Question

In: Accounting

Uptown Inc. entered into an arrangement on January 1, 2017 to lease a machine for four...

Uptown Inc. entered into an arrangement on January 1, 2017 to lease a machine for four years with lease payments of $85,000 each year with the first payment due immediately and January 1 of each year thereafter. There are no options to extend, terminate, or renew the lease. The lessor requires a return on its leases of this type of 8%, which is the same as Uptown Inc.’s marginal borrowing rate.

a) Assuming that this lease meets the criteria for finance lease treatment and the lessor purchased the machine for $281,530.78 and regularly both sells and leases this type of equipment. Which of the following journal entries should the lessor record on January 1, 2017 (not including receipt of the first lease payment)?

b) Assuming that the lease meets the criteria for finance lease treatment, which of the following journal entries should the lessee (Uptown Inc.) record on December 31, 2017?

c) Assuming, instead, that the lease qualifies for operating lease treatment, Uptown should record how much amortization expense in 2017?

Solutions

Expert Solution

Journal Entry - Lessor
01-Jan-17 Dr Lease Receivable 304053.24 (Present value of lease payment)
Cr Leased Asset 304053.2
Journal entry -Lessee
01-Jan-17 Dr Leased Asset 304053.24
Cr Cash 85000
Cr Lease Liability 219053.24
31-Dec-17 Dr Interest Exp 17524.26
Cr Interest Payable 17524.26
31-Dec-17 Dr Depreciation 76013.31
Cr Accumulated Dpr

76013.31

C) under operating lease the amortization cost would be $85000 as a lease rental expense for 2017.

Working note :

Opening Interest Principal Closing
Year Balance Expense Payment Payment Balance
1 ₹ 2,19,053.24 ₹ 17,524.26 67,476.00 85,000.00 ₹ 1,51,577.24
2 ₹ 1,51,577.24 ₹ 12,126.18 71472 85000 ₹ 80,105.24
3 ₹ 80,105.24 ₹ 6,408.42 ₹ 80,104.58 86513 ₹ 0.66

** Streight line depreciation is used .

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

Sylvan Inc. entered into a non-cancelable lease arrangement with Breton Leasing Corporation for a certain machine....
Sylvan Inc. entered into a non-cancelable lease arrangement with Breton Leasing Corporation for a certain machine. Breton's primary business is leasing;it is not a manufacturer or dealer. Sylvan will lease the machine for a period of 3 years, which is 50% of the machine's economic life. Breton will take possession of the machine at the end of the initial 3-year lease and lease it to another, smaller company that does not need the most current version of the machine. Sylvan...
Ramsay Corp. (lessor) entered into a lease arrangement with Williams Corp. (lessee) on January 1, 2018....
Ramsay Corp. (lessor) entered into a lease arrangement with Williams Corp. (lessee) on January 1, 2018. According to the lease arrangement, Ramsay leased a building to Williams for 8 years. The building has an estimated economic life of 40 years with no residual value. The cost of the building was $2,500,000 and it was purchased for cash on January 1, 2018. Its fair value is $2,500,000 and it is to be depreciated on a straight line basis. At the end...
On 1 January 2017 Kuntan Ltd entered into an operating lease contract for premises in the...
On 1 January 2017 Kuntan Ltd entered into an operating lease contract for premises in the Windhoek Weinhill Mall. The lease is to run for a period of 4 years (contract expires on 31 December 2020). As a result of several factors , the board of directors decided on 31 December 2018 to move the entity to Merua Mall with effect from 2 January 2019. However the lease contract determines the following: Operating lease payments per year (no escalation) N$10...
On January 1, 2020, Winthrop Inc. entered into a lease agreement to lease equipment: 5-year lease...
On January 1, 2020, Winthrop Inc. entered into a lease agreement to lease equipment: 5-year lease term Annual lease payments are $10,000 First payment is on January 1, 2020 and the other payments are on 31 December each year At the end of the lease the leased asset will revert to the lessor The asset’s economic life is estimated at 10 years Winthrop could have obtained equivalent financing from its bank at a rate of 5% Winthrop’s fiscal year end...
On January 1, 2020, Winthrop Inc. entered into a lease agreement to lease equipment: 5-year lease...
On January 1, 2020, Winthrop Inc. entered into a lease agreement to lease equipment: 5-year lease term Annual lease payments are $10,000 First payment is on January 1, 2020 and the other payments are on 31 December each year At the end of the lease the leased asset will revert to the lessor The asset’s economic life is estimated at 10 years Winthrop could have obtained equivalent financing from its bank at a rate of 5% Winthrop’s fiscal year end...
On January 1, 2020, Winthrop Inc. entered into a lease agreement to lease equipment: 5-year lease...
On January 1, 2020, Winthrop Inc. entered into a lease agreement to lease equipment: 5-year lease term Annual lease payments are $10,000 First payment is on January 1, 2020 and the other payments are on 31 December each year At the end of the lease the leased asset will revert to the lessor The asset’s economic life is estimated at 10 years Winthrop could have obtained equivalent financing from its bank at a rate of 5% Winthrop’s fiscal year end...
On January 1, 2020, Winthrop Inc. entered into a lease agreement to lease equipment: 5-year lease...
On January 1, 2020, Winthrop Inc. entered into a lease agreement to lease equipment: 5-year lease term Annual lease payments are $10,000 First payment is on January 1, 2020 and the other payments are on 31 December each year At the end of the lease the leased asset will revert to the lessor The asset’s economic life is estimated at 10 years Winthrop could have obtained equivalent financing from its bank at a rate of 5% Winthrop’s fiscal year end...
On January 1 year 1, superstar company leased a building to pzed  Inc. The lease arrangement is...
On January 1 year 1, superstar company leased a building to pzed  Inc. The lease arrangement is for 20 years. The building is expected to have no residual value at the end of the lease. The leased building has a cost of $21,000,000 and was purchased for cash on January 1, year 1. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value. Lease payments are $1,778,000 per year and are made...
Lewis Corporation entered into a lease agreement on January 1, 2017 to provide Dawkins company with...
Lewis Corporation entered into a lease agreement on January 1, 2017 to provide Dawkins company with a piece of machinery. The terms of the lease agreement were as follows. The lease is to be for 3 years with rental payments of $10,521 to be made at the beginning of each year. The machinery has a fair value of $55,000, a book value of $40,000, and an econnomic life of 8 years. At the end of the lease term, both parties...
On January 1, 2017, Cullumber Corporation signed a 5-year noncancelable lease for a machine. The terms...
On January 1, 2017, Cullumber Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Cullumber to make annual payments of $8,200 at the beginning of each year, starting January 1, 2017. The machine has an estimated useful life of 6 years and a $5,500 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Cullumber uses the straight-line method of depreciation for all of its plant...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT