Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January
ID: 2500701 • Letter: G
Question
Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2014. The following information relates to the lease agreement.
1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2. The cost of the machinery is $547,000, and the fair value of the asset on January 1, 2014, is $733,000.
3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $132,000. Jensen depreciates all of its equipment on a straight-line basis.
4. The lease agreement requires equal annual rental payments, beginning on January 1, 2014.
5. The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
6. Glaus desires a 10% rate of return on its investments. Jensen’s incremental borrowing rate is 12%, and the lessor’s implicit rate is unknown.
(Assume the accounting period ends on December 31.)
Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
Annual rental payment
$
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Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
Present value of minimum lease payments
$
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Prepare the journal entries Jensen would make in 2014 and 2015 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 58,971.)
Date
Account Titles and Explanation
Debit
Credit
1/1/14
(To record the lease.)
(To record lease payment.)
12/31/14
(To record depreciation.)
(To record interest.)
1/1/15
12/31/15
(To record depreciation.)
(To record interest.)
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Prepare the journal entries Glaus would make in 2014 and 2015. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 58,971.)
Date
Account Titles and Explanation
Debit
Credit
1/1/14
(To record the lease.)
(To record lease payment.)
12/31/14
1/1/15
12/31/15
Explanation / Answer
Fair Value of the Asset = $7,33,000
Less: PV of Guaranteed residual value= $59704 ($1,32,000*0.4523)
= 6,73,296
PV of Lease Payments @12% for 7 years at the begginng of the year= 5.111407
Journal Entries in the books of Jenson
Annual Lease Payment= $6,73,296/5.111407
=$131724
Present Value of Minimum Lease Payments is the Fair value of the Asset that is $7,33,000
Journal Entries in the Books of Lessor
Date Account Tiltle & Explanation Debit Credit Jan-1, 2014 Lease Equipment $7,33,000 To Lease Liability $7,33,000 (To Record Initial Lease transaction) Jan-1, 2014 Lease Liability $1,31,724 To Cash $1,31,724 (To Record Initial payment) Dec-31, 2014 Interst Expense $60,128 Interest Payable 60,128 (7,33,000-$1,31,724)*10%) (To record interest amortisation) Dec-31, 2014 Amortisation Expense $1,04,714 Accumulated amortisation $1,04,714 ($7,33,000/7 Yeasr= $104,714) Term of Lease is used to amortise the asset) Jan-1, 2015 Lease Liability $1,31,724 Cash $1,31,724 (To record Lease Payment) Dec-31, 2015 Interest expense $52968 Interest Liability $52968 (To Record Interest liability) Dec-31, 2015 Amortisation expense $104,714 Accumulated amorisation $104,714 (Accumulated depreciation for the year)
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