Question

Bramble Manufacturing Ltd. has signed a lease agreement with LPN Leasing Inc. to lease some specialized manufacturing equipment. The terms of the lease are as follows:

●		The lease is for 5 years commencing January 1, 2020.
●		Bramble must pay LPN $54,114 on January 1 of each year, beginning in 2020.
●		Equipment of this type normally has an economic life of 6 years.
●		LPN has concluded, based on its review of Bramble’s financial statements, that there is no unusual credit risk in this situation. LPN will not incur any further costs with regard to this lease.
●		LPN purchases this equipment directly from the manufacturer at a cost of $211,125, and normally sells the equipment for $251,625.
●		Bramble’s borrowing rate is 7%. LPN’s implied interest rate is 6%, which is known to Bramble at the time of negotiating the lease.
●		Bramble uses the straight-line method to depreciate similar equipment.
●		Both Bramble and LPN have calendar fiscal years (year end December 31), and follow ASPE.

Click here to view the factor table PRESENT VALUE OF 1.
Click here to view the factor table PRESENT VALUE OF AN ANNUITY DUE.

From Bramble Manufacturing’s perspective, is this a capital or operating lease?

Bramble will classify this as a Choose the answer from the menu in accordance to the question statement                                                                      operating leasecapital lease.

Prepare a lease amortization schedule for this lease. (Round answers to 0 decimal places, e.g. 5,275.)

Date		Payment		Interest		Principal		Balance
January 1, 2020
January 1, 2020
January 1, 2021
January 1, 2022
January 1, 2023
January 1, 2024

Prepare the journal entries on Bramble Manufacturing’s books on January 1, 2020.

(To record lease payment.)(To record inception of lease.)

Prepare the journal entries on LPN Leasing’s books on January 1, 2020.

(To record inception of lease
and cost of goods sold.)

(Collection of lease payment.)

Prepare the journal entries for Bramble Manufacturing on December 31, 2020.

(To record interest.)

(To record depreciation expense.)

Prepare the journal entry on LPN Leasing’s books on December 31, 2020.

(To record interest.)

Answer 1

Since Lease Period is almost cover the usefull life of the asset, the lease is Finance Lease.
Bramble will classify as Capital Lease.
Lease Amortization Schedule
Lease Period	=	5 Years
Lease Payment	=	54114$
Rate	=	7%
PV of Lease Payments	=	PV(rate,nper,pmt,type)
	=	PV(0.07,5,-54114,0,1)
	=	$2,37,410
Date	Lease Payment	Interest @ 7%	Principal Balance
Jan-20			$2,37,410
Jan-20	$54,114		$1,83,296
Jan-21	$54,114	$12,831	$1,42,013
Jan-22	$54,114	$9,941	$97,840
Jan-23	$54,114	$6,849	$50,574
Jan-24	$54,114	$3,540	$0
Journal Entry in the books of Bramble as on 1st January 2020
ROU Asset A/c	$2,37,410
To Lease Liability		$2,37,410
(Being lease asset recorded)
Lease Liability A/c	$54,114
To Bank A/c		$54,114
(Being first lease payment made)