Question

An asset has a $200k fair value. It is ‘rented’ on 1/1/A to Lessee Co. for 3 years. At EOY C the asset is expected to have a fair value of $100k when it is returned to Lessor Co. Assume the asset has an expected useful life of 5 years, and that Lessor Co. uses an implicit interest rate of 10% for lease accounting. Lessor depreciates leased type B assets S-L, -0- S.V. Provide the following information.

a. Right of Use Asset, 1/1/A_________

b. Performance Obligation, 12/31/A_________

c. Lease Receivable, 12/31/B_________

d. Annual lease payment__$45646.80__

e. Lessee’s annual lease entries

f. Lessor’s annual lease entries

g. Lessor’s annual depreciation expense_________

Answer 1

ROU Assets on 1/1	124,868.52
Performance obligation on 31/12- lease liability	79,221.72
Lease receivable on 31/12	-

In operating lease, receivable is accrued on the day lease becomes due and hence, lease receivable on 31/12 is nIl assuming collected on 1st of every year at the begining of leases.

Journal entries in lessee books
Date	General Ledger	Debit	Credit
1-Jan	ROU Asset A/c---Dr	124,868.52
	To Lease liability A/c		124,868.52
1-Jan	Lease liability A/c---Dr	45,646.80
	To Bank A/c		45,646.80
31/12	Depreciation expenses A/c---Dr	41,622.84
	To ROU Assets A/c		41,622.84
31/12	Interest expenses A/c---Dr.	7,922.17
	To Lease liability A/c		7,922.17

Journal entries in lessor books
Date	General Ledger	Debit	Credit
1-Jan	Cash A/c--Dr	45,646.80
	To Prepaid income A/c		45,646.80
31/12	Prepaid income A/c---Dr	45,646.80
	To Rental Income A/c		45,646.80

Lease working
Year	Lease	PV factor @10%	PV of lease	Interest	Repayment	Closing
0	45,646.80	1.00	45,646.80	-	(45,646.80)	79,221.72
1	45,646.80	0.91	41,497.09	7,922.17	(45,646.80)	41,497.09
2	45,646.80	0.83	37,724.63	4,149.71	(45,646.80)	-
3		0.75	-	-	-	-
			124,868.52	12,071.88	(136,940.40)
	Asumed lease payment at beginning of the year.