Laura Leasing Company signs an agreement on January 1, 2014, to lease equipment
ID: 2472817 • Letter: L
Question
Laura Leasing Company signs an agreement on January 1, 2014, to lease equipment to Plote Company. The following information relates to this agreement.
Plote Company uses the straight-line depreciation method for all equipment.
Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and Round answers to 2 decimal places, e.g. 15.25.)
Prepare all of the journal entries for the lessee for 2014 and 2015 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 15.25.)
The term of the noncancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years. The fair value of the asset at January 1, 2014, is $89,800. 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 $6,670, none of which is guaranteed. Plote Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $885 to Rocky Mountain Insurance Company for insurance and (2) $1,696 to Laclede County for property taxes. The agreement requires equal annual rental payments of $20,158.16 to the lessor, beginning on January 1, 2014. The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 9% and is known to the lessee.Plote Company uses the straight-line depreciation method for all equipment.
Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and Round answers to 2 decimal places, e.g. 15.25.)
Prepare all of the journal entries for the lessee for 2014 and 2015 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 15.25.)
Explanation / Answer
Answer:
This lease is a capital lease to the lessee beacuse the lease term five years exceeds 75% of the remaining life of the asset. Also, the present value of the minimum lease payments exceeds 90% of the fair value of the assets.
Annual rental Payment..................................................$ 20,158.16
PV of an annuity due of 1 for n = 5, i = 9%....................... * 4.23972
PV of minimum lease payments..................................... $ 85464.95
PLOTE COMPANY lease Amortization Schedule
Date Annual Lease Pay Interest(9%) Liability Reduction on lease Lib Lease Lib
1/1/14 $ 85,464.95
1/1/14 $ 20,158.16 0 $ 20,158.16 $ 65,306.79
1/1/15 $ 20,158.16 $ 5,877.61 $ 14,280.55 $ 51,026.24
1/1/16 $ 20,158.16 $ 4,592.36 $ 15,565.79 $ 35,460.45
1/1/17 $ 20,158.16 $ 3,191.44 $ 16,966.71 $ 18,493.73
1/1/18 $ 20,158.16 $ 1,664.43 $ 18,493.72 0
TOTAL $ 100,790.8 $ 15,325.84 $ 85,464.93
1/1/14 Leased Equipment................................................Dr $ 85,464.95
Lease Liability....................................................... $ 85,464.95
1/1/14 Lease Liability ......................................................Dr. $ 20,158.16
Cash ...................................................................$ 20,158.16
Insurance Expense.................................................Dr. $ 885
Cash......................................................................$ 885
Property Tax Expense..............................................Dr. $ 1,696
Cash...........................................................................$ 1,696
12/31/14 Interest Expense...................................................Dr. $ 5,877.61
Interest Payable..........................................................$ 5,877.61
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