Question

please help me with this problem. Thank you!

3. (21 points) he On January 1, 2015, BMC Company leased equipment to Pioneer Tech Co. for a two year period ending December 31, 2016. At the end of the lease term, the leased asset will be reverted back to BMC Company. The fair value of the equipment is $43,141 and has an expected useful life of three years. The lessee-guaranteed residual value at the end of the non-cancelable lease term is $6,000 with an expected residual value of $3,000. The annual lease payment is $20,000 and is due on January 1 of each year with the first payment on 1/1/2015. The collectiblility of the remaining lease payments is reasonably assured. Both BMC Company and Pioneer Tech Co. use 10% discount rate and straight- line depreciation. 0) Required: a. Show how BMC Company calculated the $20,000 annual lease payment. b. How should this lease be classified by Pioneer Tech Co. (the lessee) and by BMC Company (the lessor)? c. Prepare the appropriate entries for Pioneer Tech Co. on 1/1/2015, 12/31/2015. 1/1/2016 and 12/31/2016 (assuming that the equipment was reverted back to BMC and the residual value of the equipment on 12/31/2016 is $2.000 (Note: these entries should be prepared based on finance lease for Pioneer Tech regardless of your answer in b).

Answer 1

a)Let The Annual payment Be "X"

Date	Payments	Present value factor at 10%	Present value of Payment
1/1/2015	X	1	X
1/1/2016	X	.90909	.90909X
31/12/2016 - Guaranteed residual value	6000	.82645	4958.7
			1.90909X+4958.7
FAIR VALUE OF EQUIPMENT			43141

On equating ,1.90909X+4958.7 = 43141

                   1.90909x = 43141-4958.7

                       X= 38182.3 / 1.90909

                           = $ 20000

Find present value factor using the formula 1/(1+i)^n where i=10% n=1,2

2)The lease will be classified as Finance Lease ,if any of the following conditions apply :

a)Asset transfers to lessee at the end of lease term   (Not Apply in current situation)

b)The lessee has an option to buy the asset below fair value (Not given)

c)The present value of future lease payment is substaintially equals to fair value (Apply )

d)The lease term is significant part of useful life (Apply that is out of 3 years ,leased for 2 years)

Lease will be classified as Finance lease in books of Lessor and Lessee.

c)

Date	Account title	Debit	credit
1/1/2015	Right of use asset	43141
	Lease Liability		43141
1/1/2015	Lease Liability	20000
	cash		20000
12/31/2015	Interest expense	2314
	Interest payable		2314
	[Being interest accrued for the year 1/1/2015-31/12/2015 on carrying value of 43141-20000= 23141 at 10%]
12/31/2015	Depreciation expense	18570.5
	Right of use asset		18570.5
	[Depreciation expense :[43141-6000]/2
1/1/2016	Lease liability	17686
	Interest payable	2314
	cash		20000
12/31/2016	Right of use asset	18570.5
	Right of use asset		18570.5
12/31/2016	Loss on reversal of lease asset	4000
	Right of use asset		4000
	[Book value =6000 ,Fair value 2000 ,Loss= 6000-2000=4000]