Question

Lockhard Corporation entered into a lease agreement on January 1, 2019, to provide Cominsky Company with a piece of equipment. The terms of the lease agreement were as follows:

1. The lease is to be for 3 years with the rental payments of $10,521 to be made at the beginning of each year.

2. The equipment has a fair value of $55,000, a book value of $40,000, and an economic life of 8 years.

3. At the end of the lease term, both parties expect the equipment to have a residual value of $30,000 none of which is guaranteed.

4. The lease does not transfer ownership at the end of the term, does not have a bargain purchase option, and the asset is not of specialized nature.

5. The implicit is 6%, which is known by Cominsky.

6. Collectability of payments is probable.

Instructions:

1. Using the lease classification tests, determine the nature of this lease.

2. Prepare the amortization schedules for Cominsky will use over the lease term.

3. Prepare the 2019 journal entries for Cominsky.

4. Prepare the 2019 journal entries for Lockhard.

Answer 1

Required 1

As per the lease classification test, to be treated as a Finance Lease, any one criteria gas to be met:

• Ownership Transfer- End of the period of lease the ownership is transferred
• Written purchase option- The lease grants the lesse an option to purchase the underlying asset and the lessee is reasonably certain to excercise the option.
• No alternative use - the underlying asset is a specialized asset and has no alternative use.
• Equal or Excess PV - the sum of the lease payments and any residual value guranteed by the lessee equals or exceeds the FV of the underlying.
• Remaining Economic life - The lease term is for the major part of the remaining economic life of the underlying asset.

Since none of the above conditions are met, the lease would be categorised as Operating lease

Required 2

Year	Rental Payments	Present Value factor	Present Value
1	$ 10,521	0.9434	$               9,925
2	$ 10,521	0.8900	$               9,364
Present value of lease payments	$            19,289

Lease Amortization schedule

Year	Rental Payment	Interest amount	Amortization of Lease liability	Balance lease liability
0				$             19,289
1	$ 10,521	$            1,157	$               9,364	$               9,925
2	$ 10,521	$               596	$               9,925	$                    -

Required 3

Journal Entry in the books of Cominsky
Date	Particulars	Debit	Credit
1/1/19	Right-of - use asset	$       29,810
	Lease Liability		$   19,289
	Lease Expesne		$   10,521
	(to record operating lease )
1/1/19	Cash	$       10,521
	Right-of - use asset		$   10,521
	(to record payment of 1st installment)
12/31/19	Lease Expesne	$       10,521
	Lease Liability		$     1,157
	Right-of - use asset		$     9,364
	(to record lease expense)

Required 4

Journal Entry in the books of Lockhard
Date	Particulars	Debit	Credit
1/1/19	Cash	$       10,521
	Lease Income		$   10,521
	(to record 1st installment )

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