In: Accounting
Branif Leasing leases mechanical equipment to industrial
consumers under sales-type leases that earn Branif a 20% rate of
return for providing long-term financing. A lease agreement with
Branson Construction specified 20 annual payments beginning
December 31, 2018, the beginning of the lease. The estimated useful
life of the leased equipment is 20 years with no residual value.
Its cost to Branif was $1,051,830. The lease qualifies as a finance
lease to Branson. Maintenance of the equipment was contracted for
through a 20-year service agreement with Midway Service Company
requiring 20 annual payments of $4,000 beginning December 31, 2018.
Progressive insurance Company charges Branif $4,000 annually for
hazard insurance coverage on the equipment. Both companies use
straight-line depreciation or amortization. (FV of $1, PV of $1,
FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use
appropriate factor(s) from the tables provided.)
Required:
Prepare the appropriate entries for both the lessee and lessor to
record the second lease payment and depreciation on December 31,
2019, under each of three independent assumptions:
1. The lessee pays maintenance costs as incurred.
The lessor pays insurance premiums as incurred. The lease agreement
requires annual payments of $180,000.
2. The contract specifies that the lessor pays
maintenance costs as incurred. The lessee’s lease payments were
increased to $184,000 to include an amount sufficient to reimburse
these costs.
3. The lessee’s lease payments of $184,000
included $4,000 for hazard insurance on the equipment rather than
maintenance.
journal entry
case 1
lessor pays maintaince costs as incured .lessor pays insurance premium
books of lesseee
lease liabilty 4695
interest expense 175306
cash 180000
(paid lease rent with interest expense)
maintance expense 4000
cash 40000
(maintance expense paid)
depriciation 43826
lease asset 43826
(depriciation calculated)
in the bookks of lessor
cash a/c 180000
lease receivable 4694
interest income 175306
maintaince 4000
cash 4000
(maintaince paid)
asset 43826
depriciation
(asset amortized)
WHEN MAINTENCE EXPENCE PAIDB BY LESSOR
BOOKS OF LESSESEE
Llease liability 8695
interest expense 17306
cash 180000
(lease rent paid)
maintaice expense 4000
cash 4000
depriciation 43826
lease asset 43826
in the books of lessor
cash 184000
lease liability 8604
interst expense 175306
insurance 4000
cash 4000
depriciation 43826
cash 43826
when lesses leasee include insurance and lease amount 184000
leease liability 8604
interst 175306
cash 184000
depriciation 43826
asset 43826
same entry as above in books of lessor
lease rent received)
insurance premium paid 4000
cash 4000
case 2
when lessors pays maintance cost and lease amount increased to 184000
books of lesseese
lease liability 8695
interest 175306
cash 184000
depriciation
lease asset
(deprication calculated)
cash 184000
lease recivable 8695
interest 175306
insurance 4000
maintance cost 40000
cash 8000
case 3
lessee s lesee include include
lease liability 8695
interest 175306
cash 1840000
depriciation lease
lease asset
depriciation on lease asset
on the books of lessor
cash 184000
least liability 8695
intrest 175306
maintainence 4000
insurence 4000
cash 8000