00
	Interest revenue		$17,290.00