Question

Pina Incorporated leases a piece of equipment to Kingbird Corporation on January 1, 2020. The lease agreement called for annual rental payments of $4,970 at the beginning of each year of the 4-year lease. The equipment has an economic useful life of 6 years, a fair value of $25,900, a book value of $20,900, and both parties expect a residual value of $8,350 at the end of the lease term, though this amount is not guaranteed. Pina set the lease payments with the intent of earning a 4% return, and Kingbird is aware of this rate. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.

- Determine the nature of the lease to both Pina and Kingbird.
the lease is a/an ________ lease to pina

the lease is a/an __________ lease to kingbird

- Prepare the lease amortization schedule(s) for Kingbird for all 4 years of the lease. (Round answers to 0 decimal places, e.g. 5,275.)

- Prepare the journal entries for Kingbird for 2020 and 2021.

- Suppose Kingbird incurs initial direct costs of $700 related to the lease. Prepare the journal entries for 2020.

Answer 1

the lease is a/an Operating lease to pina

the lease is a/an Operating lease to kingbird

The criteria for a Finance lease or capital lease shall be any one of the following four alternatives: Whether Fulfilled a) Ownership. The ownership of the asset is shifted from the lessor to the lessee by the end of the lease period; or No b) Bargain purchase option. The lessee can buy the asset from the lessor at the end of the lease term and that is reasonably certain that option will be exercised No c) Lease term. The period of the lease covers major part of economic life of the asset NO No d) Present value. The present value of the minimum lease payments and lessee's guarantee of residual value, if any required under the lease represents substantially all of the fair value of the asset at the inception of the lease. e) Underlying asset is of specialised nature and there is no alternative use of the asset for lessor after the lease term Since the lease agreement does not satisfy any one of the preceding five criteria, the lease is classified as Operating lease No

Lessee Books ASC 842 states that regardless of how a lease is classified, a lessee will be required to recognize a right-of-use asset and a lease liability for substantially all leases at the commencement date Workings: Year 1 2 3 4 4 Year for discounting 0 1 2 3 Annual Lease Instalments paid at the END of the year 4,970 4,970 4,970 4,970 PV factor @4% 1.00000 0.96154 0.92456 0.88900 0.85480 Present Value of Min lease payments 4,970 4,779 4,595 4,418 Value at which to be recorded as asset by lessee 18,762 4 Unguranteed 18,762 Amortization Schedule Repayment Schedule Finance Charges Year 0 0 1 2 3 4 Reduction in Principal Amount / Annual Amortizatio Outstanding Payment In of ROU Liability 18,762 4.970 4.970 13,792 4,970 4,418 9,374 4,970 4,595 4,779 4,970 4,779 0 -0 0 19,880 18,762 552 375 191 0 1,118 Debit Credit 18,762 18,762 4,970 Operating Lease Lessee Books General Journal January 1, 2020 Januar Right-of-Use Asset Lease Liability (To record the lease.) January 1, 2020 Lease Llability sense Cash as" (to record lease payment) December 31, 2020 Amortization Expense (Lease expense) Right-of-Use Asset December 31, 2020 Interest Expense (Lease expense) Lease Liability January 1, 2021 4,970 4,418 4,418 552 552 Lease Liability 4,970 4,970 4,595 Cash December 31, 2021 Amortization Expense (Lease expense) Right-of-Use Asset December 31, 2021 Interest Expense (Lease expense) Lease Liability 4,595 375 375 Suppose Kingbird incurs initial direct costs of $700 related to the lease. Prepare the journal entries for 2020. January 1, 2020 Unamortised lease cost 7000 Cash 7000 December 31, 2020 Lease expenses 1750 Unamortised lease cost 1750 (amortozed over 4 years)

For Lessor the lease is classified as operating lease Date Accounts & Explanation Debit Credit 4,970 1-Jan-20 Cash Lease Rent Revenue (to record recognition of revenue each period) 4,970 2,092 2,092 31-Dec-20 Depreciation Expense Accumulated Depreciation-Equipment (To record the depreciation expense) =(20900-8350)/6 4,970 1-Jan-21 Cash Lease Rent Revenue 4,970 2,092 31-Dec-21 Depreciation Expense Accumulated Depreciation Equipment 2,092