Question

The following facts pertain to a noncancelable lease agreement between Riverbed Leasing Company and Marin Company, a lessee. Inception date: May 1, 2017 Annual lease payment due at the beginning of each year, beginning with May 1, 2017 $20,198.56 Bargain-purchase option price at end of lease term $3,600 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $72,000 Fair value of asset at May 1, 2017 $85,000 Lessor’s implicit rate 11 % Lessee’s incremental borrowing rate 11 % The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs. The expected residual value of the equipment at the end of 5 (10) years is $12,000 ($0).

A.) Prepare a lease amortization schedule for Marin Company for the 5-year lease term

B.) Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Marin’s annual accounting period ends on December 31. Reversing entries are used by Marin.

Answer 1

Splution: part- (A)
Present value of minimum lease payments using excel's PV function:
Annual lease payment- 20,198+20198 X PVIFA(11%, 4)					$82,862.57
Bargain purchase option price- 3,600 X PVIF(11%, 4 Years)					$2,136.60
Lease liability					$84,999.17
Lease Amortization Schedule
	Date	Annual Lease Payment	Interest (11%) on Liabilities	Reduction of Lease Liabilities	Lease Liabilities
	1/5/2017				82,862.57
	1/5/2017	20,198.56		20,198.56	62,664.01
	31/12/2017	0.00	4,595.36	-4,595.36	67,259.37
	1/5/2018	20,198.56	2,297.68	17,900.88	49,358.49
	31/12/2018	0.00	3,619.62	-3,619.62	52,978.11
	1/5/2019	20,198.56	1,809.81	18,388.75	34,589.37
	31/12/2019	0.00	2,536.55	-2,536.55	37,125.92
	1/5/2020	20,198.56	1,268.28	18,930.28	18,195.64
	31/12/2020	0.00	1,334.35	-1,334.35	19,529.98
	1/5/2021	20,198.56	668.58	19,529.98	0.00
( on 31 December interest are provided for 8 months and on 01 May interest are provided for 4 months)
Splution: part- (B)
Journal entries
Date	General Journal			Debit	Credit
1/5/2017	Right of Use Assets			84,999
	Lease Liabilities				84,999
1/5/2017	Lease Liabilities			20,199
	Cash				20,199
31/12/17	Amortization Expenses			11,333
	Right of Use Assets				49,063
	(84,999.17 X 8 months/60 months)
31/12/17	Interest Expenses			4,595
	Cash				4,595
1/5/2018	Lease Liabilities			17,901
	Interest Expenses			2,298
	Cash				20,199
31/12/18	Amortization Expenses			17,000
	Right of Use Assets				17,000
	(84,999.17 / 5 years)
31/12/18	Interest Expenses			3,620
	Cash				3619.62