Question

Exercise 21A-14 Your answer is partially correct. Try again. Phelps Company leases a building to Walsh, Inc. on January 1, 2017. The following facts pertain to the lease agreement. 1. The lease term is 5 years, with equal annual rental payments of $4,703 at the beginning of each year. 2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. 3. The building has a fair value of $23,000, a book value to Phelps of $16,000, and a useful life of 6 years. 4. At the end of the lease term, Phelps and Walsh expect there to be an unguaranteed residual value of $4,000. 5. Phelps wants to earn a return of 8% on the lease, and collectibility of the payments is probable. This rate is known by Walsh. Assume that Walsh was unaware of the implicit rate used in the lease by Phelps and has an incremental borrowing rate of 9% Click here to view the factor table. How would Phelps (lessor) and Walsh (lessee) classify this lease? sales-type Phelps would classify the lease as a lease. finance Walsh would classify the lease as a lease. How would Phelps initially measure the lease receivable, and how would Walsh initially measure the lease liability and right-of-use asset? (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to o decimal places, e.g. 5,275.) Phelps Lease receivable 20279 Present value of lease pay 20279 Walsh Lease Liability/Right-of-Use Asset 20279

Answer 1

Answer
1	phelps would classify the lease as a Sales - type lease
2	Walsh would classify the lease as a Finance lease.
3	For phelps
	Lease Receivable   $23,000
	Working
	Annual Rent Payments		$              4,703
	PVAF (5 periods, 8%)		4.31213
	Present value of Rental Payment	A	$            20,280
	Expected Residual value (Unguarantee)		$              4,000
	PVF (5 Periods,8%)		0.68058
	Present Value of Residual Value	B	$              2,722
	Lease Receivable	A+B	$            23,000
			Rounded by $2
	Present Value of lease pay $20280
	Working
	Annual Rent Payments		$              4,703
	PVAF (5 periods, 8%)		4.31213
	Present value of Rental Payment	A	$            20,280
4	For Walsh
		Walsh
	Lease Liability / Right - of - Use Asset	$20280
	The initial lease liability for Walsh is $20280.
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