Question

Morgan Leasing Company signs an agreement on January 1, 2014, to lease equipment to Cole Company. The following information relates to this agreement.

1. The term of the noncancelable 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 on January 1, 2014, 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 $43,622 none of which is guaranteed.

4. Cole Company assumes direct responsibility for all executory costs.

5. The agreement requires equal annual rental payments, beginning on January 1, 2014.

6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.

(a) Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the annual rental payment required.

(b) Prepare an amortization schedule that would be suitable for the lessor for the lease term.

(c) Prepare all of the journal entries for the lessor for 2014 and 2015 to record the lease agreement, the receipt of lease payments, and the recognition of income. Assume the lessor's

annual accounting period ends on December 31.

Answer 1

Year	PV Factor @ 10%
0	1.00000
1	0.90909
2	0.82645
3	0.75131
4	0.68301
5	0.62092
6	0.56447
Total (0 to 5)	4.79079

Cost (Fair Value) of leased asset	$                    245,000
Less: Present value of salvage value (43622*0.56447)	$                      24,623
Present value of annual payments	$                    220,377
Divided by: PV Annuity Factor (Hint: Total 0 to 5)	4.79079
Amount of Lease payment	$                      46,000

Morgan Leasing Company(Lessor)
Lease Amortization Schedule
Date	Annual Lease Payment	Interest on Lease Receivable	Recovery of Lease Receivable	Balance of Lease Receivable
Jan 1, 2014				$        245,000
Jan 1, 2014	$                      46,000		$        46,000	$        199,000
Jan 1, 2015	$                      46,000	$           19,900	$        26,100	$        172,900
Jan 1, 2016	$                      46,000	$           17,290	$        28,710	$        144,190
Jan 1, 2017	$                      46,000	$           14,419	$        31,581	$        112,609
Jan 1, 2018	$                      46,000	$           11,261	$        34,739	$          77,869
Jan 1, 2019	$                      46,000	$             7,787	$        38,213	$          39,656
Dec 31, 2019	$                      43,622	$             3,966	$        39,656	$                     0
Interest on Lease Receivable = Beginning Balance of Lease Receivable * 10%
Recovery of Lease Receivable = Annual Lease Payment - Interest on Lease Receivable
Balance of Lease Receivable = Beginning Balance of Lease Receivable - Recovery of Lease Receivable

Morgan Leasing Company(Lessor)
Date	General Journal	Debit	Credit
Jan 1, 2014	Lease Receivable	$        245,000
	Equipment		$     245,000
	(To record the lease.)
Jan 1, 2014	Cash	$           46,000
	Lease Receivable		$        46,000
	(To record Lease payment received.)
Dec 31, 2014	Interest Receivable	$           19,900
	Interest Revenue		$        19,900
	(To record accrued Interest Revenue.)
Jan 1, 2015	Cash	$           46,000
	Interest Receivable		$        19,900
	Lease Receivable		$        26,100
	(To record Lease payment received.)
Dec 31, 2015	Interest Receivable	$           17,290
	Interest Revenue		$        17,290
	(To record accrued Interest Revenue.)