Question

1)         On October 1, 20X1, Kelly Company leased a boat from Grant Company. The lease is noncancelable and requires five equal annual payments of $50,000 each. The lease payments are due each October 1, beginning October 1, 20X1. The boat is recorded on Grant’s books at $207,542, which is equal to its fair value. Grant expects that the boat’s residual value at the end of the lease term will be $10,000, but it is not guaranteed by Kelly. However, Kelly has an option to purchase the boat for $10,000 at the end of the lease term. At the inception of the lease, the boat has a remaining economic life of six years with a $2,500 estimated salvage value at the end of its life. Both firms use the straight-line method of amortization and have December 31 year-ends for financial reporting purposes. The interest rate used by Grant Company to calculate the annual lease payment is 12%, and known by Kelly. Collection of the lease payments is reasonably predictable by Grant.  

Required:

Complete the following table for Grant’s and Kelly’s December 31, 20X1 income statements:

	Grant (Lessor)	Kelly (Lessee)
Sales
Interest income
Rent revenue
Amortization expense
Rent expense
Interest expense

Be sure to show and clearly label all calculations.

Answer 1

Determining the Nature of Lease:

For Kelly (LesseE) - Since it is a non cancellable lease and there is option at the end of the lease to purchase it is a FINANCE leasee

For Grant (Lessor) - Risk and Ownership still with Lessor hence for him it is an OPERATING LEASE.Also there is no element of Income as Fair Value of Asset is equal to the book value.

Basis the above the accounting treatments shall be as hereunder:

BOOKS OF KELLY (LESSEE):

Present Value of Lease Payments using 12% discount factor

BOOKS OF GRANT (LESSOR):

FINAL TABLE BASIS THE ABOVE :