Question

1. Trevor Corporation entered into a lease agreement on January 1, 2016, to provide Jensen Company with an equipment. The terms of the lease agreement were as follows.

1. The lease is to be for 3 years with rental payments of $19,234 to be made at the beginning of each year.
2. The machinery has a fair value of $55,000, a cost of $40,000, and an economic life of 8 years.
3. At the end of the lease term, both parties expect the machinery to have no residual value.
4. The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature.
5. The implicit rate of Trevor is 5%, which is known to Jensen.
6. Collectability of the payments is probable.

Instructions

(a) Show how the lease payment is derived by the lessor and discuss the nature of this    lease for the lessee (Jensen) and lessor (Trevor).

(b) Prepare the lease related journal entries for Jensen (the lessee) for 2016, 2017 and 2018. Jensen uses the straight method to depreciate the equipment over its lease term.

Answer 1

a)
Lease payment =	$                      19,234.73	Enter in excel " =PMT(5%,3,-55000,,1) "
Type of Lease	Capital Lease	For both Lessor & Lessee
b)
01-Jan-16	Right to use asset	Debit	$                                                              55,000
	Lease Liability	Debit	$                                                              55,000
01-Jan-16	Lease Liability	Debit	$                                                              19,234
	Cash	Credit	$                                                              19,234
31-12-2016 & 31-12-2017 & 31-12-2018	Depreciation	Debit	$                                                              18,333
Right to use asset	Credit	$                                                              18,333
01-Jan-17	Lease Liability	Debit	$                                                              17,446	19234-1788
	Finance charge	Debit	$                                                                 1,788	(55000-19234)*5%
	Cash	Credit	$                                                              19,234
01-Jan-18	Lease Liability	Debit	$                                                              17,433	(55000-19234-18333)
	Finance charge	Debit	$                                                                 1,801	(19234-1788)
	Cash	Credit	$                                                              19,234

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