Question

On January 1, 2017, Bare Trees Company signed a three-year noncancelable lease with Dreams Inc. The lease calls for three payments of $62,258.09 to be made at each year-end. The lease payments include $3,000 of executory costs related to service. The lease is nonrenewable and has no bargain purchase option. Ownership of the leased asset reverts to Dreams at the end of the lease period, at which time Bare Trees has guaranteed that the leased asset will be worth at least $15,000. The leased asset has an expected useful life of four years, and Bare Trees uses straight-line depreciation for financial reporting purposes. Bare Trees’ incremental borrowing rate is 9%. Bare Trees and Dreams account for leases under ASC 842. Use tables (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)

Required:

1. Prepare Bare Trees Company’s amortization schedule for the lease liability.
2. Prepare Bare Trees Company’s journal entries to record (a) the lease on January 1, 2017; (b) the lease payments on December 31, 2017 and 2018; and (c) the leased asset’s depreciation in 2017 and 2018.
3. Assume that at the end of the lease term, the leased asset will be worth $16,000. Make Bare Trees Company’s journal entry to account for the residual value guarantee.
4. Repeat requirement 3, but assume that the leased asset will be worth only $12,000 at the end of the lease term

Answer 1

Part 1 –

Calculation of Present Value of Future Lease Payments
	Payments	PV of 3 Years at 9%	Present Value
	(A)	(B)	(A*B)
Payments ($62,258.09 - $3,000 executor cost)	$               59,258.09	2.5313	150,000.00
Guaranteed Payments	$               15,000.00	0.77218	11,582.70
			161,582.70
Amortization Schedule
Date	Interest @ 9% (Beginning Balance Lease Liability * 9%)	Cash Payments	Reduction in Lease	Lease Liability (balance)
1/1/2017				$161,582.70
12/31/2017	$14,542.44	$59,258.09	$44,715.65	$116,867.06
12/31/2018	$10,518.04	$59,258.09	$48,740.05	$68,127.00
12/31/2019	$6,131.09	$59,258.09	$53,127.00	$15,000.00

Note – PV factor table in the question is not given, hence I used the PV table from the internet. In case of any change, please put the value or let me know the value to get correct answer.

Part 2 –Journal Entries

Date	General Journal	DR.	CR.
1/1/2017	Leased Assets	161,582.70
	Obligation		161,582.70
	(To record lease liability obligation)
12/31/2017	Interest Expense	$14,542.44
	Obligation	$44,715.65
	Other Expense (executory cost)	$3,000.00
	Cash		$62,258.09
	(To record first lease payment)
12/31/2018	Interest Expense	$10,518.04
	Obligation	$48,740.05
	Other Expense (executory cost)	$3,000.00
	Cash		$62,258.09
	To record second lease payment)
	Part (c )
12/31/2017	Depreciation Expense (161,583 - 15,000)/3	$48,861
	Accumulated Depreciation	$48,861
	(To record depreciation for year 2017)
12/31/2018	Depreciation Expense (161,583 - 15,000)/3	$48,861
	Accumulated Depreciation	$48,861
	(To record depreciation for year 2018)

Part 3 -

Date	General Journal	DR.	CR.
12/31/2019	Obligation	$15,000
	Asset		$15,000
	(To record lease guaranteed payment)

Part 4 –

Date	General Journal	DR.	CR.
2/31/2019	Obligation	15,000.00
	Loss on residual value guaranteed	3,000.00
	Asset		15,000.00
	Cash		3,000.00
	(To record lease guaranteed payment)

Hope the above calculations, working and explanations are clear to you and help you to understand the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you