The following facts pertain to a noncancelable lease agreement between Sage Leas
ID: 2582918 • Letter: T
Question
The following facts pertain to a noncancelable lease agreement between Sage Leasing Company and McKee Electronics, a lessee, for a computer system. Inception date Lease term Economic life of leased equipment Fair value of asset at October 1, 2017 Residual value at end of lease term Lessor's implicit rate Lessee's incremental borrowing rate Annual lease payment due at the beginning of October 1, 2017 6 years 6 years $350,784 11% 11% each year, beginning with October 1, 2017 $74,700 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, which amount to $5,700 per year and are to be paid each October 1, beginning October 1, 2017, (This $5,700 is not included in the rental payment of $74,700.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-financing lease by the lessor. Annual Lease Interest (11%) on unpaid Reduction of Lease Balance of Lease 74,700 74,700 74,700 74,700 74,700 0/01/22448.200 10/01/17 10/01/17 10/01/18 10/01/19 10/01/20 10/01/21 Date Payment/Receipt Liability/Receivable Liability/Receivable Liability/Receivable $350,784 276,084 231,753 182,546 127,926 67,298 $74,700 44,331 49,207 54,620 60,628 67,298 $350,784 $30,369 25,493 20,080 14,072 74,700 97.41
Explanation / Answer
Answer to question no (1)
Lessers is the owner of the assets and the same is given on lease to lessee. So interest earned till 30.09.2018 is income for the lesser. As per the table $30,369 is the interest earned till 30.09.2018 and the same should be recorded in the lesser income statament.
Answer to question no (2)
Balance Sheet (Partial) as on 30.09.2018
Current Assets
Lease receivable -$ 44,331
Interest Recivables - $ 30,369
Non Current Assets
Lease Recivables - $ 231,753
Answer to question no (3)
Lessers is the owner of the assets and the same is given on lease to lessee. So interest earned till 30.09.2019 is income for the lesser. As per the table $ 25,493 is the interest earned till 30.09.2019 and the same should be recorded in the lesser income statament.
Answer to question no (4)
Balance Sheet (Partial) as on 30.09.2019
Current Assets
Lease receivable -$ 49,207
Interest Recivables - $ 25,493
Non Current Assets
Lease Recivables - $ 182,546
Second part assuming Accounting period ends on 31.12.2017
Answer to question no (1)
Lessers is the owner of the assets and the same is given on lease to lessee. So interest earned till 31.12.2017 is income for the lesser. As per the table $30,369 is the interest earned till 30.09.2018 and the same can be break for first 3 month by simply dividing the same by 12 months and multiply with the 3 months. If we doing this then we get interest amount of $7,592.25 this should be recorded in the lesser income statament as the interest income.
Answer to question no (2)
Balance Sheet (Partial) as on 31.12.2017
Current Assets
Lease receivable -$ 44,331
Interest Recivables - $ 7,592.25
Non Current Assets
Lease Recivables - $ 231,753
Answer to question no (3)
Lessers is the owner of the assets and the same is given on lease to lessee. So interest earned till 31.12.2018 is income for the lesser. As per the table $ 25,493 is the interest earned till 30.09.2019 and the same can be break for first 3 month by simply dividing the same by 12 months and multiply with the 3 months. If we doing this then we get interest amount of $6,373.25, this should be recorded in the lesser income statament as the interest income.
Answer to question no (4)
Balance Sheet (Partial) as on 31.12.2018
Current Assets
Lease receivable -$ 49,207
Interest Recivables - $ 6,373.25
Non Current Assets
Lease Recivables - $ 182,546
Note: Here Non current assets mean assets expected to be collected after 12 months.
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