Question

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.

Answer 1

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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