Question

Assume that the following facts pertain to a non-cancelable lease agreement between Coco Inc. and Bubs Corp, a Lessee.

Inception date January 1, 2018

Residual value of equipment at end of lease term, unguaranteed $100,000

Lease term 6 years

Economic life of leased equipment 8 years

Fair value of asset at January 1, 2017 $800,000

Lessor’s implicit rate 12%

Lessee’s incremental borrowing rate 10%

The lessee assumes responsibility for all executory costs, which are expected to amount to $4,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line depreciation method for all equipment.

1.Using the spreadsheet Lease Amortization Schedule, prepare an amortization schedule that would be suitable for the lessee for the lease term.

2.Using the spreadsheet Journal Entries, prepare the journal entries for the lessee for 2018 and 2019 to record the lease agreement and all expenses related to the lease. Assume the Lessee’s annual accounting period ends on December 31 and that reversing entries are used when appropriate.

3.Prepare journal entries for the lessor of the transaction.

Answer 1

Calculation of Annual Payments
	Cost of Equipment	$       800,000.00
	Unguaranteed Residual Value	$       100,000.00
	Present value of Residual Value @10% for 6yrs (100000*.565)	$         56,500.00
	Fair value to be recovered from the lease payments	$       743,500.00
	PV factor for 3years @ 10%	$                  4.36
	Annual Lease Payments	$       170,723.31
	Unearned Financial Income
	Total lease payments	$    1,024,339.84
	Add : Residual Value	$       100,000.00
	Gross Investments	$    1,124,339.84
	Less: Present value of investments (37175)	$     (800,000.00)
	Unearned Financial Income	$       324,339.84

			Bob Evans Farms - Lease Amortization Schedule
Date	Lease Payment		Interest Expense		Reduction of lease liability			Balance of Lease Liability
1-Jan-17								$800,000.00
Dec 31,2017		$170,723.31	$	80,000		$90,723.31		$709,276.69
Dec 31,2018		$170,723.31		70,928		$99,795.64		$538,553.38
		$170,723.31		53,855		$116,867.97		$367,830.07
		$170,723.31		36,783		$133,940.30		$197,106.76
		$197,106.76		19,711		$177,396.08		$0.00

Journal Entries
Dec 31,2017		Finance charges			$90,723.31
		To Coco Inc				$90,723.31
		Being Finance charges due as on year 1
Dec 31,2017		Coco Inc			$170,723.31
		To Bank				$170,723.31
		Being Lease Rent paid to Coco for year 1
Dec 31,2018		Finance charges			$99,795.64
		To Coco Inc				$99,795.64
		Being Finance charges due as on year 2
Dec 31,2018		Coco Inc			$170,723.31
		To Bank				$170,723.31
		Being Lease Rent paid to Coco for year 2