Question

Crane Incorporated leases a piece of machinery to Blue Company on January 1, 2020, under the following terms.

1.		The lease is to be for 4 years with rental payments of $13,325 to be made at the beginning of each year.
2.		The machinery’ has a fair value of $70,328, a book value of $52,480, and an economic life of 10 years.
3.		At the end of the lease term, both parties expect the machinery to have a residual value of $26,240. To protect against a large loss, Crane requests Blue to guarantee $18,430 of the residual value, which Irving agrees to do.
4.		The lease does not transfer ownership at the end of the lease term, does not have any bargain purchase options, and the asset is not of a specialized nature.
5.		The implicit rate is 5%, which is known by Blue.
6.		Collectibility of the payments is probable.

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Evaluate the criteria for classification of the lease, and describe the nature of the lease.

For the lessee, it is a , and for the lessors, it is a   

  

  Prepare the journal entries for Blue for the year 2020. (Credit account titles are automatically indented when the 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 the final answer to 0 decimal places e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To record lease)
Jan. 1
	(To records first lease payment)
Dec. 31
	(To record accrued interest)
Dec. 31
	(To record amortization expense)

  

Prepare the journal entries for Crane for the year 2020

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To record lease)
Jan. 1
	(To record first lease payment)
Dec. 31
	(To record lease revenue)

Evaluate the criteria for classification of the lease, and describe the nature of the lease, assuming that Blue did not guarantee any amount of the expected residual value.

For the lessee, it is a and for the lessor, it is a

Suppose Blue did not guarantee any amount of the expected residual value. Prepare the journal entries for Blue for the year 2020. (Credit account titles are automatically indented when the 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 the final answer to 0 decimal places e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To record lease)
Jan. 1
	(To record first lease payment)
Dec. 31
	(To record interest and amortization)

  

  

Suppose Blue did not guarantee any amount of the expected residual value. Prepare the journal entries for Crane for the year 2020. (Credit account titles are automatically indented when the 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 the final answer to 0 decimal places e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To record lease payments)
Dec. 31
	(To record lease revenue)
Dec. 31
	(To record depreciation)

Answer 1

Answer-A:

This is a capital lease to Blue Company since the NPV of the lease payment is more than 90% of the assets fair value.  The NPV of lease payment is 92% ($64,775 / 70,328 * 100) of the asset’s fair value.

This is a capital lease to Crane because collectibility of the lease payments is reasonably predictable, there are no important uncertainties surrounding the costs yet to be incurred by the lessor, and the NPV of the lease payment is more than 90% of the assets fair value. Since the fair value ($70,328) of the equipment exceeds the lessor’s cost ($52,480), the lease is a sales-type lease.

Answer-B:

Date	General Journal	Debit	Credit
1/1/2020	Leased equipment	$        64,775
	Lease liability		$       64,775
1/1/2020	Lease liability	13,325
	Cash		13,325
31/12/20	Depreciation expense (64,775 - 18,430)/10	4,635
	Accumulated depreciation-Capital lease		4,635
31/12/20	Interest expense (64,775 - 13,325)*.05	2,573
	Interest payable		2,573

Answer-C:

Date	General Journal	Debit	Credit
1/1/2020	Lease receivable	$ 70,328
	Cost of goods sold	52,480
	Sales revenue		$ 70,328
	Inventory		52,480
1/1/2020	Cash	13,325
	Lease receivable		13,325
31/12/20	Interest receivable	2,573
	Interest revenue		2,573