Question

Tony Tiger, as lessee, enters into a lease agreement on May 1, 2020, for a tiger costume with Costume Inc. The following data are relevant to the lease agreement:

• The term of the noncancelable lease is 10 years, with no renewal option. Payments of $138,990 are due at the beginning of each year, starting today.
• The fair value of the costume is $1,000,000 (it’s a pretty unique costume). The costume has an economic life of 13 years with no salvage value.
• Tony Tiger depreciates similar costumes on a straight-line basis.
• $1,000 Executory costs are paid by the lessee on an annual basis, of which are included in the above rent payment to the lessor.
• Tony Tiger’s incremental borrowing rate is 8% per year and the implicit rate is unknown.

Requirements:

1. Indicate the type of lease Tony Tiger has entered into. (2 points) ___________________ Lease
2. Prepare a partial amortization schedule for the lessee that goes up to 5/1/22. (4 points)

Date	Lease payment	Executory Costs	interest expense	reduction in liability	lease liability
5/1/20
5/1/20
5/1/21
5/1/22

(c) Prepare the journal entries on Tony Tiger’s books that relate to the lease agreement for the following dates: 5/1/20 (2 JE’s), 12/31/20 (2 JE’s), and 5/1/21 (1 JE).

(d) Prepare the journal entries on Costume Inc’s books that relate to the lease agreement for the following date: 5/1/20 (2 JE’s)

***EXPLAIN EACH AMOUNT AND CALCULATION, STEPS INCLUDE AS WELL*** NEED ASAP. THANK YOU!!!!

Answer 1

	Present value of lease payment	$ 1,000,014	( (138,990 - 1,000 ) x ( 1 + 6.247 ) )
a.)	The lease is Capital lease for Tony Tiger because the present value of lease payments ( $ 1,000,014 ) is more than the fair value ( $ 1,000,000 ) of Tiger Costume.
	The Tony Tiger will record the lease liability at $ 1,000,000 ( lower of present value of lease payments or Fair value of Tiger Costume.)
b.)	Date	Lease Payment	Executory costs	Interest Expense	Reduction in liability	Lease Liability
	01-05-2020					1,000,000
	01-05-2020	138,990	1,000		137,990	862,010
	01-05-2021	138,990	1,000	68,961	69,029	792,981
	01-05-2022	138,990	1,000	63,438	74,552	718,429
c.)	Journal entries in books of Tony Tiger
	Date	Account Titles	Debit	Credit
	01-05-2020	Right of use asset	1,000,000
		Lease Liability		1,000,000
	01-05-2020	Lease Liability	137,990
		Executory costs Expense	1,000
		Cash		138,990
	31-12-2020	Amortization Expense	66,667
		Right of use asset		66,667
		(1,000,000 / 10 ) x 8/12
	31-12-2020	Interest Expense	45,974
		Interest payable		45,974
		(1,000,000 - 137,990 ) x 8% x 8/12
	01-05-2021	Lease Liability	69,029
		Executory costs Expense	1,000
		Interest Expense (68,961- 45,974 )	22,987
		Interest payable	45,974
		Cash		138,990
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