Laura Leasing Company sings an agreement on January 1, 2017 to lease equipment t

Question

Laura Leasing Company sings an agreement on January 1, 2017 to lease equipment to Teal Mountain Company. The Following information realated to this agreement.

(a) The Term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years.

(b) The cost of the equipment is $55,000, and the fair value of the asset at January 1, 2017 is $74,000

(c)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 $3,000, non of which is guaranteed

(d) The agreement requires equal annual rental payments by the lesee to the lesor, beginning January 1, 2017

(e)The lessee's incremental borrowing rate is 5%. The lessor's implicit rate is 4% and is unknown to the lesee.

(f) Teal Mountain incurs initial direct costs of $600.00 and uses the straight-line depreciation method for all equipment.

Using the new GAPP guidelines to be implemented on Leases in 2018 please answer the following questions

1) Calculated the amount of the annual rental payment required by Laura Leasing (round to the nearest dollar)

2) Prepare the journal entries for the leasee in 2017 (round to the nearest dollar)

3) Prepare the journal entries for the lessor in 2017 (round to the nearest dollar)

Explanation / Answer

Lessee's incremental borrowing rate 5% is used to discount lease cash flows

1)Annual rental payment required by Laura Leasing PV of residual value 3000 PV of single sum(5%,3 yrs.) 0.86384 PV of residual value 2591.51 FMV of leased equipment 74000 PV of residual value -2591.51 Amt.to be recovered through lease payment 71408.49 PVOA(due) F (5%,3 yrs.) 2.85941 Annual payment reqd. by Laura Leasing 24973.15

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