Question

The following facts pertain to a non-cancelable lease agreement between Carla Vista Leasing Company and Tamarisk Company, a lessee. Commencement date May 1, 2017 Annual lease payment due at the beginning of each year, beginning with May 1, 2017 $17,865.02 Bargain purchase option price at end of lease term $7,000 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000 Fair value of asset at May 1, 2017 $85,000 Lessor’s implicit rate 6 % Lessee’s incremental borrowing rate 6 % The collectibility of the lease payments by Carla Vista is probable. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Correct answer. Your answer is correct. Discuss the nature of this lease to Tamarisk. The nature of this lease to Tamarisk is a Entry field with correct answer lease. SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Correct answer. Your answer is correct. Discuss the nature of this lease to Carla Vista. The nature of this lease to Carla Vista is a Entry field with correct answer lease. SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Partially correct answer. Your answer is partially correct. Try again. Prepare a lease amortization schedule for Tamarisk for the 5-year lease term. (Round answers to 2 decimal places, e.g. 5,275.15.) TAMARISK COMPANY (Lessee) Lease Amortization Schedule Date Annual Lease Payment Plus BPO Interest on Liability Reduction of Lease Liability Lease Liability 5/1/17 $Entry field with correct answer 0 $Entry field with correct answer 0 $Entry field with correct answer 0 $Entry field with correct answer 85000 5/1/17 Entry field with correct answer 17865.02 Entry field with correct answer 0 Entry field with correct answer 17865.02 Entry field with correct answer 67134.98 5/1/18 Entry field with correct answer 17865.02 Entry field with correct answer 4028.10 Entry field with correct answer 13836.92 Entry field with correct answer 53298.06 5/1/19 Entry field with correct answer 17865.02 Entry field with correct answer 3197.88 Entry field with correct answer 14667.14 Entry field with correct answer 38630.92 5/1/20 Entry field with correct answer 17865.02 Entry field with correct answer 2317.86 Entry field with correct answer 15547.16 Entry field with correct answer 23083.76 5/1/21 Entry field with correct answer 17865.02 Entry field with correct answer 1385.03 Entry field with correct answer 16479.99 Entry field with correct answer 6603.77 4/30/22 Entry field with correct answer 7000 Entry field with correct answer 396.23 Entry field with correct answer 6603.77 Entry field with correct answer 0 $Entry field with incorrect answer now contains modified data $Entry field with correct answer 11325.1 $Entry field with correct answer 85000 SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Partially correct answer. Your answer is partially correct. Try again. Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Tamarisk’s annual accounting period ends on December 31. Reversing entries are used by Tamarisk. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 5,275.15.) Date Account Titles and Explanation Debit Credit Entry field with correct answer Entry field with correct answer Right-of-Use Asset Entry field with correct answer 85000 Entry field with correct answer Entry field with correct answer Lease Liability Entry field with correct answer Entry field with correct answer 85000 (To record the lease) Entry field with incorrect answer now contains modified data Entry field with correct answer 17865.02 Entry field with correct answer Entry field with incorrect answer now contains modified data Entry field with correct answer Entry field with correct answer 17865.02 (To record the first lease payment) Entry field with correct answer Entry field with incorrect answer now contains modified data Entry field with incorrect answer now contains modified data Entry field with correct answer Entry field with incorrect answer now contains modified data Entry field with correct answer Entry field with incorrect answer now contains modified data (To record interest expense) Entry field with incorrect answer now contains modified data Entry field with incorrect answer now contains modified data Entry field with correct answer Entry field with incorrect answer now contains modified data Entry field with correct answer Entry field with incorrect answer now contains modified data (To record amortization of the right-of-use asset) Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer 5/1/18 Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer (To record interest expense) Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer Entry field with incorrect answer (To record amortization of the right-of-use asset)

Answer 1

Part A

The nature of this lease to Tamarisk is a Capital lease.

From the viewpoint of the lessee, as the lease agreement has a bargain-purchase option, it meets the criteria for classifying it as a capital lease. Moreover, the present value of the minimum lease payments exceeds 90% of the fair value of the assets.

Part B

The nature of this lease to Carla Vista is a sales-type lease.

The lease agreement has a bargain-purchase option. Besides, the collectibility of the lease payments is quite predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lease, therefore, qualifies as a capital-type lease from the view- point of the lessor. Mainly considering the fact that the initial amount of lease receivable (net investment) (which in this case equals the present value of the minimum lease payments, $91,000) is more than the lessor’s cost ($65,000), the lease is a sales-type lease.

Part C

Rode company (Lessee)

Lease amortization schedule

Date	Annual lease payment plus BPO	Interest liability	Reduction of lease liability	Lease liability
5/1/17				85000
5/1/17	17865.02		17865.02	67134.98
5/1/18	17865.02	4028.10	13836.92	53298.06
5/1/19	17865.02	3197.88	14667.14	38630.92
5/1/20	17865.02	2317.86	15547.16	23083.76
5/1/21	17865.02	1385.03	16479.99	6603.76
4/30/22	7000	396.24	6603.76	0.00
	96325.10	11325.10	85000

Interest liability = previous year’s lease liability * 8%

Reduction in lease liability = Annual lease payment plus BPO – interest liability

Lease liability = previous year’s lease liability – current year’s reduction of lease liability

Part D

date	Account titles and explanation	debit	Credit
5/1/17	Leased equipment	85000.00
	Lease liability		85000.00
	(to record the lease)
5/1/17	Lease liability	17865.02
	Cash		17865.02
	(to record the first lease payment)
12/31/17	Interest expense	2685.40
	Interest payable (4028.10*8/12)		2685.40
	(to record interest expense)
12/31/17	Depreciation expense	5666.67
	Accumulated depreciation – capital leases (85000/10)*8/12		5666.67
	(to record amortization of the right of use asset)
1/1/18	Interest payable	2685.40
	Interest expense		2685.40
5/1/18	Interest expense	4028.10
	Lease liability	13836.92
	Cash		17865.02
12/31/18	Interest expense	2131.92
	Interest payable (3197.88*8/12)		2131.92
	(to record interest expense)
12/31/18	Depreciation expense	5666.67
	Accumulated depreciation – capital leases (91000/10)*8/12		5666.67