Question

The following facts pertain to a non-cancelable lease agreement between Faldo Leasing Company and Cullumber Company, a lessee. Commencement date January 1, Annual lease payment due at the beginning of    each year, beginning with January 1, $121,506 Residual value of equipment at end of lease term,    guaranteed by the lessee $45,000 Expected residual value of equipment at end of lease term $40,000 Lease term 6 years Economic life of leased equipment 6 years Fair value of asset at January 1, $635,000 Lessor’s implicit rate 8 % Lessee’s incremental borrowing rate 8 % The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line amortization for all leased equipment.

CULLUMBER COMPANY (Lessee) Lease Amortization Schedule Date Annual Lease Payment Plus GRV Interest on Liability Reduction of Lease Liability Lease Liability 1/1/20 $enter a dollar amount rounded to 0 decimal places $enter a dollar amount rounded to 0 decimal places $enter a dollar amount rounded to 0 decimal places $enter a dollar amount rounded to 0 decimal places 1/1/20 enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places 1/1/21 enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places 1/1/22 enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places 1/1/23 enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places 1/1/24 enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places 1/1/25 enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places 12/31/26 enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places $enter a total amount $enter a total amount $enter a total amount

Prepare all of the journal entries for the lessee for and to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 5,275. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit

Suppose Cullumber received a lease incentive of $5,000 from Faldo Leasing to enter the lease. How would the initial measurement of the lease liability and right-of-use asset be affected? Right-of-use asset ???????? lease liability ???????????? What if Cullumber prepaid rent of $5,000 to Faldo? Right-of-use asset ???????? lease liability ????????????

Answer 1

	Lessee Accounting:Cullumber Company
	The leasee should use a single accounting model for all type of lease. The lease liability and the ROU asset are measured on the commencement date using the Implicit rate of interest (i.e., 8% p.a. in this case)or incremental borrowing rate(if implicit rate is not known) at lease commencement date . The lease liability is accounted for by the interest method subsequently and the ROU asset is subject depreciation on the straight-line basis over the lease term of 6 year.
	The leasee shall record the lease liability and right in use asset at the Present value of Lease payment & expected residual value as the same is guaranteed as calculated below.
	Year	Payments (Cash flows)	Present Value Facr @8%p.a.	Discounted Cash flows/ Present value
	1	$                                                  121,506.00	1	$                             121,506
	2	$                                                  121,506.00	0.92593	$                             112,506
	3	$                                                  121,506.00	0.85734	$                             104,172
	4	$                                                  121,506.00	0.79383	$                               96,455
	5	$                                                  121,506.00	0.73503	$                               89,311
	6	$                                                  121,506.00	0.68058	$                               82,695
	6 End	$                                                    40,000.00	0.63017	$                               25,207
	Total	$                                                        769,036		631,851
	Lease Amortisation Schedule:
Beg of year	Annual Lease Payments Plus expected residual value	Interest on lease liability	Reduction of lease Liability	Lease liability
01-01-20	$                                           -	$                                                                    -	$                              -	$                             631,851
01-01-20	$                                121,506	$                                                                    -	$                  121,506	$                             510,345
01-01-21	$                                121,506	$                                                          40,828	$                     80,678	$                             429,667
01-01-22	$                                121,506	$                                                          34,373	$                     87,133	$                             342,534
01-01-23	$                                121,506	$                                                          27,403	$                     94,103	$                             248,431
01-01-24	$                                121,506	$                                                          19,874	$                  101,632	$                             146,799
01-01-25	$                                121,506	$                                                          11,744	$                  109,762	$                               37,037
31-12-25	$                                  40,000	$                                                             2,963	$                     37,037	$                                        (0)
	$                                769,036	$                                                        137,185	$                  631,851
	Note: As the lease payment is To record made at the beginning of the month, interest will be calculated on Opening lease liability less lease payment .
	Right in use asset Schedule: (Amortisation=$631,851/6 year= $105,309)
		In the books of Leasee
a		Journal Entries
	Year	Particulars	Debit	Credit
	01-01-20	Right of Use Asset	$                  631,851
		Lease liabilty		$                             631,851
		(To record initially recognise the lease-related asset and liability .)
	01-01-20	Lease liabilty	$                  121,506
		Cash		$                             121,506
		(To record lease payment)
	31-12-20	Interest expense	$                     40,828
		Lease liabilty		$                               40,828
		(To record interest expense)
	31-12-20	Depreciation expense	$                  105,309
		Right of Use Asset		$                             105,309
		( To record depreciation expense on the ROU asset)
b	if Cullumber received a lease incentive from Faldo leasing enter the lease of $5,000, then Lease liability and Right of asset will decrease by the $5000.
	Revised Lease liabiliy & ROU asset= $631,851-$5000=$626,851
c	If Cullumber prepaid rent of $5000 , then Lease liability will remain same and Right of asset will increase by the $5000.
	Revised ROU asset= $631,851+$5000=$636,851
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