Question

Nestle Company agrees to lease machinery to Skittles on January 1, 2018. The following information relates to the lease agreement. Assume a December 31 Year-End.

1. The term of the lease is 6 years with no renewal option, and the machinery has an estimated economic life of 9 years.

2. The cost of the machinery is $400,000 and the fair value of the asset on January 1, 2018, is $600,000.

3. At the end of the lease term, Nestle expects that the machinery will be valued at $100,000 and has given Skittles the option to purchase the asset at a discounted amount of $50,000.

4. The lease agreement requires equal annual rental payments of $113,864.31, beginning on January 1, 2018

5. The collectability of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.

6. Nestle desires an 8% rate of return on its investments. Skittles incremental borrowing rate is 6%, and the lessor's implicit rate is unknown.

Present Value of $1 for 6 periods at 6% .70496

Present Value of $1 for 6 periods at 8% .63017

Present Value of Annuity for 6 periods at 6% 4.91732

Present Value of Annuity for 6 periods at 8% 4.62288

Present Value of Annuity Due for 6 periods at 6% 5.21236

Present Value of Annuity Due for 6 periods at 8% 4.99271

**** NOTE: I already did my present value of the minimum lease payments and got $628,749.77 for the lessee and 600,000 for lessor. Im stuck on the journal entries for 2019. ****

Answer 1

In books of Nestle:

Date	Account	Debit	credit
1Jan 2019	Cash	113,864.31
	Lease receivable		74973.45
	Interest receivable [486135.69*.08]		38890.86
31dec 2019	Interest receivable	32892.98
	Interest revenue [411162.24*.08]		32892.98
	[being interest accrued for a year to be received at beginning of 2020]

**Lease carrying value at end of 31dec 2018:600000-113,864.31(1jan 2018) = 486135.69

**carrying value at 31dec 2019 :486135.69-74973.45= 411162.24

In books of Skittles:

Date	account	debit	credit
1 jan 2019	lease liability	82971.18
	Interest payable [514885.46*.06]	30893.13
	cash		113,864.31
31 dec 2019	Depreciation expense	96458.30
	Accumulated depreciation -leased asset		96458.30
dec 31 2019	Interest expense	25914.86
	Interest payable [431914.28*.06]		25914.86
	[Interest accrued for 2019]

**Lease carrying value at end of 31 dec 2018 : 628,749.77 - 113,864.31 = 514885.46

**Depreciation expense :[628749.77-50000]/6=96458.30

**lease carrying value at end of 31dec 2019: 514885.46-82971.18 = 431914.28