Question

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.

Answer 1

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
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