Problem 21-6 The following facts pertain to a noncancelable lease agreement betw

Question

Problem 21-6 The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee Inception date Annual lease payment due at the beginning of January 1, 2014 $132,900 $59,000 each year, beginning with January 1, 2014 Residual value of equipment at end of lease term, guaranteed by the lessee Lease term Economic life of leased equipment Fair value of asset at January 1, 2014 Lessor's implicit rate Lessee's incremental borrowing rate 6 years 6 years $670,000 10 % 10% The lessee assumes responsibility for all executory costs, which are expected to amount to $5,550 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $59,000. The lessee uses the straight-line depreciation method for all equipment

Explanation / Answer

Annual lease rent 132900 pvif of annuity due--i =10%, n = 6 4.79079 PV of lease rent 636696 Guaranteed residual value 59000 pvif (10,6) 0.56447 PV of guaranteed residual value 33304 PV of minimum lease payments 670000 LEASE AMORTIZATION SCHEDULE Date Annual Interest Reduction in Lease + on Liability lease Lease GRV liability liability 1/1/2014 670000 1/1/2014 132900 0 132900 537100 1/1/2015 132900 53710 79190 457910 1/1/2016 132900 45791 87109 370801 1/1/2017 132900 37080 95820 274981 1/1/2018 132900 27498 105402 169579 1/1/2019 132900 16958 115942 53637 12/31/2019 59000 5363 53637 0 JOURNAL ENTRIES 1-Jan-14 Lese equipment 670000 Lease liability 670000 (to record lease) Lease liability 132900 Cash 132900 (to record first lease payment) During 2014 Prepaid lease executory costs 5550 Cash 5550 (to record executory cost payment) 31-Dec-14 Interest expense 53710 Interest payable 53710 (to record interest) Depreciation expense 101833 Accumulated depreciation 101833 [(670000-59000)/6] (to record depreciation) 1-Jan-15 Interest payable 53710 Interest expense 53710 (reversal of entry on Dec 31,2014) Interest expense 53710 Lease liability 79190 Cash 132900 (to record second lease payment) During 2015 Prepaid lease executory costs 5550 Cash 5550 (to record executory cost payment) 31-Dec-15 Interest expense 45791 Interest payable 45791 (to record interest) Depreciation expense 101833 Accumulated depreciation 101833 (to record depreciation)

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