Question

In: Accounting

On January 1, 2019 the Halle Brothers, an Agricultural Irrigation Equipment dealer, leased to Vic Werloff...

On January 1, 2019 the Halle Brothers, an Agricultural Irrigation Equipment dealer, leased to Vic Werloff Farming, a Peerless Turbine Hi Volume Irrigation Pump.

The term of the lease is 6 years with no renewal option, and because the turbine pump has an economic life of 6 years, it is estimated to have a zero residual value and will revert back to Halle Brothers at the conclusion of the lease.

The fair value of the turbine pump is $210,000 and cost Halle Brothers $130,000.

Halle Brothers set the annual lease payment to provide a 12% return.

The lease requires annual payments of $45,604.78 due at the beginning of each year, with the first payment due at the signing of the lease.

Vic Werloff’s incremental borrowing rate is 12%.

Vic Werloff depreciates all of its equipment on a straight-line basis.

Required:

Prepare all necessary journal entries for 2019 and 2020 for both Halle Brothers and Vic Werloff.

Solutions

Expert Solution

Date Lease Payment Present value factor @12% Present Value
January 1,2019                                    45,604.78 1             45,605
January 1,2020                                    45,604.78                                        0.893             40,725
January 1,2021                                    45,604.78                                        0.797             36,347
January 1,2022                                    45,604.78                                        0.712             32,471
January 1,2023                                    45,604.78                                        0.636             29,005
January 1,2024                                    45,604.78                                        0.567             25,848
Total                                273,628.68         210,000
Journal Entries in the books of Halle Brothers (Lessor)
Date Particulars Debit Credit
January 1,2019 Lease Receivable                                   210,000
Cost of goods sold                                   130,000
Sales Revenue          210,000
Equipment          130,000
January 1,2019 Cash                                45,604.78
Lease Receivable       45,604.78
December 31,2019 Interest Receivable                                19,727.42
Interest Income       19,727.42
( 210,000 - 45,604.78 ) x 12%
January 1,2020 Interest Income                                19,727.42
Interest Receivable       19,727.42
January 1,2020 Cash                                45,604.78
Lease Receivable       25,877.36
Interest Income       19,727.42
December 31,2020 Interest Receivable                                16,622.14
Interest Income       16,622.14
( 210,000 - 45,604.78 - 25,877.36 ) x 12%
Journal Entries in the books of Vic Weloff (Lessee)
Date Particulars Debit Credit
January 1,2019 Right of use asset                                   210,000
Lease Liability          210,000
January 1,2019 Lease Liability                                45,604.78
Cash       45,604.78
December 31,2019 Amotization Expense                                      35,000
Right of use asset             35,000
( 210,000 / 6 )
December 31,2019 Interest Expense                                19,727.42
Interest Payable       19,727.42
( 210,000 - 45,604.78) x 12%
January 1,2020 Interest Payable                                19,727.42
Interest Expense       19,727.42
January 1,2020 Lease Liability                                25,877.36
Interest Expense                                19,727.42
Cash       45,604.78
December 31,2020 Amotization Expense                                      35,000
Right of use asset             35,000
( 210,000 / 6 )
December 31,2020 Interest Expense                                16,622.14
Interest Payable       16,622.14
( 210,000 - 45,604.78 - 25,877.36 ) x 12%

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