Problem 21-1 Glaus Leasing Company agrees to lease machinery to Jensen Corporati

Question

Problem 21-1 Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2014. The following information relates to the lease agreement.

1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.

2. The cost of the machinery is $475,000, and the fair value of the asset on January 1, 2017, is $681,000.

3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $91,000. Jensen depreciates all of its equipment on a straight-line basis.

4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017.

5. The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. 6. Glaus desires a 9% rate of return on its investments. Jensen’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown. Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Annual rental payment $

Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Present value of minimum lease payments $

Prepare the journal entries Jensen would make in 2017 and 2018 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 58,971.)

Date Account Titles and Explanation Debit Credit 1/1/2017 Leased Asset $    Lease Liabilty $    (to record the lease) Lease Liabilty $    Cash $    (to record lease payment) 12/31/2017 Depreciation expense $    Accumulated depreciation -Capital Lease $ (to record depreciation) Interest Expense $    Interest Payable $ (to record interest) 1/1/2018 Lease Liablity $ Interest Payable $       Cash $    12/31/2018 Depreciation expense $    Accumulated depreciation -Capital Lease $ (to record depreciation) Interest Expense $    Interest Payable $ (to record interest) (d) Date Account Titles and Explanation Debit Credit 1/1/2017 Lease Receivables $681,000 Cost of Goods Sold $475,000    Sales $681000    Inventory $475000 (Sales-type Lease) Cash $    Lease Receivable $ (to record lease payment) 12/31/2017 Interest Receivable $    Interest Revenue $ 1/1/2018 Cash $      Lease receivable $ Interest Receivable $ 12/31/2018 Interest Receivable $    Interest Revenue $

Explanation / Answer

a)Annual rental payment = [$681,000–($91,000 x PVIF(9%,7)]/PVIFAD(9%,7) $115,061.839 PVIF (9%,7) $0.547034 PVIFAD (9%,7) $5.485919 b. (Present value of minimum lease payments) PV of annual payments = $115,061.839 x PVIFAD(10%,7) $616,186.15 PV of guaranteed residual value = $91,000 x PVIF(10%,7) $46,697.39 Present Value of Minimum Lease Payments $662,883.54 PVIF (10%,7) $0.513158 PVIFAD (10%,7) $5.355261 Prepare the journal entries Jensen would make in 2017 and 2018 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 58,971.) Date Account Titles and Explanation Debit Credit 1/1/2017 Leased Asset $662,883.54 Lease Liabilty $662,883.54 (to record the lease) Lease Liabilty $115,061.839 Cash $115,061.839 (to record lease payment) 12/31/2017 Depreciation expense $81,697.65 Accumulated depreciation -Capital Lease $81,697.65 (to record depreciation) ($662,883.54 - $91000)/7 Interest Expense $54,782.17 Interest Payable $54,782.17 (to record interest) ($662,883.54 - $115,061.839) x 10% 1/1/2018 Lease Liablity $60,279.670 Interest Payable $54,782.17 Cash $115,061.839 12/31/2018 Depreciation expense $81,697.65 Accumulated depreciation -Capital Lease $81,697.65 (to record depreciation) Interest Expense $49,303.95 Interest Payable $49,303.95 (to record interest) ($662,883.54 - $115,061.839 - $54,782.17) x 10% (d) Date Account Titles and Explanation Debit Credit 1/1/2017 Lease Receivables $681,000.00 Cost of Goods Sold $475,000.00 Sales $681,000.00 Inventory $475,000.00 (Sales-type Lease) Cash $115,061.839 Lease Receivable $115,061.839 (to record lease payment) 12/31/2017 Interest Receivable $50,934.434 Interest Revenue $50,934.434 ($681,000 - $115,061.839) x 9% 1/1/2018 Cash $115,061.839 Lease receivable $64,127.405 Interest Receivable $50,934.434 12/31/2018 Interest Receivable $45,162.968 Interest Revenue $45,162.968 ($681,000 - $115,061.839 - $64127.405) x 9%

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