Question

Timmer Company signs a lease agreement dated January 1, 2019, that provides for it to lease equipment from Landau Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows: • The lease is noncancelable and has a term of 5 years. • The annual rentals are $83,222.92, payable at the end of each year, and provide Landau with a 12% annual rate of return on its net investment. • Timmer agrees to pay all executory costs directly to a third party on December 1 of each year. In 2019, these were insurance, $3,760; property taxes, $5,440. In 2020: insurance, $3,100; property taxes, $5,330. • There is no renewal or bargain purchase option. Timmer estimates that the equipment has a fair value of $300,000, an economic life of 5 years, and a zero residual value. Timmer’s incremental borrowing rate is 16%, it knows the rate implicit in the lease, and it uses the straightline method to record depreciation on similar equipment.

Required: 4. Next Level Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2019. Use the present value of next year’s payment approach to classify the finance lease liability between current and noncurrent.

5. Next Level Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2019. Use the change in present value approach to classify the finance lease liability between current and noncurrent.

I Need the ??? amounts for both #4 and #5 answered. The partial balance sheets both require the same information. #4 is for present value and #5 is change in present value.

                          Timber Company

                       Balance Sheet (Partial)

                        December 31, 2019

    

Assets
Right-of-Use Asset	???
Current Liabilities
Lease liability	???
Noncurrent
Lease liability	???
Total lease liability	???

                        

Answer 1

Year	Lease rent	PVF@12%	PV of lease rentals
1	83,222.92	0.8929	74,306.18
2	83,222.92	0.7972	66,344.80
3	83,222.92	0.7118	59,236.43
4	83,222.92	0.6355	52,889.67
5	83,222.92	0.5674	47,222.92
			300,000.00	= Fair Value estimated by Timmer. Hence, implicit rate is 12%
Lease amortisation schedule
Year	Rent paid	Expense @12% of Liab. Balance	Liab reduction	Liab balance
0				300,000.00
1	83,222.92	36,000.00	47,222.92	252,777.08
2	83,222.92	30,333.25	52,889.67	199,887.41
3	83,222.92	23,986.49	59,236.43	140,650.98
4	83,222.92	16,878.12	66,344.80	74,306.18
5	83,222.92	8,916.74	74,306.18	(0.00)
Depreciation=		300000 divided by 5	60,000.00
Assets
Right to use asset(300000-60000)			240,000.00
Current liabilities
Lease liability			52,889.67	(due within 12 months from reporting date)
Noncurrent
Lease liability			199,887.41	(remaining balance)
Total Lease liability			252,777.08