Question

Riverbed Leasing Company agrees to lease equipment to Marin Corporation on January 1, 2017. The following information relates to the lease agreement.

1.		The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2.		The cost of the machinery is $573,000, and the fair value of the asset on January 1, 2017, is $642,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $98,000. Marin estimates that the expected residual value at the end of the lease term will be 98,000. Marin amortizes all of its leased equipment on a straight-line basis.
4.		The lease agreement requires equal annual rental payments, beginning on January 1, 2017.
5.		The collectibility of the lease payments is probable.
6.		Riverbed desires a 10% rate of return on its investments. Marin’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.

(Assume the accounting period ends on December 31.)

QUESTIONS

1.Compute the value of the lease liability to the lessee. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,972.)

Present value of minimum lease payments

2.Prepare the journal entries Marin would make in 2017 and 2018 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,972.)

1/1/17...

...

...

..

12/31/17...

...

..

...

...

1/1/18...

...

12/31/18..

..

..

..

3.Prepare the journal entries Riverbed would make in 2017 and 2018 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,972.)

1/1/17...

...

...

...

...

...

12/31/17...

...

1/1/18...

...

12/31/18...

...

4. Suppose Marin expects the residual value at the end of the lease term to be $88,000 but still guarantees a residual of $98,000. Compute the value of the lease liability at lease commencement.

LEASE LIABILITY?

Answer 1

Solution:

Riverbed Leasing Company agrees to lease equipment to Marin Corporation on January 1, 2017.

(1)-Computation of the Lease Liability to the Lessee :

• Computation of present value of minimum Lease payments :

Present value of Annual payments = $1,10,491.40*5.23054(*)                    = 5,77,929.8

present value of guaranteed residual value = $98,000*0.48166(**) = 47,202.68

  =6,25,132.5

*present value of an annuity due at 11% for 7 periods .

**present value of 1 at $11% for 7 periods .

(2) : Preparation of journal entries Marin would make in 2017 and 2018 related to the lease arrangement.

(3) :preparation of journal entries Riverbed would make in 2017 and 2018 related to the lease Agreement.