2:18 PM blackboard.morton.edu Sprint LTE 24%) } + On January1, 2016, Rider Inc.

Question

2:18 PM blackboard.morton.edu Sprint LTE 24%) } + On January1, 2016, Rider Inc. leased a truck to Pine Valley Transportation. The lease qualifies as a capital lease under criteria established by the accounting profession. The following information relates to this 1. The lease term is for ten years. The useful life of 2. The lease agreement specifies that ownership of the 3. Lease payments are $8,800 per year (exclusive of 4, Pine Valley's incremental borrowing rate is 15%. the truck is 15 years. asset be transferred to the lessee at the end of the lease term. executory costs) with the first payment due January 1, 2016 The lessor's implicit rate is 10% and is known to Pine Valley the lessee 5. Maintenance and other operating costs (executory costs), not included in the lease payments, are $1,500 and payable on June 1 of each year by Pine Valley 6. Pine Valley uses straight-line depreciation on all its assets. (note: review GAAP depreciation for capital leases) 7. Rider uses reversing journal entries where appropriate. 8. The present value factors for an annuity due are as follows: 15% 5.77158 10% 6.75902 Instructions 1. Provide all necessary journal entries required of Pine Valley for the years 2016 and 2017 2. Complete the lease amortization schedule below (up to 1/1/19) (round all answers to the nearest dollar) Lease Lease Obligation Date Lease Balance

Explanation / Answer

Step 1: Calculation of Present value of Lease Obligation:

Annual Lease payments = $8,800

Period of Lease = 10 years

Implicit rate = 10%

Present value of Lease payments = Lease payments * Present value annuity factor

Present value of Lease payments = $8,800 * 6.75902

Present value of Lease payments = $59,480

Step 2: Lease Amortization Schedule:

S.No

Date

Lease Payment

Interest

Principal

Balance

01-01-16

         59,480

0

01-01-16

         8,800

                -  

         8,800

         50,680

1

01-01-17

         8,800

         7,602

         1,198

         49,482

2

01-01-18

         8,800

         7,422

         1,378

         48,104

3

01-01-19

         8,800

         7,216

         1,584

         46,520

Step 3:

Journal Entries in the books of Pine Vally Transportation (Lessee)

Date

Account Titles and Explanation

Debit

Credit

01-01-16

Lease Asset

            59,480

Lease Obligation

           50,680

Cash

             8,800

01-06-16

Executory costs

              1,500

Cash

             1,500

31-12-16

Depreciation Expenses

              5,948

Accumulated Depreciation

             5,948

01-01-17

Interest expenses

              7,602

Interest payable

             7,602

01-01-17

Interest Payable

              7,602

Lease Obligation

              1,198

Cash

             8,800

01-06-17

Executory costs

              1,500

Cash

             1,500

31-12-17

Depreciation Expenses

              5,948

Accumulated Depreciation

             5,948

S.No

Date

Lease Payment

Interest

Principal

Balance

01-01-16

         59,480

0

01-01-16

         8,800

                -  

         8,800

         50,680

1

01-01-17

         8,800

         7,602

         1,198

         49,482

2

01-01-18

         8,800

         7,422

         1,378

         48,104

3

01-01-19

         8,800

         7,216

         1,584

         46,520

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