Question

Crane Company leases a building to Walsh, Inc. on January 1, 2020. The following facts pertain to the lease agreement. 1. The lease term is 4 years, with equal annual rental payments of $4,056 at the beginning of each year. 2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. 3. The building has a fair value of $16,200, a book value to Crane of $9,200, and a useful life of 5 years. 4. At the end of the lease term, Crane and Walsh expect there to be an unguaranteed residual value of $2,300. 5. Crane wants to earn a return of 8% on the lease, and collectibility of the payments is probable. This rate is known by Walsh. Click here to view factor tables. (b) Using the original facts of the lease, show the journal entries to be made by both Crane and Walsh in 2020. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Answer 1

Working Notes:
	Annual Rent Payments		$              4,056
	PVAF (4 periods, 8%)		3.57710
	Present value of Rental Payment	A	$            14,509
	Expected Residual value (Unguarantee)		$              2,300
	PVF (4 Periods,8%)		0.73503
	Present Value of Residual Value	B	$              1,691
	Lease Receivable	A+B	$            16,200
Journal Entries:
Crane's
Date	Particulars	Debit	Credit
Jan 1 2020	Lease Receivable	$ 16,200
	Cost of Goods Sold	$ 7,509
	Sales Revenue		$            14,509
	Inventory (Book Value)		$            9,200
	(Being to record lease contract)
Jan 1 2020	Cash	$    4,056
	Lease Receivable		$              4,056
	(Being to record first payment received)
Dec 31 2020	Lease Receivable	$    972
	Interest Revenue		$              972
	(Bering to record first year interest)
	($16,200-$4,056)*8%
Walsh's
Jan 1 2020	Right to use assets	$ 14,509
	Lease Liability		$            14,509
	(Being to record lease)
Jan 1 2020	Lease Liability	$    4,056
	Cash		$              4,056
	(Being to record first payment)
Dec 31 2020	Interest Expense	$    836
	Lease Liability		$              836
	(Being to record interest expense)
	($14,509-$4,056) *8%
Dec 31 2020	Depreciation Expense	$    3,627
	Right to use asset		$              3,627
	(Being to record depreciation)
	($14,509/4 Year)

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