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In: Accounting

Needed Information: -The equipment has an estimated useful life of 13 years. -There is no purchase...

Needed Information:

-The equipment has an estimated useful life of 13 years.
-There is no purchase option. Transfer of ownership to Michael is not stipulated in the lease contract.
-The fair value to Thomas (lessor) at the inception of the lease was $4,000,000. Lessor's cost was $3,775,000. Sales
commissions were $2,500.
-Michael's incremental borrowing rate is 10%. The implicit annual rate in the lease (known to Michael) is 8%.
- Michael and Thomas use straight-line depreciation.
-The lease requires rental payments of $266,000, payable on 1/2/20 and subsequently on 6/30 and 12/31.
-Michael guarantees that Thomas will realize $200,000 from selling the asset at the end of the lease. The expected
residual value is $120,000.

- ROU Asset $3,796,139 but for classification $3,850,906. Lease receivable $5,520,000 = [$266,000 x 20 ]+ $200,000

Create a well-labeled amortization table and the entries for Thomas and Michael for 2020 and 2021. *Tip Lessor will being its schedule with $3,850,906 because lessor will receive full $200,000 even if residual were unguaranteed. Lessee will start its schedule with $3,796,139 because probable only paying $80,000 for residual.

Solutions

Expert Solution

Lease Amortization Schedule - Lessee - Micheal

Lease Amortisation Schedule
Date Lease Payment Interest Expense Reduction in Liability Lease Liability
01-01-2020 3796139
01-01-2020 266000.00 266000 3530139
30-06-2020 266000.00 141206 124794 3405344
31-12-2020 266000.00 136214 129786 3275558
30-06-2021 266000.00 131022 134978 3140580
31-12-2021 266000.00 125623 140377 3000204
Journal Entries - In Lessee Books
01-01-2020 Right to use Asset 3796139
    Lease Liability 3796139
(To record Liability)
01-01-2020 Lease Liability 266000
   Cash 266000
(To record lease payments)
30-06-2020 Interest Expense 141206
Lease Liability 124794
    Cash 266000
To record lease payment
31-12-2020 Interest Expense 136214
Lease Liability 129786
    Cash 266000
To record lease payment
31-12-2020 Amortization Expense 185807
Right-to- Use Asset 185807
Right to use Asset
30-06-2021 Interest Expense 131022
Lease Liability 134978
    Cash 266000
To record lease payment
31-12-2021 Interest Expense 125623
Lease Liability 140377
    Cash 266000
To record lease payment
31-12-2021 Amortization Expense 185807
Right-to- Use Asset 185807
Interest Expense

Lease Amortizartion Schedule - Lessor - Thomas

Lease Amortisation Schedule
Date Lease Payment Interest Expense Reduction in Liability Lease Liability
01-01-2020 3850905
01-01-2020 266000.00 266000 3584905
30-06-2020 266000.00 143396 122604 3462301
31-12-2020 266000.00 138492 127508 3334794
30-06-2021 266000.00 133392 132608 3202185
31-12-2021 266000.00 128087 137913 3064273
Journal Entries - In the Books of Lessor
01-Jan-20 Lease Receivable 3850905
Equipment 3850905
( To record the inception of lease)
01-01-2020 Cash 266000
   Lease Receivable 266000
30-06-2020 Cash 266000.00
   Interest Income 143396
   Lease Receivable 122604
31-12-2020 Cash 266000.00
   Interest Income 138492
   Lease Receivable 127508
30-06-2021 Cash 266000.00
   Interest Income 133392
   Lease Receivable 132608
31-12-2021 Cash 266000.00
   Interest Income 128087
   Lease Receivable 137913

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ekkarill92 answered 2 years ago
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