Byran Leasing Company signs an agreement on January 1, 2017, to lease equipment
ID: 2521497 • Letter: B
Question
Byran Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement.
Assuming the lessor desires a 11% rate of return on its investment, 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.)
$__________________
Prepare an amortization schedule that would be suitable for the lessor for the lease term. (Round answers to 0 decimal places e.g. 58,971.)
Prepare all of the journal entries for the lessor for 2017 and 2018 to record the lease agreement, the receipt of lease payments, and the recognition of income. Assume the lessor’s annual accounting period ends on December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. 2. The cost of the asset to the lessor is $303,000. The fair value of the asset at January 1, 2017, is $303,000. 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 $167,097, none of which is guaranteed. 4. Cole Company assumes direct responsibility for all executory costs. 5. The agreement requires equal annual rental payments, beginning on January 1, 2017. 6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. Lease Amortization Schedule Annual Lease Payment Plus Interest on Lease Recovery of Lease Date URV Receivable Receivable Lease Receivable 1/1/20 1/1/21 1/1/22 12/31/22Explanation / Answer
Present value of residual value at the end of 6th year
Residual value
167097
PV factor @11% pa
0.53464
Present value of residual value (167097 x 0.5346408)
89336.88
Fair value of the leased asset
303000
Less: Present value of residual value
89336.88
Amount to be recovered from lease rental (303000 - 89336.88)
213663.12
PV factor for year 1 to 6 @11% pa.
4.69590
Annual lease rental should be (213663.12 / 4.69)
45499.96
Working note:
The amount to be recovered from lease rental, i.e. $213,663.12 has been divided by 4.69. This is 4.69 is the aggregate of present value factor from year 0 to 5. The reason that year 0 to 5 has been taken is because te lease payments have been made at the beginning of the year.
Present value factor calculation:
Year
Present value factor @11% pa.
0
1
1
0.90090
2
0.81162
3
0.73119
4
0.65873
5
0.59345
6
0.53464
Date
Annual lease rent plus URV
Interest on lease receivable @11%
Recovery of lease receivable
Lease receivable
01-01-17
303000
303000
01-01-17
45499.96
0
45499.96
257500.04
01-01-18
45499.96
28325.005
17174.95
240325.09
01-01-19
45499.96
26435.76
19064.20
221260.89
01-01-20
45499.96
24338.698
21161.26
200099.63
01-01-21
45499.96
22010.959
23489.00
176610.63
01-01-22
45499.96
19427.169
26072.79
150537.84
31-12-22
167097.00
16559.16
150537.84
440096.75
137096.75
303000.00
Journal entries in the books of the Lessor, i.e. Byran Leasing Company.
Date
Account titles and explanations
Debit ($)
Credit ($)
01-01-17
Cole Company
213663.12
Equipment on lease
213663.12
(Being equipment provided on lease)
Bank
45499.96
Cole Company
45499.96
(Being first lease payment received)
31-12-17
Cole Company
28325.005
Interest on lease
28325.005
(Being interest on amount due recorded)
Interest on lease
28325.005
Profit and loss account
28325.005
(Being interest credited to profit and loss account)
01-01-18
Bank
45499.96
Cole Company
45499.96
(Being first lease payment received)
Present value of residual value at the end of 6th year
Residual value
167097
PV factor @11% pa
0.53464
Present value of residual value (167097 x 0.5346408)
89336.88
Fair value of the leased asset
303000
Less: Present value of residual value
89336.88
Amount to be recovered from lease rental (303000 - 89336.88)
213663.12
PV factor for year 1 to 6 @11% pa.
4.69590
Annual lease rental should be (213663.12 / 4.69)
45499.96
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.