Question

Exercise 21-8 (Part Level Submission) The following facts pertain to a noncancelable lease agreement between Culver Leasing Company and Larkspur Company, a lessee. Inception date: May 1, 2017 Annual lease payment due at the beginning of    each year, beginning with May 1, 2017 $21,763.30 Bargain-purchase option price at end of lease term $4,200 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $61,000 Fair value of asset at May 1, 2017 $95,000 Lessor’s implicit rate 9 % Lessee’s incremental borrowing rate 9 % The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs. The expected residual value of the equipment at the end of 5 (10) years is $12,000 ($0). Click here to view factor tables

(c) Your answer is correct. Prepare a lease amortization schedule for Larkspur Company for the 5-year lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25126 and Round answers to 2 decimal places, e.g. 15.25.) LARKSPUR COMPANY (Lessee) Lease Amortization Schedule Date Annual Lease Payment Plus BPO Interest on Liability Reduction of Lease Liability Lease Liability 5/1/17 $ $ $ $ 5/1/17 5/1/18 5/1/19 5/1/20 5/1/21 4/30/22 $ $ $ SHOW LIST OF ACCOUNTS SHOW SOLUTION SHOW ANSWER LINK TO TEXT Attempts: 1 of 3 used

(d) Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Larkspur’s annual accounting period ends on December 31. Reversing entries are used by Larkspur. (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 present value factor calculations to 5 decimal places, e.g. 1.25124 and Round answers to 2 decimal places, e.g. 15.25.) Date Account Titles and Explanation Debit Credit 5/1/1712/31/171/1/185/1/1812/31/18 (To record the lease.) (To record the first lease payment.) 5/1/1712/31/171/1/185/1/1812/31/18 (To To record interest.) (To record depreciation.) 5/1/1712/31/171/1/185/1/1812/31/18 5/1/18 5/1/1712/31/171/1/185/1/1812/31/18 (To record interest.) (To record depreciation.)

Answer 1

Computation of lease Receivable at inception

Annual rental payment= $21763.30

PV of annuity due of 1 for n = 4, i = 9%=4.2397

PV of periodic rental payments= $21763.30*4.2397

$92270

Bargain purchase option=$4200

PV of 1 for n = 5, i = 9%= 0.6499

PV of bargain purchase option=4200*0.6499=$2730

Hence,

PV of periodic rental payments=$92270

PV of bargain purchase option=$2730

Lease receivable at inception=$92270+$2730=$95000

Lease Amortization Schedule
`	Annual Lease Payment Plus BPO	Interest (9%) on Lease Receivable	Reduction of Lease Liability	Lease Liability
05/01/2017				95,000.00
05/01/2017	21,763.30		21,763.30	73,236.70
05/01/2018	21,763.30	6,591.30	15,172.00	58,064.70
05/01/2022	21,763.30	5,225.82	16,537.48	41,527.23
05/01/2020	21,763.30	3,737.45	18,025.85	23,501.38
05/01/2021	21,763.30	2,115.12	19,648.18	3,853.20
4/30/2022	4,200.00	346.79	3,853.21	-0.01
	113,016.50	18,016.49	95,000.01

Journal Entry
Date	Account Tittle	Debit	Credit
01/05/2017	Leased Equipment	$95,000.00
	Lease liability		$95,000.00
	To record the lease
01/05/2017	Lease liability	$21,763.30
	Cash		$21,763.30
	To record the first lease payment
31/12/2017	Interest Expense ($73236*9%*8/12)	$4,394.16
	Interest payable		$4,394.16
	To record Interest
31/12/2017	Depreciation ($95000/10)	$9,500.00
	Accumulated Depreciation		$9,500.00
	To record depreciation
01/01/2018	Interest payable	$4,394.16
	Interest Expense		$4,394.16
01/05/2018	Lease liability	$15,172.00
	Interest Expense	$6,591.00
	Cash		$21,763.00
	To record the lease payment
31/12/2018	Interest Expense ($58064*9%*8/12)	$3,484.00
	Interest payable		$3,484.00
	To record Interest
31/12/2018	Depreciation	$9,500.00
	Accumulated Depreciation		$9,500.00
	To record depreciation