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In: Accounting

Marlin Industries enters into a lease agreement with Anemone Corporation on January 1, 2020 for fishing...

Marlin Industries enters into a lease agreement with Anemone Corporation on January 1, 2020 for fishing trawler. As per the agreement, Marlin Industries gets full use of the trawler for 4 years, at which time it will then revert back to Anemone. The trawler has an expected life of 6 years. Marlin’s incremental borrowing rate is 10% and Anemone’s implicit rate of return is 8%. Assume that the expected residual value is $50,000, the fair value of the trawler is $3,500,000 and the trawler cost Anemone $2,000,000 to build.

a. What is the annual lease payment that the lessor will charge on this investment? Assume that the residual value is guaranteed and the lease payments will occur on the first day of the year.

b. Record the required journal entry(ies) for the first year of the lease for the lessor. Date your journal entry(ies).

c. Record the payment on January 1, 2021 for the lessor.

d. What type of lease is this for the lessee? Provide evidence for your answer.

e. Record the first year of journal entry(ies) for the lessee. Date your journal entry(ies).

Solutions

Expert Solution

a. the amount of the annual Lease payment
3500000-(50000*PV of $1 8% 6 years)/PV of Annuity $1 8% 6 Year
3500000-(50000*0.6806)/4.9927
(3500000-34030)/4.9927
3465970/4.9927
694208
Working.the present value of the minimum lease payments.
PV of Minimum Leas Payment 694208*PVAF 6 year 10% 694208*4.7908 3325812
PV of Guaranteed Residual Value 50000*PVF 6 Year 10% 50000*0.5645 28225
PV of minimum Lease payments 3354037

b. Jouranl Entries-Lessor
01-01-2020 Lease Receivable 3500000
Cost of goods sold 2000000
Sales Revenue 3500000
Inventory 2000000
01-01-2020 Cash 694208
Lease Receivable 694208
31-12-2020 Interest Receivable 224463
Interest Revenue 224463
(3500000-694208)*8%

C. Payment received by Lessor on 1 Jan 2021:

01-01-2021 Cash 694208
Lease Receivable 469744
Interest Receivable 224463

e. Lesse Entries:

3. Journal Entries-Lessee
Date Account Debit Credit
01-01-2020 Lease Equipment 3354037
leased Liability 3354037
01-01-2020 leased Liability 694208
Cash 694208
31-12-2020 Depreciation Expense 580673
Accumulated Depreciation 580673
(3534037-50000)/6
31-12-2020 Interest Expense 283983
Interest Payable 283983
(3534037-694208)*10%

d. THis is sale type lease since this is giving profit to manufacturer/dealer.

ekkarill92 answered 1 year ago
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