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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?

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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
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