Question

Reynolds County has three large trucks with a total net book value of $600,000 and remaining lives of six years with no expected residual value. County officials lease the trucks to the City of Webster on January 1, 2020, for six years. Based on a negotiated annual implicit interest rate of 5 percent, the parties agree on annual payments of $112,581 beginning immediately and each January 1 thereafter. For both governments, the trucks relate to activities maintained with the General Fund. What is the total expense Webster reports on government-wide financial statements for 2020?

what amount of deferred lease revenue will Reynolds report on its statement of net position as of December31,2020, assuming that country recognizes revenue on a straight-line method?

Answer 1

​​​​​​The solution to the question is as follows:

Statement showing the interest and principal portion is shown in that picture.

From this table ,

Entries in the Books of Webster for the year 2020 are

1. Reynolds account. Dr 112581

To bank account. 112581

( being lease rent paid to lessor. As the payment made at the beginning of the year, no interest accrued for the first payment. Hence l, finance charges not recognised for the first year)

2. Trucks account. Dr 600000

To Reynolds account. 600000

( being assets recognised at the inception of lease)

Hence , as the lease payments are to be made at the beginning of the year, for the first year, no fenance charges or interest will a raise. So, the total installment amount will be treated as paid in respect of the principal amount and adjusted against the principal amount in the statement of financial position and no expense is recognised in the statement of profit and loss in 2020.

Entries in the books of Reynolds:

1. Webster account. Dr 600000

To trucks account. 600000

( being entry passed at the inception of lease)

2. Bank account Dr. 112581

Webster account. 112581

( as there is no interest in the first installment and total amount adjusted to principal amount)

Hence ,the amount of deferred lease revenue reported in the statement of financial position of Reynolds is 600000-112581= 487419.