Question

Exercise 21-4 Your answer is partially correct. Try again. Vaughn Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Bramble Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement: 1. Bramble Company has the option to purchase the equipment for $14,900 upon termination of the lease. 2. The equipment has a cost and fair value of $175,000 to Vaughn Leasing Company. The useful economic life is 2 years, with a salvage value of $14,900. 3. Bramble Company is required to pay $4,700 each year to the lessor for executory costs. 4. Vaughn Leasing Company desires to earn a return of 8% on its investment. 5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Click here to view factor tables

Answer 1

Answer -

Step - (1) - Calculation of Annual Lease Payments -

	Particulars	Explanation
I.	Fair value of leased asset	Given in question	$175000
II.	Present Value of salvage value of leased asset	Salvage value * PVIF of $1 (i%, n) = $14900 * $1(8%,2 years) = $14900 * 0.85734 = $12774	$12774
III.	Present Value of annual lease payments	I - II	$162226
IV.	Lease term	Given in question	2 years
Annual Lease Payments		III / IV	$81113

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Step - (2) -

Journal of Vaughn Leasing Company

Date	Account Titles and Explanation	Debit ($)	Credit ($)
1/1/17	Lease Receivable Equipment	175000 -	- 175000
12/31/17	Cash Executory Costs Payable [given in question] Interest Revenue [$175000 * 8%] Lease Receivables [$81113 - $14000]	85813 - - -	- 4700 14000 67113
12/31/18	Cash Executory Costs Payable [given in question] Interest Revenue [($175000 - $67113) * 8%] Lease Receivables [$81113 - $8631]	85813 - - -	- 4700 8631 72482