Question

Rentals Inc. leases a vehicle to United Inc. for four years on January 1, 2020, requiring equal annual payments

on each January 1. The leased asset, recently purchased new, cost the lessor $45,000. The estimated unguaran-

teed value of the asset at the end of the lease term is $5,000. The annual lease payments were computed to yield

Rentals Inc. 6%, a rate known to United Inc. The leased asset has a six-year life with zero residual value at the

end of year 6. There is no purchase option, and the asset is retained by Rentals Inc. at the end of the lease term.

The accounting period for both lessor and lessee ends December 31.

Required

a. Compute the annual lease payment.

b. What type of lease is this to the lessor and lessee? Explain.

c. Prepare amortization schedules for the lessee and for the lessor.

d. Provide all journal entries associated with this lease for the lessee for the years ended December 31, 2020,

and 2021.

e. Provide all journal entries associated with this lease for the lessor for the years ended December 31, 2020,

and 2021.

f. What balances (account titles, amounts) appear on the lessee’s balance sheet on December 31, 2020, related

to the lease?

g. What balances (account titles, amounts) appear on the lessee’s income statement for 2020, related to the lease?

h. What balances (account titles, amounts) appear on the lessor’s balance sheet on December 31, 2020, related

to the lease?

i. What balances (account titles, amounts) appear on the lessor’s income statement for 2020, related to the lease?

Answer 1

a)

	lease payment	P.V factor @6%	P.V of Lease Payments
1	7500	0.943	7075.47
2	7500	0.889	6667.50
3	7500	0.839	6292.50
4	7500	0.792	5940.00
5	7500	0.747	5602.50
6	7500	0.704	5280.00
	Total		36857.97

b) lease term covers the whole economic life cycle of an asset so it is financial lease even though risk and rewards are not transferred and the asset is retained by the lessor.

C)

	calculation of lease payments between outstanding liability and finance charges
year	outstanding balance(A)	lease rent(B)	finance charge@6% on A=C	reduction in liability(A-C)=D	closing balance A-D
1	36857.97	7500	2211.48	5288.52	31569.45
2	31569.45	7500	1894.17	5605.83	25963.62
3	25963.62	7500	1557.82	5942.18	20021.43
4	20021.43	7500	1201.29	6298.71	13722.72
5	13722.72	7500	823.36	6676.64	7046.08
6	7046.08	7500	453.91	7046.09	0.00

D)

	Lessee
year	ParticulaR	Debit	Credit
The inception of the year 2020	Machinery	36857.97
	To Rental Inc		36857.97
	Being machinery leased and recorded at p.value
31st Dec 2020	Finance Charges	2211.48
	To Rental Inc		2211.48
	Being Finance charges for the first year due
31st Dec 2020	Rental Inc
	To Bank account		7500
	Being First installment paid
31st Dec 2020	Depreciation	6143.00
	To Machinery		6143.00
	Beng Depreciation Calculated on Straight line basis of PV = 36857.98/6
31st dec 2020	Profit and loss account	8354.47
	To Depreciation		6143.00
	To Finance Charges		2211.48
	Being expenses transfer to profit and loss account

E) lessor

year	ParticulaR			Debit	Credit
The inception of the year 2020	United Inc			36857.97
	To Lease sales account				36857.97
	Being a lease agreement is entered
31st Dec 2020	Bank Account			7500
	To United Inc				7500
	Being the first installment paid
31st Dec 2020	United Inc			2211.48
	To interest				2211.48
	Being Interest is due
31st Dec 2020	Interest			2211.48
	To Profit and loss account				2211.48
	Being expenses transferred to profit and loss account