Question

Lessor Sales Company and Lessee Manufacturing Company agreed to a noncancelable lease. The following in- formation is available to both entities regarding the lease terms and the leased asset. I. Lessor's cost of the leased asset was $30,000. The asset was new at the inception of the lease term. 2. Lease term is three years starting January 1,2020 3. Estimated useful life of the leased asset is six years. Estimated residual value at end of six years is zero. 4. On January 1, 2023, the estimated unguaranteed residual value of the leased asset one day after the end of the lease term is $10,000 Lessor's implicit rate is 7% Lessee's incremental borrowing rate on January 1, 2020, is 8% and the lessee is unaware of the lessor's implicit rate. Title to the leased asset is retained by the lessor The fair value of the leased asset on January 1, 2020, is $45,000. Three annual lease payments are due on January 1 of each year during the lease term, and the first payment is due at the inception of the lease term. 5. 6. 7. 8. 10. The accounting period for the lessor and the lessee ends on December 31 Required b What type of lease is this for the lessee and lessor? Compute the annual lease payment. a. c. Provide all journal entries associated with this lease for the lessee for the years ended December 31, 2020, and 2021 Provide all journal entries associated with this lease for the lessor for the years ended December 31, 2020, and 2021

Answer 1

Answer

Desired Rate of return for Lessor Lease term Calculate the amount of the annual rental payment. Salvage Value Amount to be recovered (fair value) Less: Present Value of the residual value (10000 x 0.81630) Amount to be recovered through periodic lease payments 7% 3.00 vears 10,000 45,000 8,163 36,837 Present Value of Annuity factor @7% n:3 years Lease payment at the beginning of each year Year Year for discountin PV factor @ 7% Answr a Payments Required per year Answer b Fair Value NPV Percentage Since present value of lease payments does not exceed 90% To be classified as Operating Lease Lease term estimated useful life Percentage Since Lease term < 75% of economic life of the leased property the same will be classified as Operting lease 2.80802 13,118 2 0 1.00000 0.93458 2 0.87344 0.81630 2.80802 13,118 45,000 36,512 81% 50%) ASC 842 states that regardless of how a lease is classified, a lessee will be required to recognize a right-of-use asset and a lease liability for substantially all leases at the commencement date

Lessee Books Workings: Year Year for discounting 0 Salavge value not Guarantee Annual Lease Installments paid at the beginning of the year PV factor @8% Present Value of Min lease payments Value at which to be recorded as asset by lessee is lower of FMV or NPV Depreciation (FV-Salvage value)/3 years 13,118 13,118 13,118 1.00000 0.925930.85734 0.79383 13,118 12,147 11,247 36,512 36,512 12,171 12,171 12,171 36,512 Amortisation Shedule for Lessee Repayment Schedule Reduction in Finance Annual Principal Outstandin 36,512 12,147 Year Charges Paymen Amountg Liability 0 13,118 13,118 13,118 39,355 13,118 23,394 11,247 12,147 36,512 0 1,872 972 2,843 Answer d Lessee Books General Journal Jan 1, 2020 a) Capital Lease-in the books of Lessee Right-of-Use Asset Lease Liability (To record the lease.) Debit Credit 36,512 36,512 Jan 1, 2020 b1) Record the down payment Lease Liability Cash (to record lease payment) 13,118 13,118 c) To record the depreciation Dec 31, 2020 Amortization Expense Right-of-Use Asset 12,171 12,171 Dec 31, 2020 d) To record interest Interest Expense Lease Liability 1,872 1,872

Lessor Books Operating Lease General Journal 1-Jan-20 Machine Asset Cash 1-Jan-20 Cash Unearned Lease Revenue Debit Credit 30,000 30,000 13,118 13,118 Dec 31, 2020 Unearned Lease Revenue Lease Revenue 13,118 13,118 Depreciation Expense Accumulated Depreciation 5,000 5,000