Question

Branif Leasing leases mechanical equipment to industrial consumers under sales-type leases that earn Branif a 10% rate of return for providing long-term financing. A lease agreement with Branson Construction specified 20 annual payments beginning December 31, 2018, the beginning of the lease. The estimated useful life of the leased equipment is 20 years with no residual value. Its cost to Branif was $889,667. The lease qualifies as a finance lease to Branson. Maintenance of the equipment was contracted for through a 20-year service agreement with Midway Service Company requiring 20 annual payments of $3,000 beginning December 31, 2018. Progressive insurance Company charges Branif $3,000 annually for hazard insurance coverage on the equipment. Both companies use straight-line depreciation or amortization. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
Prepare the appropriate entries for both the lessee and lessor to record the second lease payment and depreciation on December 31, 2019, under each of three independent assumptions:

1. The lessee pays maintenance costs as incurred. The lessor pays insurance premiums as incurred. The lease agreement requires annual payments of $95,000.
2. The contract specifies that the lessor pays maintenance costs as incurred. The lessee’s lease payments were increased to $98,000 to include an amount sufficient to reimburse these costs.
3. The lessee’s lease payments of $98,000 included $3,000 for hazard insurance on the equipment rather than maintenance.

Transaction List:

Required 1 Leesee:

1-Record cash payment.

2-Record maintenance expense.

3-Record amortization expense.

Required 1 Lessor:

1- record cash received

Required 2 Leesee:

1- Record cash payment

2- Record amortization expense

Required 2 Lessor:

1- Record Cash received

Required 3 Leesee:

1- Record Cash Payment

2-record amortization expense

Required 3 Lessor:

1-Record cash received

Answer 1

	Answer
								$
	Lessor	Branif Leasing			Maintainence cost per annum			3,000
	Lessee	Branson Construction			Insurance charges per annum			3,000
	Leased Asset	Mechanical Equipment
	Lease Type	Finance Lease
	Lease Term	20 years
	Lease beginning	31-12-2018
	Rate of interest implicit in lease	10%
	Depreciation/ amortisation method used	Straight line method
	Assumption 1	$
	Annual lease payment	95,000
	Minimum Lease Payments discounted at the rate of interest implicit in the lease @10%
Year	Annual lease payments	Discount Rate (1/(1+0.10)^n)	Lease liability		Discount rate= 1/(1+r)^n)
1	95,000	0.91	86,364		where
2	95,000	0.83	78,512		r = rate of interest implicit in the lease
3	95,000	0.75	71,375		n = number of years
4	95,000	0.68	64,886
5	95,000	0.62	58,988
6	95,000	0.56	53,625
7	95,000	0.51	48,750
8	95,000	0.47	44,318
9	95,000	0.42	40,289
10	95,000	0.39	36,627
11	95,000	0.35	33,297
12	95,000	0.32	30,270
13	95,000	0.29	27,518
14	95,000	0.26	25,016
15	95,000	0.24	22,742
16	95,000	0.22	20,675
17	95,000	0.20	18,795
18	95,000	0.18	17,087
19	95,000	0.16	15,533
20	95,000	0.15	14,121
	Present value of minimum lease payments		8,08,789
	Books of lessee
	A finance lease results in recognition of both an asset and a liability in the books of the lessee at the inception of the lease at amount equal to present value of minimum lease payments.
1	Recording cash payment as on 31/12/2019
	Lease liabilty                       Dr.	85,500
	Interest Expense(95000*10%) Dr.	9,500
	To Cash		95,000
2	Recording maintainence expense as on 31/12/2019
	Maintainence expenses        Dr.	3,000
	To Cash		3,000
3	Recording amortisation expense as on 31/12/2019
	Amortization expenses        Dr.	40,439
	To Accumulated Depreciation		40,439
	(808,789/20)
	Note:
	Under finance lease, the lessee recognizes the depreciation expense on the leased asset. It depreciates the leased asset as if it is an owned asset. Since, the both lessor and lessee use straight line method of depreciation the amortization expense per year would be = Present value of minimum lease payments/useful life or lease term (808,789/20=40,439)
	Books of lessor
1	Recording cash received as on 31/12/2019
	Cash                                    Dr.	95,000
	To Finance Income		9,500
	To Lease receivable (95000-5000)		85,500
	Assumption 2	$
	Annual lease payment	98,000
	However, this includes $3000 towards maintainence costs, hence, the actual lease expense will be considered as $95000 only and not $98000. The amortisation expense in the books of lessee will be calculated at Present value of lease payments considering $95000 as annual lease payment.
	Present value of minimum lease payments		8,08,789
	( same as Assumption 1)
	Books of lessee
1	Recording cash payment as on 31/12/2019
	Lease liabilty                       Dr.	85,500
	Interest Expense(95000*10%) Dr.	9,500
	Maintainence expense          Dr.	3,000
	To Cash		98,000
2	Recording amortisation expense as on 31/12/2019
	Amortization expenses        Dr.	40,439
	To Accumulated Depreciation		40,439
	(808,789/20)
	Books of lessor
1	Recording cash received as on 31/12/2019
	Cash                                    Dr.	98,000
	To Finance Income		9,500
	To Lease receivable (95000-5000)		88,500
	To Maintainence payable on leased asset		3,000
	Assumption 3	$
	Annual lease payment	98,000
	However, this includes $3000 towards Hazard insurance, hence, the actual lease expense will be considered as $95000 only and not $98000. The amortisation expense in the books of lessee will be calculated at Present value of lease payments considering $95000 as annual lease payment.
	Present value of minimum lease payments		8,08,789
	( same as Assumption 1)
	Books of lessee
1	Recording cash payment as on 31/12/2019
	Lease liabilty                       Dr.	85,500
	Interest Expense(95000*10%) Dr.	9,500
	Insurance expense               Dr.	3,000
	To Cash		98,000
2	Recording amortisation expense as on 31/12/2019
	Amortization expenses        Dr.	40,439
	To Accumulated Depreciation		40,439
	(808,789/20)
	Books of lessor
	Recording cash received as on 31/12/2019
	Cash                                    Dr.	98,000
	To Finance Income		9,500
	To Lease receivable (95000-5000)		88,500
	To Insurance payable on leased asset		3,000