8 E21-7 (Lessee-Lessor Entries, Sales-Type Lease) On January 1, 2015, Palmer Com

Question

8 E21-7 (Lessee-Lessor Entries, Sales-Type Lease) On January 1, 2015, Palmer Company leased equipment to Immelman Corporation. The following information pertains to this lease. 1. The term of the non-cancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease. 2. Equal rental payments are due on January 1 of each year, beginning in 2015. 3. The fair value of the equipment on January 1,2015, is $200,000, and its cost is $150,000. 4. The equipment has an economic life of 8 years, with an unguaranteed residual value of S10,000. Immelman depreciates all of its equipment on a straight-line basis 5. Palmer sets the annual rental to ensure an 11% rate of return. Immelman's incremental borrowing rate is 12%, and it is impracticable for Imine!man to determine the implicit rate (a) Prepare an amortization schedule that would be suitable for the lessee for the lease term,

Explanation / Answer

IT IS ASSUMED THAT LEASE RENTALS HAS NO NON LEASE ELEMENT EXPENSES AS PER IFRS 16
INCREMENTAL BORROWING RATE 12% YEAR PAYMENT PVF@(12%,6)
LEASE INSTALMENTS 6 2015 42201 1 42201
PRESENT VALUE OF ANNUITY FACTOR @12% PAYABLE AT BEGINNING FOR 6YEARS 4.6048 2016 42201 0.8929 37681.27
LET ANNUAL LEASE RENTALS BE X 2017 42201 0.7972 33642.64
X*4.6048+(10000*0.5674) = 200000 2018 42201 0.7118 30038.67
X = 42201 2019 42201 0.6355 26818.74
2020 52201 0.5674 29618.85
You need to recognize right to use a lease asset in the amount equal to the lease liability plus some other items like initial direct costs. ASSET   A/C   DR             200000 263206 4.6048 200001.2
The lease liability is calculated at present value of lease payments over the lease term. TO    LIABILITY A/C                             200000
Year Opening Lease liability Less amounts paid O/S after insl Add interest at 12% Lease liability c/f
Subsequently, when you make a payment you need to: 0 200000 42201 157799 18935.88 176734.9
Recognize depreciation of the right-of-use asset over the lease term 1 176734.9 42201 134533.88 16144.07 150677.9
Recognize remeasurement of the lease liability to include interest, exclude amounts paid and take any lease modifications into account. 2 150677.9 42201 108476.9456 13017.23 121494.2
3 121494.2 42201 79293.17907 9515.181 88808.36
4 88808.36 42201 46607.36056 5592.883 52200.24
5 52200.24 52201 -0.756172083 -0.09074 -0.84691
263206
ASSET IS RETURNED AT THE END ON 2020
200000 33333.33
YEAR OPENING DEPRECIATION CLOSING
2015 200000 33333.33333 166666.7
2016 166666.7 33333.33333 133333.3
2017 133333.3 33333.33333 100000
2018 100000 33333.33333 66666.67
2019 66666.67 33333.33333 33333.33
2020 33333.33 33333.33333 0

IT IS ASSUMED THAT LEASE RENTALS HAS NO NON LEASE ELEMENT EXPENSES AS PER IFRS 16 INCREMENTAL BORROWING RATE 12% YEAR PAYMENT PVF@(12%,6) LEASE INSTALMENTS 6 2015 42201 1 42201 PRESENT VALUE OF ANNUITY FACTOR @12% PAYABLE AT BEGINNING FOR 6YEARS 4.6048 2016 42201 0.8929 37681.27 LET ANNUAL LEASE RENTALS BE X 2017 42201 0.7972 33642.64 X*4.6048+(10000*0.5674) = 200000 2018 42201 0.7118 30038.67 X = 42201 2019 42201 0.6355 26818.74 2020 52201 0.5674 29618.85 You need to recognize right to use a lease asset in the amount equal to the lease liability plus some other items like initial direct costs. ASSET   A/C   DR             200000 263206 4.6048 200001.2 The lease liability is calculated at present value of lease payments over the lease term. TO    LIABILITY A/C                             200000 Year Opening Lease liability Less amounts paid O/S after insl Add interest at 12% Lease liability c/f Subsequently, when you make a payment you need to: 0 200000 42201 157799 18935.88 176734.9 Recognize depreciation of the right-of-use asset over the lease term 1 176734.9 42201 134533.88 16144.07 150677.9 Recognize remeasurement of the lease liability to include interest, exclude amounts paid and take any lease modifications into account. 2 150677.9 42201 108476.9456 13017.23 121494.2 3 121494.2 42201 79293.17907 9515.181 88808.36 4 88808.36 42201 46607.36056 5592.883 52200.24 5 52200.24 52201 -0.756172083 -0.09074 -0.84691 263206 ASSET IS RETURNED AT THE END ON 2020 200000 33333.33 YEAR OPENING DEPRECIATION CLOSING 2015 200000 33333.33333 166666.7 2016 166666.7 33333.33333 133333.3 2017 133333.3 33333.33333 100000 2018 100000 33333.33333 66666.67 2019 66666.67 33333.33333 33333.33 2020 33333.33 33333.33333 0

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