Question

Question 11

The following facts pertain to a non-cancelable lease agreement between Carla Vista Leasing Company and Tamarisk Company, a lessee.

Commencement date		May 1, 2020
Annual lease payment due at the beginning of
each year, beginning with May 1, 2020		$15,138.16
Bargain purchase option price at end of lease term		$4,000
Lease term		5	years
Economic life of leased equipment		10	years
Lessor’s cost		$50,000
Fair value of asset at May 1, 2020		$68,000
Lessor’s implicit rate		8	%
Lessee’s incremental borrowing rate		8	%

The collectibility of the lease payments by Carla Vista is probable.

Discuss the nature of this lease to Tamarisk.
Discuss the nature of this lease to Carla Vista.

Prepare a lease amortization schedule for Tamarisk for the 5-year lease term. (Round answers to 2 decimal places, e.g. 5,275.15.)

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 2020 and 2021. Tamarisk’s annual accounting period ends on December 31. Reversing entries are used by Tamarisk. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 5,275.15. Record journal entries in the order presented in the problem.)

Answer 1

Year	Lease payment & Purchase option	PV Factor @8%	Present Value
1	15,138.16	1	15,138.16
2	15,138.16	0.92593	14,016.81
3	15,138.16	0.85734	12,978.53
4	15,138.16	0.79383	12,017.16
5	15,138.16	0.73503	11,127.00
5 End	4,000.00	0.68058	2,722.33
Total	79,690.80		68,000.00

1.)	This lease is a Capital lease for Tamarisk, because the present value of lease payment is equal to fair value of Asset.
2.)	This lease is a Capital lease for Carla Vista, because the present value of lease payment is equal to fair value of Asset.

3.)	Date	Lease payment/Purchase option	Interest Expense @8%	Reduction in lease liability	Lease liability
	May 1,2020				68,000.00
	May 1,2020	15,138.16	-	15,138.16	52,861.84
	May 1,2021	15,138.16	4,228.95	10,909.21	41,952.63
	May 1,2022	15,138.16	3,356.21	11,781.95	30,170.68
	May 1,2023	15,138.16	2,413.65	12,724.51	17,446.17
	May 1,2024	15,138.16	1,395.69	13,742.47	3,703.71
	April 30,2025	4,000.00	296.30	3,703.70	-
	Total	79,690.80	11,690.80	68,000.00

4.)	Date	Particulars	Debit $	Credit $
	May 1,2020	Right of use asset	68,000.00
		Lease Liability		68,000.00
	May 1,2020	Lease Liability	15,138.16
		Cash		15,138.16
	December 31,2020	Amotization Expense	9,066.67
		Right of use asset		9,066.67
		(68,000 / 5 ) x 8/12
	December 31,2020	Interest Expense	2,819.30
		Interest Payable		2,819.30
		(68,000 - 15,138.16 ) x 8% x 8/12
	1 January ,2021	Interest Payable	2,819.30
		Interest Expense		2,819.30
	May 1,2021	Lease Liability	10,909.21
		Interest Expense	4,228.95
		Cash		15,138.16
	December 31,2021	Amotization Expense	13,600.00
		Right of use asset		13,600.00
		(68,000 / 5 )
	December 31,2021	Interest Expense	2,237.47
		Interest Payable		2,237.47
		( 68,000 - 15,138.16- 10,909.21 ) x 8% x 8/12