Question

(Lessee-Lessor Entries, Finance Lease with a Guaranteed Residual Value) (LO 2, 4) Glaus Leasing Company agrees to lease equipment to Jensen Corporation on January 1, 2017. The following information relates to the lease agreement. 1.The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2.The cost of the machinery is $525,000, and the fair value of the asset on January 1, 2017, is $700,000. 3.At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $50,000. Jensen estimates that the expected residual value at the end of the lease term will be $50,000. Jensen amortizes all of its leased equipment on a straight-line basis. 4.The lease agreement requires equal annual rental payments, beginning on January 1, 2017. 5.The collectibility of the lease payments is probable. 6.Glaus desires a 5% rate of return on its investments. Jensen's incremental borrowing rate is 6%, and the lessor's implicit rate is unknown. Instructions (Assume the accounting period ends on December 31.)

(a) Discuss the nature of this lease for both the lessee and the lessor.

(b) Calculate the amount of the annual rental payment required.

(c) Compute the value of the lease liability to the lessee.

(d) Prepare the journal entries Jensen would make in 2017 and 2018 related to the lease arrangement.

(e) Prepare the journal entries Glaus would make in 2017 and 2018 related to the lease arrangement.

(f) Suppose Jensen expects the residual value at the end of the lease term to be $40,000 but still guarantees a residual of $50,000. Compute the value of the lease liability at lease commencement.

Answer 1

4 Glous leasing Company @ the lease term is 2 years which is 78% of economic life of the asset therefore it is a capital lease 1.719 78% There is no uncertainity regarding collectibility of rease Payments and costs to be incurred by the lesson. The food Value $ 700.000 exceeds the lessor's cost 525000, the lease is sale type of lease. ② calculation of annual rental payment $ 700000 -($100000 XOS1316) 5.35526 $ 121130 Present value of $ 1 at 104 for 7 periods. Present value of an annuity due at 10% for 7 Periods. of of Present value minimum lease payments! computation PV of annual Payments : $121,130 X5 .23052* *. 63357530 py of guaranteed residual value; $100.000 X48166 ** 48166 Present value of an annuity due at 11). for periods. Present value of I at lll. for 7 Periods

Journal Enteries Date Particulars Debit in & credit in $ 1-1-2017 681741 Leased Equipment als Dr To lease ciability 68174) lease 121130 liability alc To Cash 121136 31.12 2017 83106 Depreciation Expense ale Or. To Accumulated Deprestano canal ($681,741- $ 100 000 +7 leases 83106 61667 61667 interest Expense alc Dr. To interesi payable C$6817411 - $121,130) X L Lease wability Interest Payable Our To cash 98 59463 61667 121130 31-12 2018 Deere Clation Expense alc Dr. 83106 To Accumulated Depreciation C$681 7241 - $100.000) -7 -capital leases 83106 55 126 interest Expense To interest [$681-741-$121.30 alc Dr. Payable $ 59,463) 4:10 55126

Particulars Debit ins Credit in $ Lease Receivable alc o r cost of Goods sold alc Dr. _ To sales Revenue To Inventory 700000 525000 ვეუბ 525000 cash ale 121130 To lease Receivable 121130 31.12.2017 alc 57887 Interest Receivable • To interest ($ 200,000 $121.130) x 10] Dro Revenue 57887 1.1.2018 - cash 121130 alc To lease To interes. Or Receivable Receivable 63243 57887 51563 31.12.2018 51563 Interest Receivable ale ore To interest Reveove $_700000-$121,130 - $63,243) X.10