Question

On January 1, 2020, Crane Company leased equipment to Flynn Corporation. The following information pertains to this lease.

1.		The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $3,000, while the expected residual value at the end of the lease is $5,000.
2.		Equal rental payments are due on January 1 of each year, beginning in 2020.
3.		The fair value of the equipment on January 1, 2020, is $150,000, and its cost is $120,000.
4.		The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis.
5.		Crane set the annual rental to ensure a 6% rate of return. Flynn’s incremental borrowing rate is 7%, and the implicit rate of the lessor is unknown.
6.		Collectibility of lease payments by the lessor is probable.

Both the lessor and the lessee’s accounting periods end on December 31.

*(e)

	Your answer is partially correct. Try again.

Prepare all the necessary journal entries for Flynn for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
1/1/20	Right-of-Use Asset
	Lease Liability
	(To record the lease)
1/1/20	Lease Liability	28372
	Cash		28372
	(To record the lease payment)
12/31/20	Depreciation Expense ? (not correct)
	Right-of-Use Asset
	(To record amortization of the right-of-use asset)
12/31/20	Interest Expense
	Lease Liability
	(To record interest expense)

Need help with section E. Thank you.

Answer 1

Year	PV factor @ 6%	Remarks
0	1.00000
1	0.94340	= 1 / 1.06
2	0.89000	= 0.9434 / 1.06
3	0.83962	= 0.89 / 1.06
4	0.79209	= 0.83962 / 1.06
5	0.74726	= 0.79209 / 1.06
6	0.70496	= 0.74726 / 1.06
Total (0 to 5)	5.21236

Fair value of Machine	$    150,000
Less: Present value of purchase option value (3000*0.70496)	$        2,115
Amount recover through annual lease payments	$    147,885
Divided : Total Present Value Factor (as above)	5.21236
Annual lease payments	$      28,372

Lessee (Flynn) does not known the implicit rate of the lessor. Therefore, incremental borrowing rate of 7% is used by lessee.

Year	PV factor @ 7%	Remarks
0	1.00000
1	0.93458	= 1 / 1.07
2	0.87344	= 0.93458 / 1.07
3	0.81630	= 0.87344 / 1.07
4	0.76290	= 0.8163 / 1.07
5	0.71299	= 0.7629 / 1.07
6	0.66634	= 0.71299 / 1.07
Total (0 to 5)	5.10020

	Amount	Multiply: PV factor	Present value
Lease payment	28,372	5.10020	144,703
Bargaining purchase option	3,000	0.66634	1,999
Present value of minimum lease payments			146,702

Date	Accounts titles and explanation		Debit	Credit
Jan 1, 2020	Right of use Asset		146,702
	Lease liability			146,702
	(To record the lease)
Jan 1, 2020	Lease liability		28,372
	Cash			28,372
	(To record lease payment.)
Dec 31, 2020	Amortization Expense		18,338
	Right of use Asset			18,338
	(To record amortization expense.) (146702/8)
Dec 31, 2020	Interest expense		8,283
	Lease liability			8,283
	(To record accrue interest) ((146702-28372)*7%)

If the reasonably certain to exercise of bargain purchase option, Lease of use asset is amortized over the useful life of 8 years.