Question

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

Commencement date		January 1,
Annual lease payment due at the beginning of    each year, beginning with January 1,		$102,418
Residual value of equipment at end of lease term,    guaranteed by the lessee		$55,000
Expected residual value of equipment at end of lease term		$50,000
Lease term		6	years
Economic life of leased equipment		6	years
Fair value of asset at January 1,		$546,000
Lessor’s implicit rate		8	%
Lessee’s incremental borrowing rate		8	%

The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line amortization for all leased equipment.

a. Prepare an amortization schedule that would be suitable for the lessee for the lease term. \

b. Prepare all of the journal entries for the lessee for and to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31.

c. Suppose Carla received a lease incentive of $5,000 from Faldo Leasing to enter the lease. How would the initial measurement of the lease liability and right-of-use asset be affected?

d. What if Carla prepaid rent of $5,000 to Faldo?

Answer 1

Part A

Period	PV due factor @8%	PVA due factor @8%
1	1.00000	1.00000
2	0.92593	1.92593
3	0.85734	2.78326
4	0.79383	3.57710
5	0.73503	4.31213
6	0.68058	4.99271
7	0.63017

	Amount	PV factor	Present value
Lease payment	$      102,418	4.99271	511,343
Difference in Residual value (55000-50000)	$           5,000	0.63017	3,151
Lease liability	$ 514,494

Lessee
Lease Amortization Schedule
Date	Annual Lease Payment	Interest on Liability	Reduction of Lease Liability	Lease Liability
Jan 1, Year 1				514,494
Jan 1, Year 1	102,418		102,418	412,076
Jan 1, Year 2	102,418	32,966	69,452	342,624
Jan 1, Year 3	102,418	27,410	75,008	267,616
Jan 1, Year 4	102,418	21,409	81,009	186,607
Jan 1, Year 5	102,418	14,929	87,489	99,118
Jan 1, Year 6	102,418	7,929	94,489	4,629
Dec 31, Year 6	5,000	371	4,629	0

Part B

Lessee
Journal entries
Date	General Journal	Debit	Credit
Jan 1, Year 1	Right of use Asset	514,494
	Lease liability		514,494
	(To record the lease)
Jan 1, Year 1	Lease liability	102,418
	Cash		102,418
	(to record Lease liability paid)
Dec 31, Year 1	Interest expense	32,966
	Lease liability		32,966
	(To record accrued interest expense.)
Dec 31, Year 1	Amortization Expense	85,749
	Right of use Asset		85,749
	(To record Amortization.) (514494/6)

Part C

	Amount	PV factor	Present value
Lease payment	$      102,418	4.99271	511,343
Difference in Residual value (55000-50000)	$           5,000	0.63017	3,151
Lease liability	$ 514,494
Lease payment			511,343
Difference in Residual value (55000-50000)			3,151
Lease incentive paid			5,000
Right-of-use asset	$ 519,494

Part D

	Amount	PV factor	Present value
Lease payment	$      102,418	4.99271	511,343
Difference in Residual value (55000-50000)	$           5,000	0.63017	3,151
Prepaid rent			-5,000
Lease liability	$ 509,494
Lease payment			511,343
Difference in Residual value (55000-50000)			3,151
Right-of-use asset	$ 514,494