Question

Exercise 21-22 a-b (Part Level Submission) Rauch Incorporated leases a piece of equipment to Donahue Corporation on January 1, 2020. The lease agreement called for annual rental payments of $4,892 at the beginning of each year of the 4-year lease. The equipment has an economic useful life of 6 years, a fair value of $25,000, a book value of $20,000, and both parties expect a residual value of $8,250 at the end of the lease term, though this amount is not guaranteed. Rauch set the lease payments with the intent of earning a 5% return, and Donahue is aware of this rate. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature. Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

(a) Your answer is correct. What is the amount of the rental payments used in the lease agreement? (Round answer to 0 decimal places, e.g. 5,275.) Rental payments $ Click if you would like to Show Work for this question: Open Show Work LINK TO TEXT LINK TO TEXT Attempts: 1 of 15 used (b) Your answer is partially correct. Try again. Prepare the entries for Rauch for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit 1/1/2012/31/20 1/1/2012/31/20 (To record the recognition of the revenue) 1/1/2012/31/20 (To record depreciation expense on the leased equipment)

Answer 1

Solutions:

The lease is an operating lease for both Rauch and Donahue, as none of the classification tests are met. The lease term is only 67% (4 ÷ 6) of the economic life of the asset, there is no bargain purchase, ownership does not transfer, and the asset is not specialized. The calculation for the 90% test shows the present value of lease payments is below 90% ($18,214 ÷ $25,000 = 73%):

Lease Liability
PV of Lease Payments
Lease Payment	4892
No of periods	4
Interest rate per period	5.00%
PV annuity due Factor @ 10% for 5 years	3.72325
PV of Lease Payments (4892* PV factor for annuity due)	18214.13

Journal Entries - Rauch

01-01-2020	Cash	4892
	Unearned Lease Revenue		4892
12/31/2020	Unearned Lease Revenue	4892
	Lease Revenue		4892
	(To Record the recognition of revenue)
12/31/2020	Depreciation Expense (20000*33.33%)	6666
	Accumulated Depreciation - Equipment		6666
	(Depreciating the asset on double decling balance method)

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