Macinski Leasing Company Leases a new machine to Sharrer Corporation. The machin

Question

Macinski Leasing Company Leases a new machine to Sharrer Corporation. The machine has a cost of $70,000 and fair value of $95,000. Under the 3 year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3 year useful life and no residual value. The lease was signed on January 1, 2017. Macinski expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals are payable on each December 31, beginning December 31, 2017.

a) Discuss the nature of the lease agreement and the accounting method that each party to the lease should apply

b) Prepare amortization schedule suitable for both the lessor and lessee

c) Prepare the journal entry at commencement of the lease for Macinski

d) Prepare the journal entry at commencement of the lease for Sharrer

e) Prepare the journal entry at commencement of the lease for Sharrer, assuming (1) Sharrer does not know Macinski's implicit rate (Sharrer's incremental borrowing rate is 9%), and (2) Sharrer incurs initial direct costs of $10,000.

Explanation / Answer

Requirement a The nature of lease is a Capital Lease Lease Amortization schedule using Actuarial method of accounting to be used by Lessor. Year Principal oustanding at beginning of the year Annual Rental Principal repaid Interest Principal oustanding at end of the year 0 95000 0 0 95000 1 95000 36863.18383 29263.18 7600 65736.81617 2 65736.81617 36863.18383 31604.24 5258.945 34132.57762 3 34132.57762 36863.18383 34132.58 2730.606 0 Requirement b Lease Amortization schedule using Discounted method of accounting to be used by Lessee Year PVIF@8% Annual Rental Present worth Interest 0 1 1 0.925925926 36863.18383 34132.58 2730.606 2 0.85733882 36863.18383 31604.24 5258.945 3 0.793832241 36863.18383 29263.18 7600 PVIF annuity 2.577096987 Fair Value of machine 95000 Annual Rentals 36863.18383 Requirement 3 Amount in $ Date General journal Debit Credit Requirement c In the books of Macinski January 1, 2017 Investment in Lease 95000 Profit on leasing of machinery 25000 Machinery 70000 To record the inception of lease Requirement d In the Books of Sharrer January 1, 2017 Leased machinery 95000 Leased liability 95000 To record the inception of lease As per Chegg Policy, we are supposed to answer the maximum of four sub-parts of a question. Thank You

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.