Exercise 21-8 The following facts pertain to a noncancelable lease agreement bet
ID: 2559178 • Letter: E
Question
Exercise 21-8 The following facts pertain to a noncancelable lease agreement between Blue Leasing Company and Kingbird Company, a lessee. Inception date: Annual lease payment due at the beginning of May 1, 2017 $21,144.66 $3,800 each year, beginning with May 1, 2017 Bargain-purchase option price at end of lease term Lease term Economic life of leased equipment Lessor's cost Fair value of asset at May 1, 2017 Lessor's implicit rate Lessee's incremental borrowing rate 5 years 10 years $68,000 $89,000 11 % 11 % The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs. The expected residual value of the equipment at the end of 5 (10) years is $12,000 ($0) Click here to view factor tablesExplanation / Answer
Fair Value of lease payable = First lease payment)+[Annual lease payments*PVAF(11%, 4 yrs)]+PV of bargain option
= $21,144.66+($21,144.66*3.10245)+($3,800*0.59345)
= $21,144.66+$65,600.25+$2,255.11 = $89,000
Journal Entries (Amounts in $)
Date Account Titles and Explanation Debit Credit 5/1/17 Right of use Asset 89,000 Lease Liability 89,000 (To record the lease) 5/1/17 Lease Liability 21,144.66 Cash 21,144.66 (To record the first lease payment) 12/31/17 Interest Expense [($89,000-$21,144.66)*11%*7/12] 4,354.05 Interest Payable 4,354.05 (To record interest) 12/31/17 Depreciation Exp. ($89,000*1/5*7/12) 10,383.33 Right of use Asset 10,383.33 (To record depreciation) 1/1/18 Interest Payable 4,354.05 Interest Expense 4,354.05 (To reverse the entry for interest) 5/1/18 Interest Expense [($89,000-$21,144.66)*11%] 7,464.09 Lease Liability ($21,144.66-$7,464.09) 13,680.57 Cash 21,144.66 (To record the second lease payment) 12/31/18 Interest Expense [($89,000-$21,144.66-$13,680.57)*11%*7/12] 3,476.21 Interest Payable 3,476.21 (To record Interest) 12/31/18 Depreciation Exp. ($89,000/5) 17,800 Right of use Asset 17,800 (To record the depreciation)Related Questions
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