In: Accounting
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.
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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