Question

The France Transportation Agency signed a lease for a new railcar on 1/1/13. The initial lease requires payments of $300,000 at the BEGINNING of each year (1/1/13, 12/31/13, 12/31/14, etc.) for 10 years. The Transportation Agency's borrowing rate is 8% and the fair value of the railcar at the inception of the lease is $2,674,067. The estimated life of the railcar is 20 years. Assume that the residual value is NOT guaranteed and that after 10 years, the railcar will be returned to the lessor. Part 1 - Compute the estimated residual value that was used to determine the annual lease payments Part 2 - Record all lease entries for 2013 and 2014 for the France Transportation Agency Part 3 - Show the amounts related to this lease that would be reported on the 12/31/13 and 12/31/14 Balance Sheet for the France Transportation Agency. Part 4 - Record all lease entries for 2013 and 2014 for the LESSOR. Note: Assume Lease Test 5 is satisfied

Answer 1

1. Annual Payment = Estimated Residual value / PVAF (8%, 0-9 years) +1

$ 3,00,000 = Estimated Residual value / 6.2469 + 1

Estimated Residual value = $ 3,00,000 * 7.2469   

            Estimated Residual value = $ 21,74,070.

2. Lease entries in the books of France transport agency :

Year 2013 :

1. Railcar A/c Dr.                                       $ 21,74,070 - To Lessor A/c                                           -        $ 21,74,070   
2. Finance Charges A/c Dr.                       $ 1,73,926           - To Lessor A/c                                             -        $ 1,73,926
3. Lessor A/c Dr.                                        $ 3,00,000            - To Bank A/c                                                -        $ 3,00,000
4. Profit & Loss A/c Dr.                              $ 1,73,926            - To Finance Charges A/c                             -        $ 1,73,926 Year 2014:   
5. Finance Charges A/c Dr.                       $ 1,63,840           -                   To Lessor A/c                                             -        $ 1,63,840
6. Lessor A/c Dr.                                        $ 3,00,000            -                  To Bank A/c                                                -        $ 3,00,000
7. Profit & Loss A/c Dr.                              $ 1,63,840            -                  To Finance Charges A/c                             -        $ 1,63,840

1. Amount Reported in balance sheet :                                                                  

1. Year 2013 :   

Liabilities	Amount In $	Assets	Amount In $
Lessor A/c	$ 20,47,996	Railcar A/c	$ 21,74,070

1. Year 2014 :                                                                                           

  

Liabilities	Amount In $	Assets	Amount In $
Lessor A/c	$ 19,11,836	Railcar A/c	$ 21,74,070

Note : As there is no information on depreciation, Same not deducted from the Railcar account in any of years.

1. Lease entries in the books of Lessor :

1. Year : 2013                                                                                                    

1. France Transport Agency A/c Dr.       $ 21,74,070            - To Railcar A/c                                         -             $ 21,74,070
2. France Transport Agency A/c $ 1,73,926              - To Finance Income A/c                         -             $ 1,73,926
3. Finance Income A/c Dr.                      $ 1,73,926             - To Profit & Loss A/c                               -             $ 1,73,926

1.      Year : 2014                                                                                                         

I)   France Transport Agency A/c Dr.            $ 1,63,840              - To Finance Income A/c -             $ 1,63,840

II) Finance Income A/c Dr.                            $ 1,63,840            - To Profit & Loss A/c -            $ 1,63,840