The following facts pertain to a lease agreement between LeasingCompany and Smith Company, a lessee. (Round all numbers to thenearest cent.)
ï· Inception date: May 1, 2015
ï· Annual lease payment due at the beginning of each year,beginning with May 1, 2015: $13,604.79.
ï· Guaranteed residual value after 6 years is $5,000.00.
ï· Lease term: 6 years
ï· Economic life of leased equipment: 10 years
ï· Lessorâs cost: $53,000.00; fair value of asset at May 1, 2015,$68,000.00
ï· Lessorâs implicit rate: 10%; lesseeâs incremental borrowingrate 10%
Required
1. Discuss the nature of this lease to Smith Company.
2. Discuss the nature of this lease to Leasing Company.
3. Prepare a lease amortization schedule for Smith Company forthe 6-year lease term.
4. Prepare the journal entries on the lesseeâs books to reflectthe signing of the lease agreement and to record the payments andexpenses related to this lease for the years 2015 and 2016. Smithâsannual accounting period ends on December 31.
The following facts pertain to a lease agreement between LeasingCompany and Smith Company, a lessee. (Round all numbers to thenearest cent.)
ï· Inception date: May 1, 2015
ï· Annual lease payment due at the beginning of each year,beginning with May 1, 2015: $13,604.79.
ï· Guaranteed residual value after 6 years is $5,000.00.
ï· Lease term: 6 years
ï· Economic life of leased equipment: 10 years
ï· Lessorâs cost: $53,000.00; fair value of asset at May 1, 2015,$68,000.00
ï· Lessorâs implicit rate: 10%; lesseeâs incremental borrowingrate 10%
Required
1. Discuss the nature of this lease to Smith Company.
2. Discuss the nature of this lease to Leasing Company.
3. Prepare a lease amortization schedule for Smith Company forthe 6-year lease term.
4. Prepare the journal entries on the lesseeâs books to reflectthe signing of the lease agreement and to record the payments andexpenses related to this lease for the years 2015 and 2016. Smithâsannual accounting period ends on December 31.
Related questions
Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Bramble Company. The following information relates to this agreement.
| 1. | The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years. | |
| 2. | The fair value of the asset at January 1, 2017, is $55,000. | |
| 3. | The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $3,000, none of which is guaranteed. | |
| 4. | The agreement requires equal annual rental payments of $18,133 to the lessor, beginning on January 1, 2017. | |
| 5. | The lesseeâs incremental borrowing rate is 5%. The lessorâs implicit rate is 4% and is unknown to the lessee. | |
| 6. | Bramble uses the straight-line depreciation method for all equipment. |
Assume that the expected residual value at the end of the lease is $8,000, such that the payments are $16,593.
Prepare all of the journal entries for the lessee for 2017 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lesseeâs annual accounting period ends on December 31
Laura Leasing Company signs an agreement on January 1, 2017, tolease equipment to Nash Company. The following information relatesto this agreement.
| The term of the noncancelable lease is 5 years with no renewaloption. The equipment has an estimated economic life of 5years. | ||
| 2. | The fair value of the asset at January 1, 2017, is$79,300. | |
| 3. | The asset will revert to the lessor at the end of the leaseterm, at which time the asset is expected to have a residual valueof $7,300, none of which is guaranteed. | |
| 4. | Nash Company assumes direct responsibility for all executorycosts, which include the following annual amounts: (1) $940 toRocky Mountain Insurance Company for insurance and (2) $1,490 toLaclede County for property taxes. | |
| 5. | The agreement requires equal annual rental payments of$17,930.41 to the lessor, beginning on January 1, 2017. | |
| 6. | The lesseeâs incremental borrowing rate is 12%. The lessorâsimplicit rate is 10% and is known to the lessee. | |
| 7. | Nash Company uses the straight-line depreciation method for allequipment. | |
| 8.Prepare an amortization schedule that would be suitable forthe lessee for the lease term. (Round present valuefactor calculations to 5 decimal places, e.g. 1.25124 and Roundanswers to 2 decimal places, e.g. 15.25.) Prepare all of the journal entries for the lessee for 2017 and2018 to record the lease agreement, the lease payments, and allexpenses related to this lease. Assume the lesseeâs annualaccounting period ends on December 31. (Credit accounttitles are automatically indented when amount is entered. Do notindent manually. If no entry is required, select "No Entry" for theaccount titles and enter 0 for the amounts. Round answers to 2decimal places, e.g. 15.25.) | Nash uses reversing entries when appropriate. |
