Assume that the following facts pertain to a non-cancelable lease agreement betw
ID: 2530910 • Letter: A
Question
Assume that the following facts pertain to a non-cancelable lease agreement between Fifth-Third Leasing Company and Bob Evans Farms, a Lessee.
Inception date
January 1, 2017
Residual value of equipment at end of lease term, guaranteed by the lessee
$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
10%
Lessee’s incremental borrowing rate
12%
The lessee assumes responsibility for all executory costs, which are expected to amount to $4,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. 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.m.
Inception date
January 1, 2017
Residual value of equipment at end of lease term, guaranteed by the lessee
$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
10%
Lessee’s incremental borrowing rate
12%
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
Note : Question does not mention that lease payment have to be made on beginning of the year or end of the year. I am giving solution on the assumption that annual lease payments are made at the beginning of the year. Lease amortization schedule Year PVIF@10% Year Lease Payments Interest Expense Reduction of Lease Liability Balance of lease Liability 0 400000 0 77602.13 1 77602.13 0 77602.13 0 77602.13 322397.9 1 77602.13 0.909091 70547.39 1 77602.13 32239.79 45362.35 277035.5 2 77602.13 0.826446 64133.99 2 77602.13 27703.55 49898.58 227136.9 3 77602.13 0.751315 58303.63 3 77602.13 22713.69 54888.44 172248.5 4 77602.13 0.683013 53003.3 4 77602.13 17224.85 60377.28 111871.2 5 77602.13 0.620921 48184.82 5 77602.13 11187.12 66415.01 45456.2 6 50000 0.564474 28223.7 6 50000 4545.62 45454.38 0 Total 400000 Annual Lease payments =(400000-28223.7)/4.7908 77602.13 Amount in $ Date General journal Debit Credit January 1, 2017 Right to use asset/Leased equipment 400000 Lease Liability 400000 To record the inception of lease January 1, 2017 Lease Liability 77602.13 Cash 77602.13 To record the payment of annual lease payments December 31, 2017 Executory Lease expense 4000 Cash 4000 To record the annual executory lease expense payment December 31, 2017 Interest expense 32239.79 Lease liability 32239.79 To record the Interest expense on lease January 1, 2018 Lease Liability 77602.13 Cash 77602.13 To record the payment of annual lease payments December 31, 2018 Executory Lease expense 4000 Cash 4000 To record the annual executory lease expense payment December 31, 2018 Interest expense 27703.55 Lease liability 27703.55 To record the Interest expense on lease
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