Assume that the following facts pertain to a non-cancelable lease agreement betw
ID: 2528862 • Letter: A
Question
Assume that the following facts pertain to a non-cancelable lease agreement between Coco Inc. and Bubs, Corp, a Lessee.
Inception date
January 1, 2017
Residual value of equipment at end of lease term, unguaranteed
$50,000
Lease term
6 years
Economic life of leased equipment
8 years
Fair value of asset at January 1, 2017
$400,000
Lessor’s implicit rate
12%
Lessee’s incremental borrowing rate
10%
The lessee assumes responsibility for all executory costs, which are expected to amount to $2,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line depreciation method for all equipment.
Using the spreadsheet, Lease Amort Schedule found in the link below, prepare an amortization schedule that would be suitable for the lessee for the lease term.
Inception date
January 1, 2017
Residual value of equipment at end of lease term, unguaranteed
$50,000
Lease term
6 years
Economic life of leased equipment
8 years
Fair value of asset at January 1, 2017
$400,000
Lessor’s implicit rate
12%
Lessee’s incremental borrowing rate
10%
Bob Evans Farms Lease Amortization Schedule Date Lease Payment Interest Expense Reduction of Lease Liabili Balance of Lease Liabili January 1 2014 January 1 2014 January 1 2015 January 1 2015 January 1 2017 January 1 2018 January 1 2019 December 31 2019 $400,000Explanation / Answer
Solution 'The asset will revert to the lessor at the end of the lease term', from this statement we can presume it to be operating lease, since the right to asset still lies with the lessor Calculation of Annual Payments Cost of Equipment $4,00,000.00 Unguaranteed Residual Value $50,000.00 Present value of Residual Value @10% for 6yrs (50000*.565) $28,250.00 Fair value to be recovered from the lease payments $3,71,750.00 PV factor for 3years @ 10% $4.355 Annual Lease Payments $85,361.65 Unearned Financial Income Total lease payments (85361.65*6) $5,12,170.00 Add : Residual Value $50,000.00 Gross Investments $5,62,170.00 Less: Present value of investments (37175) $4,00,000.00 Unearned Financial Income $1,62,170.00 Bob Evans Farms - Lease Amortization Schedule Date Lease Payment Interest Expense Reduction of lease liability Balance of Lease Liability Jan 1, 2017 $400,000.00 Dec 31,2017 $85,361.65 $ 40,000 $45,361.65 $3,54,638.35 Dec 31,2018 $85,361.65 $35,464 $49,897.82 $3,04,740.54 $85,361.65 $30,474 $54,887.60 $2,49,852.94 $85,361.65 $24,985 $60,376.36 $1,89,476.58 $85,361.65 $18,948 $66,413.99 $1,23,062.59 Journal Entries Dec 31,2017 Finance charges $45,361.65 To Coco Inc $45,361.65 Being Finance charges due as on year 1 Dec 31,2017 Coco Inc $85,361.65 To Bank $85,361.65 Being Lease Rent paid to Coco for year 1 Dec 31,2018 Finance charges $49,897.82 To Coco Inc $49,897.82 Being Finance charges due as on year 2 Dec 31,2018 Coco Inc $85,361.65 To Bank $85,361.65 Being Lease Rent paid to Coco for year 2 $1,35,361.65 12306 $1,23,062.59 $0.00
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