Question

Assume that the following facts pertain to a non-cancelable lease agreement between Coco Inc. and Bubs, Corp, a Lessee.

Inception date	January 1, 2017
Residual value of equipment at end of lease term, unguaranteed	$50,000
Lease term	6 years
Economic life of leased equipment	8 years
Fair value of asset at January 1, 2017	$400,000
Lessor’s implicit rate	12%
Lessee’s incremental borrowing rate	10%

The lessee assumes responsibility for all executory costs, which are expected to amount to $2,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line depreciation method for all equipment.

Using the spreadsheet, Lease Amort Schedule found in the link below, prepare an amortization schedule that would be suitable for the lessee for the lease term.

Using the spreadsheet Journal Entries, prepare the journal entries for the lessee for 2017 and 2018 to record the lease agreement and all expenses related to the lease. Assume the Lessee’s annual accounting period ends on December 31 and that reversing entries are used when appropriate.

Answer 1

Year	PV Factor @12%	PV Factor @10%
1	0.89286	0.90909
2	0.79719	0.82645
3	0.71178	0.75131
4	0.63552	0.68301
5	0.56743	0.62092
6	0.50663	0.56447
Annuity Factor	4.11141	4.35525

Fair Value of Assets	$        400,000
Less: PV of Unguranteed Residual value(50000*.50663)	$        (25,332)
Subtotal	$        374,669
Annuity Factor (6, 12%)	4.11141
Lease Rental(374669/4.11141)	$          91,129

In the books of Lessee
Lease Rental	$          91,129
Annuity Factor	4.35525
Leased Assets	$        396,890
Lease Liability(91129*4.35525)	$        396,890
Useful Life	8 Years
Depreciation(396890/8)	$          49,611

Assumption:

• Lease rental Paid at the end of each year
• The Lessor implicit rate is not known to the lessee

Amortization Table
Year	Lease Rental	Interest @ 10%	Lease Liability Reduction	Lease Liability
0				$          396,890
1	$          91,129	$              39,689	$                51,440	$          345,450
2	$          91,129	$              34,545	$                56,584	$          288,866
3	$          91,129	$              28,887	$                62,242	$          226,623
4	$          91,129	$              22,662	$                68,467	$          158,157
5	$          91,129	$              15,816	$                75,313	$            82,843
6	$          91,129	$           8,285.32	$                82,844	$                     (0)

In the Books of Lessee
Date	Account Description	Debit	Credit
1-Jan-17	Equipment	$        396,890
	Lease Liability		$        396,890
	(To Record Lease )
31-Dec-17	Lease Liability	$          51,440
	Interest Expesnes	$          39,689
	Cash		$          91,129
	(To record Lease Expesnes and Payment)
31-Dec-17	Depreciation	$          49,611
	Accumulated Depreciation		$          49,611
	(To Record Depreciation)
31-Dec-18	Lease Liability	$          56,584
	Interest Expesnes	$          34,545
	Cash		$          91,129
	(To record Lease Expenses and Payment)
31-Dec-18	Depreciation	$          49,611
	Accumulated Depreciation		$          49,611
	(To Record Depreciation)

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