Question

Shamrock Leasing Company agrees to lease equipment to Bridgeport Corporation on January 1, 2020. The following information relates to the lease agreement.

1.		The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2.		The cost of the machinery is $507,000, and the fair value of the asset on January 1, 2020, is $690,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $45,000. Bridgeport estimates that the expected residual value at the end of the lease term will be 45,000. Bridgeport amortizes all of its leased equipment on a straight-line basis.
4.		The lease agreement requires equal annual rental payments, beginning on January 1, 2020.
5.		The collectibility of the lease payments is probable.
6.		Shamrock desires a 10% rate of return on its investments. Bridgeport’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.

(Assume the accounting period ends on December 31.)

1.Calculate the amount of the annual rental payment required.

2. Present value of minimum lease payments

Can you explain to me what the differnce is between 1 and 2

3.Prepare the journal entries Bridgeport would make in 2020 and 2021 related to the lease arrangement.

4.Prepare the journal entries Shamrock would make in 2020 and 2021 related to the lease arrangement.

Answer 1

1. Annual rental payments:
Fair value of asset	$690,000
Guaranteed residual value	$ 45,000
Less: PV of guaranteed residual value (45000*0.5132)	$ 23,092
Amount to be recovered by lessor through lease payments	$666,908
Annual rental payments PV(7,10%) (666,908/5.3553)	$124,533
2. Present value of minimum lease payments:
Present value of minimum rental payments (n=7, r=11%) (124533*5.23054)	$651,376
Add: Present value of guaranteed residual value (45000*0.48166)	$ 21,675
PV of minimum lease payments	$673,050

3
In books of Bridgeport - Lessee
Date	Journal	Debit	Credit
1-Jan-20	Leased Equipment	$673,050
	Lease Liability		$673,050
1-Jan-20	Lease Liability	$124,533
	Cash		$124,533
31-Dec-20	Interest Expense	$ 60,337
	Interest Payable		$ 60,337
31-Dec-20	Depreciation	$ 89,721
	Accumulated Depreciation		$ 89,721
31-Dec-20	Lease Liability	$ 64,196
	Interest Payable	$ 60,337
	Cash		$124,533
31-Dec-21	Interest Expense	$ 53,275
	Interest Payable		$ 53,275
31-Dec-21	Depreciation	$ 89,721
	Accumulated Depreciation		$ 89,721
4
In books of Shamrock - Lessor
1-Jan-20	Lease receivables	$690,000
	Cost of Goods Sold	$565,467
	Sales Revenue		$690,000
	Inventory		$565,467
31-Dec-20	Cash	$124,533
	Lease receivable		$124,533
31-Dec-20	Interest receivable	$ 56,547
	Interest Revenue		$ 56,547
31-Dec-21	Cash	$124,533
	Lease receivable		$ 67,987
	Interest receivable		$ 56,547
31-Dec-21	Interest receivable	$ 49,748
	Interest Revenue		$ 49,748

W.N

Amortization Schedule
Date	Payment	Interest Exp @ 11%	Amortized	Carrying Value
					1-Jan-20				$       673,050
1-Jan-20	$124,533	$            -	$(124,533)	$       548,517
31-Dec-20	$124,533	$    60,337	$ (64,196)	$       484,321
31-Dec-21	$124,533	$    53,275	$ (71,258)	$       413,063
31-Dec-22	$124,533	$    45,437	$ (79,096)	$       333,967
31-Dec-23	$124,533	$    36,736	$ (87,797)	$       246,170
31-Dec-24	$124,533	$    27,079	$ (97,455)	$       148,715
31-Dec-25	$124,533	$    16,359	$(108,175)	$         40,541
31-Dec-26	$ 45,000	$      4,459	$ (40,541)	$                  0

Amortization Schedule
Date	Payment	Interest Exp @ 10%	Amortized	Carrying Value
					1-Jan-20				$       690,000
1-Jan-20	$124,533	$            -	$(124,533)	$       565,467
31-Dec-20	$124,533	$    56,547	$ (67,987)	$       497,480
31-Dec-21	$124,533	$    49,748	$ (74,785)	$       422,695
31-Dec-22	$124,533	$    42,270	$ (82,264)	$       340,431
31-Dec-23	$124,533	$    34,043	$ (90,490)	$       249,941
31-Dec-24	$124,533	$    24,994	$ (99,539)	$       150,402
31-Dec-25	$124,533	$    15,040	$(109,493)	$         40,909
31-Dec-26	$ 45,000	$      4,091	$ (40,909)	$                  0