Question

Railcar Leasing Inc. early adopts ASU 2016-02 on January 1, 2017. Also, on January 1, 2017, Railcar Leasing Inc. (the lessor) purchased 10 used boxcars from Railroad Equipment Consolidators at a price of $8,749,520. Railcar leased the boxcars to the Reading Railroad Company (the lessee) on the same date. The lease calls for eight annual payments of $1,500,000 to be made at the beginning of each year (that is, the first payment is due at the inception of the lease on January 1, 2017). The boxcars have a nine-year remaining useful life, the lease contains no renewal or bargain purchase option, and possession of the boxcars reverts to the lessor at the lease’s end. The lessor expects the boxcars to be worth $1,000,000 at the end the lease term, but this value is not guaranteed by the lessee. The payment’s collectibility is reasonably certain with no important uncertainties regarding unreimbursable costs to be incurred by the lessor. The lessor has structured the lease to earn a rate of return of 12.0%. Use tables (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)

Required:

Prepare an amortization schedule for the lease for Railcar.

Prepare all journal entries for Railcar for 2017 and 2018. Assume that it reports on a calendar-year basis. (8 entries)

Answer 1

				Year	Annual Lease payments	PVIF@12%	Present value
				0	1500000	1	1500000
				1	1500000	0.892857143	1339285.714
				2	1500000	0.797193878	1195790.816
				3	1500000	0.711780248	1067670.372
				4	1500000	0.635518078	953277.1176
				5	1500000	0.567426856	851140.2836
				6	1500000	0.506631121	759946.6818
				7	1500000	0.452349215	678523.823
				8	1000000	0.403883228	403883.228
				Fair value of Lease			8749518.036
				Lease amortization schedule
				Year	Annual Lease payments	Principle repayment	Interest	Principal outstnading
								8749518.036
				0	1500000	1500000	0	7249518.036
				1	1500000	630057.8356	869942.1644	6619460.201
				2	1500000	705664.7759	794335.2241	5913795.425
				3	1500000	790344.549	709655.451	5123450.876
				4	1500000	885185.8949	614814.1051	4238264.981
				5	1500000	991408.2023	508591.7977	3246856.778
				6	1500000	1110377.187	389622.8134	2136479.592
				7	1500000	1243622.449	256377.551	892857.1429
				8	1000000	892857.1429	107142.8571	0
In the Books of Railcar
Date	General Journal		Debit	Credit
January 1, 2107	Asset(Box cars)/ to be given on lease)		8749520
		Railroad equipment consolidators		8749520
	To record the purchase of used Boxcars
January 1, 2107	Investment in Lease/Lease Receviable		8749520
		Leased asset(Box cars)		8749520
	To record the inception of lease
January 1, 2017	Cash		1500000
		Investment in Lease/Lease Receviable		1500000
	To record the receipt of annual lease payments
December 31, 2017	Investment in Lease/Lease Receviable		869942.16
		Interest Revenue/income		869942.16
	To record the receipt of interest
January 1, 2018	Cash		1500000
		Investment in Lease/Lease Receviable		1500000
	To record the receipt of annual lease payments
December 31, 2018	Investment in Lease/Lease Receviable		794335.22
		Interest Revenue/income		794335.22
	To record the receipt of interest