Question

The following facts pertain to a non-cancelable lease agreement between Faldo Leasing Company and Riverbed Company, a lessee. Commencement date January 1, Annual lease payment due at the beginning of    each year, beginning with January 1, $105,757 Residual value of equipment at end of lease term,    guaranteed by the lessee $46,000 Expected residual value of equipment at end of lease term $41,000 Lease term 6 years Economic life of leased equipment 6 years Fair value of asset at January 1, $557,000 Lessor’s implicit rate 8 % Lessee’s incremental borrowing rate 8 % The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line amortization for all leased equipment.

Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places e.g. 5,275.) RIVERBED COMPANY (Lessee) Lease Amortization Schedule Date Annual Lease Payment Plus GRV Interest on Liability Reduction of Lease Liability Lease Liability 1/1/20 $enter a dollar amount rounded to 0 decimal places $enter a dollar amount rounded to 0 decimal places $enter a dollar amount rounded to 0 decimal places $enter a dollar amount rounded to 0 decimal places 1/1/20 enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places 1/1/21 enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places 1/1/22 enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places 1/1/23 enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places 1/1/24 enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places 1/1/25 enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places 12/31/26 enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places $enter a total amount $enter a total amount $enter a total amount

Prepare all of the journal entries for the lessee for and to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 5,275. Record journal entries in the order presented in the problem.)

Suppose Riverbed received a lease incentive of $5,000 from Faldo Leasing to enter the lease. How would the initial measurement of the lease liability and right-of-use asset be affected? Right-of-use asset $enter a dollar amount Lease Liability $enter a dollar amount What if Riverbed prepaid rent of $5,000 to Faldo? Right-of-use asset $enter a dollar amount Lease Liability $enter a dollar amount

Answer 1

Faldo leasing Company & Riverbed company
Commencement Date	Jan 1
Annual lease Payment $	1,05,757
Residual value of asset @ end of lease term$	46,000
Expected residual value $	41,000
Lease term - year	6
Economic life of leased asset Year	6
Fair value of asset @ jan 1 $	5,57,000
Lessor Implicit rate	8%
Lesse Incremental borrowing rate	8%
the asset will revert to Lessor at the end of lease term
The lessee used straight Amortization table
Lease accounting - forst we need to determined Present Value of lease liability
Annual lease Payment $	1,05,757
Residual value of asset @ end of lease term$ Guaranteed	46,000
Lease term - year	6

Present Value derived as below
Year	Cash Inflow($)	Discount Factor-8%	Present Value $
1	1,05,757	1	1,05,757
2	1,05,757	0.9259	97,923
3	1,05,757	0.8573	90,670
4	1,05,757	0.7938	83,953
5	1,05,757	0.7350	77,735
6	1,05,757	0.6806	71,976
at 6th Year	46,000	0.6302	28,988
Present Value of Future cash flow			5,57,002
Amortization table
	Annual lease Payment$-a	Interest on Liability$-b 8% on d	Reduction in Lease liability$-c=(a-b)	Lease Liability$-d
1/1/20				5,57,002
1/1/20	1,05,757		1,05,757	4,51,245	(lease Liability- Reduction in Liability)
1/1/21	1,05,757	36,100	69,657	3,81,587
1/1/22	1,05,757	30,527	75,230	3,06,357
1/1/23	1,05,757	24,509	81,248	2,25,109
1/1/24	1,05,757	18,009	87,748	1,37,361
1/1/25	1,05,757	10,989	94,768	42,593
31/12/26	46,000	3,407	42,593	-0

	Journal Entry to account following Entries
Date	Details		Debit($)	credit($)
1/1/20	Right to use		5,57,002
	Lease liability			5,57,002
1/1/20	Lease liability		1,05,757
	cash			1,05,757
31/12/21	Finance Charges		36,100
	Lease liability			36,100
31/12/20	Amortization Expenses		92,834
	Right to use			92,834
	( Present value of lease amount spread over 6 Years
	$557002/6)
1/1/22	Lease liability		1,05,757
	cash			1,05,757
31/12/21	Finance Charges		30,527
	Lease liability			30,527
31/12/21	Amortization Expenses		92,834
	Right to use			92,834

Suppose Riverbed received a lease incentive of $ 5000 from faldo leasing
Journal Entry
Details	Debir($)	Credit($)
Right to use	5,62,002
Lease liability		5,57,002
Cash		5,000

Present Value derived as below
Year	Cash Inflow($)	Discount Factor-8%	Present Value $
1	1,10,757	1	1,10,757
2	1,05,757	0.9259	97,923
3	1,05,757	0.8573	90,670
4	1,05,757	0.7938	83,953
5	1,05,757	0.7350	77,735
6	1,05,757	0.6806	71,976
Present Value of Future cash flow			5,33,014
Amortization table
	Annual lease Payment$-a	Interest on Liability$-b 8% on d	Reduction in Lease liability$-c=(a-b)	Lease Liability$-d
1/1/20				5,33,014
1/1/20	1,10,757		1,10,757	4,22,257	(lease Liability- Reduction in Liability)
1/1/21	1,05,757	33,781	71,976	3,50,281
1/1/22	1,05,757	28,022	77,735	2,72,546
1/1/23	1,05,757	21,804	83,953	1,88,593
1/1/24	1,05,757	15,087	90,670	97,923
1/1/25	1,05,757	7,834	97,923	-

	Journal Entry to account following Entries
Date	Details		Debit($)	credit($)
1/1/20	Right to use		5,33,014
	Lease liability			5,33,014
1/1/20	Lease liability		1,10,757
	cash			1,10,757
31/12/21	Finance Charges		33,781
	Lease liability			33,781
31/12/20	Amortization Expenses		88,836
	Right to use			88,836
	( Present value of lease amount spread over 6 Years
	$533014/6)
1/1/22	Lease liability		1,10,757
	cash			1,10,757
31/12/21	Finance Charges		28,022
	Lease liability			28,022
31/12/21	Amortization Expenses		88,836
	Right to use			88,836