Question

Exercise 21-05

Morgan Leasing Company signs an agreement on January 1, 2020, to lease equipment to Cole Company. The following information relates to this agreement.

1.		The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.
2.		The cost of the asset to the lessor is $245,000. The fair value of the asset at January 1, 2020, is $245,000.
3.		The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $24,335, none of which is guaranteed.
4.		The agreement requires equal annual rental payments, beginning on January 1, 2020.
5.		Collectibility of the lease payments by Morgan is probable.

1.) Assuming the lessor desires a 8% rate of return on its investment, calculate the amount of the annual rental payment required

2.)

Prepare an amortization schedule that is suitable for the lessor for the lease term. (Round answers to 0 decimal places e.g. 5,275.) MORGAN LEASING COMPANY (Lessor) Lease Amortization Schedule Date Annual Lease Payment Plus URV Interest on Lease Receivable Recovery of Lease Receivable Lease Receivable 1/1/20 $enter a dollar amount $enter a dollar amount $enter a dollar amount $enter a dollar amount 1/1/20 enter a dollar amount enter a dollar amount enter a dollar amount enter a dollar amount 1/1/21 enter a dollar amount enter a dollar amount enter a dollar amount enter a dollar amount 1/1/22 enter a dollar amount enter a dollar amount enter a dollar amount enter a dollar amount 1/1/23 enter a dollar amount enter a dollar amount enter a dollar amount enter a dollar amount 1/1/24 enter a dollar amount enter a dollar amount enter a dollar amount enter a dollar amount 1/1/25 enter a dollar amount enter a dollar amount enter a dollar amount enter a dollar amount 12/31/25 enter a dollar amount enter a dollar amount enter a dollar amount enter a dollar amount $enter a total amount for this column $enter a total amount for this column $enter a total amount for this column

3.) Prepare all of the journal entries for the lessor for 2020 and 2021 to record the lease agreement, the receipt of lease payments, and the recognition of revenue. Assume the lessor’s annual accounting period ends on December 31, and it does not use reversing entries

Date	Account Titles and Explanation	Debit	Credit
1/1/2012/31/201/1/2112/31/21	enter an account title To record the lease on January 1 2017	enter a debit amount	enter a credit amount
	enter an account title To record the lease on January 1 2017	enter a debit amount	enter a credit amount
	enter an account title To record the lease on January 1 2017	enter a debit amount	enter a credit amount
	enter an account title To record the lease on January 1 2017	enter a debit amount	enter a credit amount
	(To record the lease)
1/1/2012/31/201/1/2112/31/21	enter an account title To record the receipt of lease payment on January 1 2017	enter a debit amount	enter a credit amount
	enter an account title To record the receipt of lease payment on January 1 2017	enter a debit amount	enter a credit amount
	(To record the receipt of lease payment)
1/1/2012/31/201/1/2112/31/21	enter an account title for the journal entry on December 31 2017	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2017	enter a debit amount	enter a credit amount
1/1/2012/31/201/1/2112/31/21	enter an account title for the journal entry on January 1 2018	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1 2018	enter a debit amount	enter a credit amount
1/1/2012/31/201/1/2112/31/21	enter an account title for the journal entry on December 31 2017	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2017	enter a debit amount	enter a credit amount

Answer 1

a)

calculation of annual lease payment
Fair value	245000
Less : PV of unguaranteed residual value
unguaranteed residual value	24335
x PVF(8%,6)	0.63017
PV of unguaranteed residual value	15,335
amount to be recovered through periodic payments	229,665
x PVADIF(8%,6)	4.99271
lease payments payable at beginning of each year	46,000

b)

Lease Amortization schedule
date	payment	Interest at 8%	recovery of lease receivable	Lease receivable
Jan 1 ,2020				245,000
Jan 1 ,2020	46,000	-	46,000	199,000
Jan 1 ,2021	46,000	15,920	30,080	168,920
Jan 1 ,2022	46,000	13,514	32,486	136,433
Jan 1 ,2023	46,000	10,915	35,085	101,348
Jan 1 ,2024	46,000	8,108	37,892	63,456
Jan 1 ,2025	46,000	5,076	40,924	22,532
Dec 31,2025	24,335	1,803	22,532	0

c)

Journal entry
Date	Particulars	Debit	Credit
Jan 1,2020	Lease receivable	245000
	equipment		245000
Jan 1,2020	Cash	46000
	Lease receivable		46000
Dec 31, 2020	Interest receivable	15920
	Interest revenue		15920
Jan 1,2021	Cash	46000
	Interest receivable		15,920
	Lease receivable		30,080
Dec 31, 2021	Interest receivable	13,514
	Interest revenue		13,514

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