Question

On January 1, 2020, Suncadia (lessee) leased 100 golf carts from the manufacturer, Yakima Inc. (lessor) for a 7-year period.

Pertinent information follows:

• Lease term is 7 years.
• The first annual payment of $30,000 is due at the inception of the lease.
• The remaining annual lease payments are all at 31 December each year.
• At the end of the lease term, Suncadia can buy the golf carts at a price below the fair value of the golf carts.
• Suncadia’s year end is December 31. The estimated useful life of the golf carts is 10 years.
• Suncadia’s borrowing rate is 6%.
• Fair value of the golf carts is $190,000.

Required:

1. Calculate the present value of the lease payments.
2. Prepare the amortization table.
3. Classify the lease agreement.
4. Prepare the journal entry(ies) for the lessor and the lessee for the 2020 fiscal year related to the lease arrangement.

Answer 1

a. Calculation of lease liability

Date	Amount	PV @ 6%
01-01-2020	$ 30,000	$ 30,000
31-12-2021	$ 30,000	$ 26,699.89
31-12-2022	$ 30,000	$ 25,188.58
31-12-2023	$ 30,000	$ 23,762.81
31-12-2024	$ 30,000	$ 22,417.75
31-12-2025	$ 30,000	$ 21,148.82
31-12-2026	$ 30,000	$ 19,951.71
PV of lease liability		$ 169,169.56

PV = 1/ (1+ 0.06)n

n = No of years

b. Amortization table

Date	Opening Balance	Finance Charges (Op bal - $ 30,000)*0.06	Lease payments	Closing Balance (Op bal + Finance charges - Lease payment)
01-01-2020	$169,169.56	$ 8,350.17	$ 30,000	$ 147,519.73
31-12-2021	$ 147,519.73	$ 8,851.18	$ 30,000	$ 126,370.91
31-12-2022	$ 126,370.91	$ 7,582.25	$ 30,000	$ 103,953.17
31-12-2023	$ 103,953.17	$ 6,237.19	$ 30,000	$ 80,190.36
31-12-2024	$ 80,190.36	$ 4,811.42	$ 30,000	$ 55,001.78
31-12-2025	$   55,001.78	$ 3,300.11	$ 30,000	$ 28,301.89
31-12-2026	$   28,301.89	$ 1,698.11	$ 30,000	0

c. Journal entries in the books of Lessee

Date	Accounts	Debit	Credit
01-01-2020	ROU Asset	$169,169.56
	Lease Liability		$169,169.56
	( To record ROU)
01-01-2020	Lease Liability	$ 30,000
	Bank		$ 30,000
	( To record payment of lease rentals)
31-12-2020	Depreciation	$ 19,000
	ROU Asset		$ 19,000
	( To record depreciation)
31-12-2020	Finance Charge	$ 8,350.17
	Lease liaility		$ 8,350.17
	(To record finance charges)

d.  Journal entries in the books of Lessor

Date	Accounts	Debit	Credit
01-01-2020	Lease receivable	$169,169.56
	Revenue		$169,169.56
	( To record PV)
01-01-2020	Bank	$ 30,000
	Lease receivable		$ 30,000
	( To record receipt of lease rentals)
31-12-2020	Lease receivable	$ 8,350.17
	Finance income		$ 8,350.17
	(To record finance income)