2)Prepare all of the journal entries for the lessee for 2017 and 2018 to record

Question

2)Prepare all of the journal entries for the lessee for 2017 and 2018 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31.

3)Suppose Flint received a lease incentive of $5,000 from Faldo Leasing to enter the lease. How would the initial measurement of the lease liability and right-of-use asset be affected?

What if Flint prepaid rent of $5,000 to Faldo?

Right-of-use asset $

Problem 21A-1 a-c The following facts pertain to a non-cancelable lease agreement between Faldo Leasing Company and Flint Company, a lessee Commencement date Annual lease payment due at the beginning of January 1, 2017 $104,218 $51,000 each year, beginning with January 1, 2017 Residual value of equipment at end of lease term guaranteed by the lessee Expected residual value of equipment at end of lease term Lease term Economic life of leased equipment Fair value of asset at January 1, 2017 Lessor's implicit rate Lessee's incremental borrowing rate $46,000 6 years 6 years $540,000 9% 9% The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line amortization for all leased equipment. ac ble

Explanation / Answer

Note: This lease is a capital lease to the lessee because the lease term
(six years) exceeds 75% of the remaining economic life of the asset (six years). Also, the present value of the minimum lease payments exceeds 90% of the fair value of the asset.

        $ 104,218       Annual rental payment

        X 4.88965       PV of an annuity-due of 1 for n = 6, i = 9%

        $ 509,590*     PV of periodic rental payments

        $    51,000       Guaranteed residual value

        X   .59627       PV of 1 for n = 6, i = 9%

        $    30,410       PV of guaranteed residual value

        $ 509,590*     PV of periodic rental payments

        +    30,410       PV of guaranteed residual value

        $ 540,000       PV of minimum lease payments

(a)                                    VANCE COMPANY (Lessee)

Lease Amortization Schedule

                                                                                                                             

Date

Annual Lease Payment Plus GRV

Interest (9%) on Liability

Reduction     of Lease Liability

Lease Liability

1/1/17

$540,000

1/1/17

$104,218

$       –0–

$104,218

435,782

1/1/18

104,218

* 39,220

64,998

370,784

1/1/19

104,218

33,371

70,847

299,937

1/1/20

104,218

26,994

77,224

222,713

1/1/21

104,218

20,044

84,174

138,539

1/1/22

104,218

12,469

91,749

46,790

12/31/23

    51,000

*      4,210*

    46,790

0

$676,308

$136,308

$540,000

*Rounding error is $1.

(b)                                                January 1, 2017

        Leased Equipment...................................................      540,000

               Lease Liability....................................................                           540,000

        Lease Liability...........................................................      104,218

               Cash.....................................................................                           104,218

December 31, 2017

        Interest Expense......................................................      39,220

               Interest Payable.................................................                           39,220

        Depreciation Expense.............................................      81,500

               Accumulated Depreciation—Capital

                   Leases ([$540,000 – $51,000] ÷ 6)..............                           81,500

January 1, 2018

        Interest Payable........................................................      39,220

               Interest Expense...............................................                           39,220

        Interest Expense......................................................      39,220

        Lease Liability...........................................................      64,998

               Cash.....................................................................                           104,218

December 31, 2018

        Interest Expense......................................................      33,371

               Interest Payable.................................................                           33,371

        Depreciation Expense.............................................      81,500

               Accumulated Depreciation—Capital

                   Leases.............................................................                           81,500

(c) Right of use asset would reduce by $5000 i.e $535,000

In second case right of use asset remains at 540000 but lease liability recorded at $535,000

Date

Annual Lease Payment Plus GRV

Interest (9%) on Liability

Reduction     of Lease Liability

Lease Liability

1/1/17

$540,000

1/1/17

$104,218

$       –0–

$104,218

435,782

1/1/18

104,218

* 39,220

64,998

370,784

1/1/19

104,218

33,371

70,847

299,937

1/1/20

104,218

26,994

77,224

222,713

1/1/21

104,218

20,044

84,174

138,539

1/1/22

104,218

12,469

91,749

46,790

12/31/23

    51,000

*      4,210*

    46,790

0

$676,308

$136,308

$540,000

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