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. Calculate the present value of the lease payments.

PV of lease payment = Annual lease payment * Present value annuity due factor

Present value annuity due factor, 6%, 7 = 5.9173

PV of lease payment = 30000 * 5.9173 = 177520

B. Prepare the amortization table.

Date	Lease payment (A)	Interest @6% (B) Beginning value * rate	Principal repayment (A-B)	Ending value
01-Jan-20	30000		30000	147520
31-Dec-20	30000	8851	21149	126371
31-Dec-21	30000	7582	22418	103953
31-Dec-22	30000	6237	23763	80191
31-Dec-23	30000	4811	25189	55002
31-Dec-24	30000	3300	26700	28302
31-Dec-25	30000	1698	28302	0

C. Classify the lease agreement.

Here the lease agreement is capital lease, because it met the one of condition of capital lease,which is:

> Bargaining purchase of option at end of year.

D. Prepare the journal entry(ies) for the lessor and the lessee for the 2020 fiscal year related to the lease arrangement.

Book of lessee. - Suncadia

Date	Accounts	Debit	Credit
Jan 1,20	Leased Assets	177520
	Lease liability		147520
	Cash		30000
Dec 31, 20	Lease liability	21149
	Interest expenses	8851
	Lease payable		30000
Dec 31, 20	Depreciation expenses (177520/10)	17752
	Accumulated depreciation		17752

Book of Lessor - Yakima Inc.

Date	Accounts	Debit	Credit
Jan 1,20	Lease Receivable	147520
	Cash	30000
	Assets		177520
Dec 31, 20	Account receivable	30000
	Lease Receivable		21149
	Finance income		8851