Question

The following facts pertain to a non-cancelable lease agreement between Faldo Leasing Company and Riverbed Company, a lessee.

Commencement date		January 1, 2017
Annual lease payment due at the beginning of    each year, beginning with January 1, 2017		$ 116,249
Residual value of equipment at end of lease term,    guaranteed by the lessee		$ 54,000
Expected residual value of equipment at end of lease term		$ 49,000
Lease term		6	years
Economic life of leased equipment		6	years
Fair value of asset at January 1, 2017		$ 644,000
Lessor’s implicit rate		6	%
Lessee’s incremental borrowing rate		6	%

The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line amortization for all leased equipment.

Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places e.g. 5,275.)

RIVERBED COMPANY (Lessee) Lease Amortization Schedule
Date		Annual Lease Payment Plus GRV		Interest on Liability		Reduction of Lease Liability

Prepare all of the journal entries for the lessee for 2017 and 2018 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31. (Credit account titles are automatically indented when 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 answers to 0 decimal places e.g. 5,275. Record journal entries in the order presented in the problem.)

TO RECORD THE LEASE TO RECORD THE LEASE PAYMENT TO RECORD THE INTEREST TO RECORD THE AMORTIZATION TO REVERSE THE DECEMBER 31 ENTRY TO RECORD THE SECOND LEASE PAYMENT TO RECORD THE INTEREST TO RECORD AMORTIZATION Suppose Riverbed received a lease incentive of $ 5,000 from Faldo Leasing to enter the lease. How would the initial measurement of the lease liability and right-of-use asset be affected?

Right-of-use asset

$

What if Riverbed prepaid rent of $ 5,000 to Faldo?

Right-of-use asset

$

Answer 1

1. RIVERBED COMPANY (LESSEE)

LEASE AMORTIZATION SCHEDULE

DATE	ANNUAL LEASE PAYMENT PLUS GRV ($)	INTEREST ON LIABILITY ($)	REDUCTION OF LEASE LIABILITY ($)
January1,2017	116,249	0	116,249
January1,2018	116,249	29,544	86,705
January1,2019	116,249	24,342	91,907
January1,2020	116,249	18,828	97,421
January1,2021	116,249	12,982	103,267
January1,2022	116,249	6,786	109,463
December31,2022	54,000 (GRV)	0	54,000

2. STATEMENT OF JOURNAL ENTRY FOR THE YEAR 2017 AND 2018 IN THE BOOKS OF LESSEE

Date	Journal Entry	Debit ($)	Credit ($)
January1,2017	Lease Asset A/c	608,656
	To Faldo Leasing Company		608,656
	(Being record of lease asset in the books of Riverbed Company as lower of minimum lease payment ($608,656) and fair market value ($644,000)
January1,2017	Faldo Leasing Company	116,249
	To Bank A/c		116,249
	(Being payment made towards !st Installment of lease payment)
December31,2017	Profit & LossA/c	29,544
	To Faldo Leasing Company		29,544
	(Being interest due for the year 2017)
December31,2017	Amortization Expense	92,443
	To Lease Asset A/c		92,443
	(Being Amortization Expense booked as on December31,2017)
January1,2018	Faldo Leasing Company	86,705
	Profit & Loss A/c	29,544
	To Bank A/c		116,249
	(Being payment made toward second installment of Lease payment)
December31,2018	Profit & Loss A/c	24,342
	To Faldo Leasing Company
	(Being interest due for the year 2018)
December31,2018	Amortization Expense A/c	92,443
	To Lease Asset A/c		92,443
	(Being Amortization expense booked as on December31,2018)