Question

Silver Company Ltd. leased an equipment to Grey Company on January 1, 2015. The equipment has an economic life of 8 years. The term of the non-cancellable lease is 7 years. Silver Company determined that the implicit interest rate was 10%. Grey Company will make annual payments of $55,000 at the beginning of each year. The equipment had a cost basis of $250,000 to Silver Company. The initial direct costs related to the lease amounted to $6572. The selling price of the equipment is $302,750 and its unguaranteed residual value at the end of the lease term is estimated to be $16,000. Instructions a. Discuss the nature of the lease to Silver Company Ltd. b. Compute each of the following in relation to Silver Company Ltd: (i) Lease Receivable (ii) Sales price of the asset (iii) Cost of goods sold (iv) Gross Profit c. Prepare the 7-year lease amortization schedule for Silver Company Ltd. d. Prepare the journal entries for Silver Company Ltd. for the year 2015. e. Discuss the nature of the lease to Grey Company. f. Prepare the lease amortization schedule for Grey Company for the first two years. g. Prepare the journal entries for Grey Company for the year 2015.

Answer 1

Requirement a
	The nature of the lease to Silver Company is Capital Lease
Requirement b
	i)	The lease receivable is	302750
	ii)	The sale price of lease is	302750
	iii)	Cost of goods sold is
		Cost basis	250000
		Initial direct costs	6572
		Total costof goods sold	256572
	iv)	Gross profit	46178
		(Sale price-Cost of goods sold)
Requirement c
	The Seven year lease amortization schedule for Silver company
	Year	Cash flow	PVIF@10%	Present Worth	Interest component
	0	55000	1	55000	0
	1	55000	0.909090909	50000	5000
	2	55000	0.826446281	45454.54545	9545.45455
	3	55000	0.751314801	41322.31405	13677.686
	4	55000	0.683013455	37565.74005	17434.26
	5	55000	0.620921323	34150.67277	20849.3272
	6	55000	0.56447393	31046.06615	23953.9338
	7	16000	0.513158118	8210.529892
	Total			302749.8684
Requirement d
	The journal entry in the books of Silver Company for the year 2015
			Amount in $
Date	General Journal		Debit	Credit
January 1, 2015	Lease Receivable		302750
		Sale of Equipment on Lease		302750
	To record the inception of lease
January 1, 2015	Cash		55000
		Lease Receivable		55000
	To record the receipt of first annual payment towards lease
Requirement e
	The nature of lease to Grey company is Capital Lease
Requirement f
	The lease amortization schedule for Grey Company
	Year	Cash flow	PVIF@10%	Present Worth	Interest component
	0	55000	1	55000	0
	1	55000	0.909090909	50000	5000
	2	55000	0.826446281	45455	9545
Requirement g
	The journal entries for Grey Company for the year 2015
			Amount in $
Date	General Journal		Debit	Credit
January 1, 2015	Leased Equipment(asset)		302750
		Leased Liability/Lease payable		302750
	To record the inception of lease
January 1, 2015	Leased Liability/Lease payable		55000
		Cash		55000
	To record the first annual payment towards the lease
December 31, 2015	Depreciation on leased equipment		37843.75
		Accumulated depreciation on leased equipement		37843.75
	To record the annual depreciation on leased equipment
	Note : the depreciation has been calculated as follows
	=	The cost of leased asset to Grey company/economic life of asset
	=	302750/8 years	37843.75