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Exercise 21-10 Assuming the lessor desires a 9% rate of return on its investment

ID: 2595541 • Letter: E

Question

Exercise 21-10

Assuming the lessor desires a 9% rate of return on its investment, calculate the amount of the annual rental payment required.  

Prepare an amortization schedule that would be suitable for the lessor for the lease term.

Prepare all of the journal entries for the lessor for 2017 and 2018 to record the lease agreement, the receipt of lease payments, and the recognition of income. Assume the lessor’s annual accounting period ends on December 31.

Exercise 21-10

Pina Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement.
1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. 2. The cost of the asset to the lessor is $290,000. The fair value of the asset at January 1, 2017, is $290,000. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $196,882, none of which is guaranteed. 4. Cole Company assumes direct responsibility for all executory costs. 5. The agreement requires equal annual rental payments, beginning on January 1, 2017. 6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.

Explanation / Answer

Answer a. Fair Market Value of Leased Equipment          290,000 PV of Residual Value - $196,882 X 0.59627       (117,395) Amount to be recovered through Lease          172,605 PV of Annuity Due          4.88965 Annual Payment Required            35,300 Answer b. Date Annual Lease Payment Plus URV Interest on Lease Receivable Recovery of Lease Receivable Lease Receivable 1/1/2017                           -                            -                              -                  290,000 1/1/2017                  35,300                          -                     35,300                254,700 1/1/2018                  35,300                22,923                   12,377                242,323 1/1/2019                  35,300                21,809                   13,491                228,832 1/1/2020                  35,300                20,595                   14,705                214,127 1/1/2021                  35,300                19,271                   16,029                198,098 1/1/2022                  35,300                17,829                   17,471                180,627 12/31/2022               196,882                16,254                180,628                          (0) Answer c. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1-Jan-17 Lease Receivable                                        Dr.          290,000 To Equipment          290,000 1-Jan-17 Cash                                                                  Dr.            35,300 To Lease Receivable            35,300 31-Dec-17 Interest Receivable                                    Dr.            22,923 To Interest Revenue            22,923 1-Jan-18 Cash                                                                  Dr.            35,300 To Lease Receivable            12,377 To Interest Receivable            22,923 31-Dec-18 Interest Receivable                                    Dr.            21,809 To Interest Revenue            21,809