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.

1. Discuss the nature of this lease to Tamarisk

a) operating b) finance c) sales type

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

a) operating b) finance c) sales type

3. 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