Question

The following facts pertain to a lease agreement between Leasing Company and Brown Company, a lessee. (Round all numbers to the nearest cent.)

 Inception date: March 1, 2019

 Annual lease payment due at the beginning of each year, beginning with March 1, 2019: €13,604.79.

 Unguaranteed residual value after 6 years is €5,000.00.  Lease term: 6 years

 Economic life of leased equipment: 10 years

 Lessor’s cost: €53,000.00; fair value of asset at March 1, 2019, €68,000.00

 Lessor’s implicit rate: 10%; lessee’s incremental borrowing rate 10% Instructions

1. Discuss the nature of this lease to Leasing Company. 2. Prepare a lease amortization schedule for Brown Company for the 6-year lease term. 3. Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2019 and 2020. Brown’s annual accounting period ends on December 31.

Answer 1

Answer:-

wn	PV of periodic rental payments = 13604.79*PV of Annuity due of 1 for n =6 ,i-10%=13604.79*4.79079 =65178
	PV of guaranteed residual value = 5000 * PV of 1 for n=6,i-10%=5000*0.56447=2822
	Lease receivable at inception = 65178+2822 =		68000
1	For Brown company it is a capital Lease as the present value of minimum lease payments exceeds 90% of the fair value of assets.
	For leasing company it is a sales type lease as the fair value of assets exceeds the lessor's cost.
2	Year	Annual Lease payment	Interest	Reduction of Lease Liability	Lease Liability
	3/1/2019				68000
	3/1/2019	13604.79		13604.79	54395.21
	3/1/2020	13604.79	5439.52	8165.27	46229.94
	3/1/2021	13604.79	4622.99	8981.8	37248.15
	3/1/2022	13604.79	3724.81	9879.98	27368.17
	3/1/2023	13604.79	2736.82	10867.97	16500.2
	3/1/2024	13604.79	1650.02	11954.77	4545.43
	4/30/2024	5000	454.57	4545.43	0
	Total	86628.74	18628.74	68000
	Date	Account Title	Debit-$	Credit-$
	1-Mar-19	Lease Equipment	68000
		Lease Liability		68000
		to Record Lease
		Lease Liability	13604.79
		Cash		13604.79
		To record Lease payment
	12/31/2019	Interest Expense	4532.93		5439.52/12*10
		Interest payable		4532.93
		To record interest
	3/1/2020	Lease Liability	8165.27
		Interest payable	4532.93
		Interest expense	906.59		5439.52-4532.93
		Cash		13604.79
		To record Lease payment
	12/31/2020	Interest Expense	3852.49		4622.99/12*10
		Interest payable		3852.49
		To record interest

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