NEED DETAILED SOLUTIONS OF PARTS 6,7,8 AND 9 On January 1, 2016, Charloff Compan
ID: 2575937 • Letter: N
Question
NEED DETAILED SOLUTIONS OF PARTS 6,7,8 AND 9
On January 1, 2016, Charloff Company entered into an agreement to lease a piece of machinery from Pierre Corporation for four years. The machinery had a cost and fair value of $800,000 and a useful life of seven years. The lease called for annual rental payments on December 31 of each year, starting on December 31, 2016. At the end of the lease term, Charloff has the option to purchase the equipment for $30,000, which is significantly less than what the fair market value of the equipment will be at that time.
Charloff’s incremental borrowing rate is 10% and Pierre’s implicit borrowing rate is 8%. Charloff is unaware of Pierre’s implicit rate.
Collectability of the future lease payments is reasonably predictable, and no additional costs related to the lease are expected.
Required:
1. What type of lease is this for Pierre? (Be specific and provide justification)
2. What type of lease is this for Charloff?
3. Determine the annual lease payments, as set by Pierre Corporation.
4. Determine the minimum lease payments, as calculated by Charloff.
5. Prepare the entry on the date of the lease inception for both the lessee and lessor.
6. Prepare the lessee’s amortization schedule for the term of the lease.
7. Prepare the entry for the first interest payment for both the lessee and lessor.
8. Prepare the entry to record depreciation expense for the asset for the year 2017, assuming that Charloff uses the straight-line method.
9. Complete parts 3-6, assuming that the lease payments are made each January 1, starting on January 1, 2016 instead of on December 31st of each year.
Explanation / Answer
6) Amortization schedule - Lesser
Year
Minimum Lease payment
Opening Receivable
Finance charges (interest)
Principal payment (Capital recovery)
Balance Receivable
1
$1,64,324
$8,00,000
$80,000
$84,324
$7,15,676
2
$1,64,324
$7,15,676
$71,568
$92,757
$6,22,919
3
$1,64,324
$6,22,919
$62,292
$1,02,033
$5,20,886
4
$1,64,324
$5,20,886
$52,089
$1,12,236
$4,08,650
5
$1,64,324
$4,08,650
$40,865
$1,23,459
$2,85,191
6
$1,64,324
$2,85,191
$28,519
$1,35,805
$1,49,386
7
$1,64,324
$1,49,386
$14,939
$1,49,386
-$0
7) Journal entry in Lessee's books
Finance charges - Debit $80,000
(interest charges)
To Cash - Credit $80,000
(being interest paid on first lease payment)
Journal entry in Lesser books
Cash - Debit $80,000
To Interest received - Credit $80,000
(being interest received on first lease payment)
8) Depreciation expense - Debit $114,285.71
(800,000/7 years)
To Accumulated depreciation (machinery)- Credit $114,285.71
(being depreciation expenses recorded on machinery)
9)
a) Calculation of annual lease payment - as set by Pierre Corporation
Lease term - Years 7
Lessee's rate of return 8%
fair value of asset $800,000
in the above scenario present value of $1, n = 7, i =8%
$153,657.92 (lease payment) * 5.20637006 = $800,000
b) Calculation of annual lease payment - as set by Charloff
Lease term - Years 7
Lessor's rate of return 10%
fair value of asset $800,000
in the above scenario present value of $1, n = 7, i =10%
$164,324.40 (lease payment) * 4.86841882 = $800,000
c) Journal entries on the date of inception
Journal entry in Lessee's books
Prepaid Finance charges - Debit $64,000
(interest charges)
To Cash - Credit $64,000
(being interest paid on first lease payment on inception of the lease)
Journal entry in Lesser books
Cash - Debit $80,000
To Deferred Interest - Credit $80,000
(being interest received on first lease payment)
d) Amortization schedule - Lesser
Year
Minimum Lease payment
Opening Receivable
Finance charges (interest)
Principal payment (Capital recovery)
Balance Receivable
1
$1,53,658
$8,00,000
$64,000
$89,658
$7,10,342
2
$1,53,658
$7,10,342
$56,827
$96,831
$6,13,512
3
$1,53,658
$6,13,512
$49,081
$1,04,577
$5,08,935
4
$1,53,658
$5,08,935
$40,715
$1,12,943
$3,95,991
5
$1,53,658
$3,95,991
$31,679
$1,21,979
$2,74,013
6
$1,53,658
$2,74,013
$21,921
$1,31,737
$1,42,276
7
$1,53,658
$1,42,276
$11,382
$1,42,276
-$0
Year
Minimum Lease payment
Opening Receivable
Finance charges (interest)
Principal payment (Capital recovery)
Balance Receivable
1
$1,64,324
$8,00,000
$80,000
$84,324
$7,15,676
2
$1,64,324
$7,15,676
$71,568
$92,757
$6,22,919
3
$1,64,324
$6,22,919
$62,292
$1,02,033
$5,20,886
4
$1,64,324
$5,20,886
$52,089
$1,12,236
$4,08,650
5
$1,64,324
$4,08,650
$40,865
$1,23,459
$2,85,191
6
$1,64,324
$2,85,191
$28,519
$1,35,805
$1,49,386
7
$1,64,324
$1,49,386
$14,939
$1,49,386
-$0
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