SHOW LIST OF ACCOUNTS LINK TO TEXT Date Account Titles and Explanation Debit Cre
ID: 2524972 • Letter: S
Question
SHOW LIST OF ACCOUNTS
LINK TO TEXT
Date
Account Titles and Explanation
Debit
Credit
(To record the lease.)
(To record lease payment.)
(To record depreciation.)
(To record interest.)
SHOW LIST OF ACCOUNTS
LINK TO TEXT
Date
Account Titles and Explanation
Debit
Credit
1/1/17
(To record the lease.)
(To record lease payment.)
12/31/17
(To record interest.)
On January 1, 2017, Nash Company leased equipment to Crane Corporation. The following information pertains to this lease.1. The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease. 2. Equal rental payments are due on January 1 of each year, beginning in 2017. 3. The fair value of the equipment on January 1, 2017, is $150,000, and its cost is $120,000. 4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $10,000. Crane depreciates all of its equipment on a straight-line basis. 5. Nash set the annual rental to ensure an 10% rate of return. Crane’s incremental borrowing rate is 11%, and the implicit rate of the lessor is unknown. 6. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.
(Both the lessor and the lessee’s accounting period ends on December 31.)
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Explanation / Answer
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Part-1 Fair Value of Equipment 150000 Less: Present Value of Residual Value-Unguaranteed 10000*0.5644 10000 -5644 (PV 6 Year 10%) Net Value 144356 Divided by: PVAF 6 Year 10%=4.7908 144356/4.7908 30132 Annual Rental Paymemnt $ 30132 Part-2 Present value of Annual Rental Payment 30132*4.6959 141497 (Annual Rental Payment*PVAF 11% 6 Year) Journal: for Lesses-Crane Date Account Debit Credit 1/1/17 Lease Equipment 141497 Lease Liability 141497 (to record lease) 1/1/17 Lease Liability 30132 Cash 30132 (to record lease payment) 12/31/17 Depreciation Expense 23583 Accumulated Depreciation 23583 (to record Depreciation 141497/6) 12/31/17 Interest Expense 12250 Interest Payable 12250 (To record interest payable)(141497-30132)*11% Part-2 Journal: for Lessor-Nash 1/1/17 Lease Receivable- FAIR VALUE 150000 Cost of goods sold (120000-PV of Residual Value 5644) 114356 Sales 144356 Equipment/Inventory-COST Price 120000 (to record lease) 1/1/17 Cash 30132 Lease Receivable 30132 (to record lease payment) 12/31/17 Interest Receivable 11987 Interest Revenue 11987 (to record interest revenue) (150000-30132)*10%Related Questions
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