Question

Tamarisk Dairy leases its milking equipment from Vaughn Finance Company under the following lease terms.

1.The lease term is 10 years, noncancelable, and requires equal rental payments of $27,900 due at the beginning of each year starting January 1, 2020.

2.The equipment has a fair value at the commencement of the lease (January 1, 2020) of $211,081 and a cost of $263,000 on Vaughn Finance's books. It also has an estimated economic life of 15 years and an expected residual value of $12,700, though Tamarisk Dairy has guaranteed a residual value of $19,200 to Vaughn Finance.

3.The lease contains no renewal options, and the equipment reverts to Vaughn Finance upon termination of the lease. The equipment is not of a specialized use.

4.Tamarisk Dairy's incremental borrowing rate is 8% per year. The implicit rate is also 8%.

5.Tamarisk Dairy depreciates similar equipment that it owns on a straight-line basis.

6.Collectibility of the payments is probable.

Prepare the journal entries for the lessee and lessor at January 1, 2020, and December 31, 2020 (the lessee's and lessor's year-end). Assume no reversing entries.

What would have been the amount of the initial lease liability recorded by the lessee upon the commencement of the lease if:

The residual value of $19,200 had been guaranteed by a third party, not the lessee?

The residual value of $19,200 had not been guaranteed at all?

On the lessor's books, what would be the amount recorded as the lease receivable at the commencement of the lease, assuming:

The residual value of $19,200 had been guaranteed by a third party?

The residual value of $19,200 had not been guaranteed at all?

Answer 1