Question

Operating Lease Y Co. is an 80% owned subsidiary of X Company. On January 1, 2019, X leased equipment to Y under a four year operating lease agreement. The agreement calls for four rent annual payments of $10,000 at the end of each year. The interest rate is 2%. The cost of equipment is $90,000 and its useful life of the equipment is 10 years and no salvage value. Prepare all of the entries for both lessee and the lessor in 2019. Financing lease for lessee/Sales-type Lease with no Profit for Lessor: Y Co. is an 80% owned subsidiary of X Company. On January 1, 2020, X purchased equipment for $112,080 with the useful life of 8 years. On this date, X leased the equipment to Y. The term of the lease is 8 years, the annual lease payment is $15,000 payable at the beginning of each year starting on 1/1/2020, and the interest rate is 2%. Assume a financing lease for the lessee and a sales-type lease with no profit for the lessor. Prepare all of the entries for both lessee and the lessor in 2020 and 2021.

Answer 1

Operating Lease
In the books of Y (Lessee)
Account Title and Explanation	Debit	Credit
Lease Rent Expenses	$10,000
Cash		$10,000
(to record the lease rent for the year 2019)
In the books of X (Lessor)
Account Title and Explanation	Debit	Credit
Cash	$10,000
Lease Rent Income		$10,000
(to record the lease rent income for the year 2019)
Depreciation Expense	$9,000
Accumulated Depreciation - Equipment		$9,000
(to record the depreciation on equipment leased to Y)
Finance Lease
Values given
Annual Lease Rentals	$15,000
Rate of Interest	2%
Lease Period ( in years)	8
Computation of Present Value of Lease Rentals
Since payment is made at the beginning of the year
= P+P*(1-(1+r) ^-(n+1)/r)
where, P = Annual Lease Rent
r = rate of interest
n = period
Annual Lease Rental(P)	$15,000
Rate of interest (r.)	2%
Period (n)	8
PV = P+P*(1-(1+r) ^-(n+1)/r)	$137,434
Year	Beginning Balance	Lease Rental	Interest Expense	Principle Payment	Ending Balance
1	$137,434	$15,000	$0	$15,000	$122,434
2	$122,434	$15,000	$2,449	$12,551	$109,883
3	$109,883	$15,000	$2,198	$12,802	$97,081
4	$97,081	$15,000	$1,942	$13,058	$84,023
5	$84,023	$15,000	$1,680	$13,320	$70,703
6	$70,703	$15,000	$1,414	$13,586	$57,117
7	$57,117	$15,000	$1,142	$13,858	$43,259
8	$43,259	$15,000	$865	$14,135	$29,124
In the books of Y (Lessee)
Account Title and Explanation	Debit	Credit
Leased Equipment	$137,434
Lease Liability		$137,434
(to record the lease liability on the asset leased from X)
Lease Liability	$15,000
Cash		$15,000
(to record the annual lease payment made to X)
Interest Expense	$2,449
Accrued Expenses		$2,449
(to record the interest accrued on lease liability for 2019 @ 2%)
Depreciation Expense	$17,179
Leased Equipment		$17,179
(to record the depreciation on the leased asset to be written during the term
of the lease)
In the books of X (Lessor)
Account Title and Explanation	Debit	Credit
Lease Receivable	$137,434
Equipment		$13,434
(to record the asset leased to Y)
Cash	$15,000
Lease Receivable		$15,000
(to record the receipt of annual lease payment from Y)

Working Notes:

Depreciation expenses in the books of lessee in finance lease

Fair Value of the leased equipment $ 137,434

Term of Lease in years 8  

Depreciation = $ 137,434 / 8 = $ 17,179