Question

Problem 21-01

The following facts pertain to a non-cancelable lease agreement between Faldo Leasing Company and Kingbird Company, a lessee.

Commencement date		January 1,
Annual lease payment due at the beginning of    each year, beginning with January 1,		$107,198
Residual value of equipment at end of lease term,    guaranteed by the lessee		$50,000
Expected residual value of equipment at end of lease term		$45,000
Lease term		6	years
Economic life of leased equipment		6	years
Fair value of asset at January 1,		$594,000
Lessor’s implicit rate		6	%
Lessee’s incremental borrowing rate		6	%

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.

Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places e.g. 5,275.)

KINGBIRD COMPANY (Lessee) Lease Amortization Schedule
Date		Annual Lease Payment Plus GRV		Interest on Liability		Reduction of Lease Liability		Lease Liability
1/1/20
1/1/20
1/1/21
1/1/22
1/1/23
1/1/24
1/1/25
12/31/26

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
choose a transaction date
choose a transaction date
	(
choose a transaction date Jan. 1, 2020During 2020Dec. 31, 2020Jan. 1, 2021During 2021Dec. 31, 2021		enter a debit amount	enter a credit amount
		enter a debit amount	enter a credit amount
choose a transaction date
choose a transaction date Jan. 1, 2020During 2020Dec. 31, 2020Jan. 1, 2021During 2021Dec. 31, 2021	enter an account title to record interest	enter a debit amount	enter a credit amount
	enter an account title to record interest	enter a debit amount	enter a credit amount
	(To record interest.)
choose a transaction date Jan. 1, 2020During 2020Dec. 31, 2020Jan. 1, 2021During 2021Dec. 31, 2021	enter an account title to record amortization	enter a debit amount	enter a credit amount
	enter an account title to record amortization	enter a debit amount	enter a credit amount
	(To record amortization.)

Suppose Kingbird 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		$enter a dollar amount
Lease Liability		$enter a dollar amount

What if Kingbird prepaid rent of $5,000 to Faldo?

Right-of-use asset
Lease Liability

Answer 1

a. Calculation of initial lease liability

PV of lease payment ($107,198 * 5.21236)	$558,755
Add: PV of guaranteed residual value ($45,000 * 0.70496)	$31,723
Initial lease liability	$590,478

Amortization schedule

Date	Lease payment + GRV	Interest	Reduction of liability	Lease liability
01-01-2020				$590,478
01-01-2020	$107,198	$0	$107,198	$483,280
01-01-2021	$107,198	$28,997	$78,201	$405,079
01-01-2022	$107,198	$24,305	$82,893	$322,186
01-01-2023	$107,198	$19,331	$87,867	$234,319
01-01-2024	$107,198	$14,059	$93,139	$141,180
01-01-2025	$107,198	$8,471	$98,727	$42,453
12-31-2025	$45,000	$2,547	$42,453	$0

b. Journal entries

Date	Account	Debit	Credit
01-01-2020	Right of use - Asset	$590,478
	Lease liability		$590,478
01-01-2020	Lease liability	$107,198
	Cash		$107,198
01-01-2021	Lease liability	$107,198
	Cash		$107,198
12-31-2021	Interest expense	$28,997
	Interest payable		$28,997
12-31-2021	Depreciation expense*	$98,413
	Right of use - Asset		$98,413
01-01-2022	Lease liability	$107,198
	Cash		$107,198
12-31-2022	Interest expense	$24,305
	Interest payable		$24,305
12-31-2022	Depreciation expense	$98,413
	Right of use - Asset		$98.413

* Depreciation = $590,478 / 6