Exercise 21A-21 a-d Grouper Incorporated leases a piece of equipment to Skysong

Question

Exercise 21A-21 a-d Grouper Incorporated leases a piece of equipment to Skysong Corporation on January 1, 2017. The lease agreement called for annual rental payments of $5,344 at the beginning of each year of the 4-year lease. The equipment has an economic useful life of 6 years, a fair value of $25,700, a book value of $20,700, and both parties expect a residual value of $8,300 at the end of the lease term, though this amount is not guaranteed. Grouper set the lease payments with the intent of earning a 7% return, and Skysong is aware of this rate. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.

Explanation / Answer

a) Calculation of present value of minimum lease payment.

Minimum Lease payment

Interest rate

Present value

01-01-2017

5344

0.9345

4993.97

01-01-2018

5344

0.8734

4667.45

01-01-2019

5344

0.8162

4361.77

01-01-2020

5344

0.7628

4076.40

21376

$18,099.59

Present value of minimum lease payment is less than fair value on inception of lease and hence lease asset and liability should be recognized at $18,099.59.

b) Statement showing apportionment of minimum lease payment

Minimum Lease payment

Opening outstanding

Finance charges (interest) @7%

Principle repayment

Closing balance

01-01-2017

5344

18099.59

1266.97

4077.03

14022.57

01-01-2018

5344

14022.57

981.58

4362.42

9660.14

01-01-2019

5344

9660.14

676.21

4667.79

4992.35

01-01-2020

5344

4992.35

349.46

4994.54

0.00

Annual payment

Interest on liability

lease liability

lease liability

18099.59

01-01-2017

5344

1266.97

4077.03

14022.57

01-01-2018

5344

981.58

4362.42

9660.14

01-01-2019

5344

676.21

4667.79

4992.35

01-01-2020

5344

349.46

4994.54

0.00

Lease expense schedule

Lease expense (Straight Line)

Interest on Lease liability

Amortization of ROU Asset

Carrying value of ROU Asset

18099.59

01-01-2017

5344

1266.97

4077.03

14022.57

01-01-2018

5344

981.58

4362.42

9660.14

01-01-2019

5344

676.21

4667.79

4992.35

01-01-2020

5344

349.46

4994.54

0.00

Minimum Lease payment

Interest rate

Present value

01-01-2017

5344

0.9345

4993.97

01-01-2018

5344

0.8734

4667.45

01-01-2019

5344

0.8162

4361.77

01-01-2020

5344

0.7628

4076.40

21376

$18,099.59

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.