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Chapter 21: 9E_b (page 1242)

A lease agreement between Mooney Leasing Company and Rode Company is described in E21-8.

Inception date

May 1, 2017

Annual lease payment due at the beginning

of each year, beginning with May 1, 2017

\(21,227.65

Bargain-purchase option price at end of lease term

\) 4,000.00

Lease term

5 years

Economic life of leased equipment

10 years

Lessor’s cost

\(65,000.00

Fair value of asset at May 1, 2017

\)91,000.00

Lessor’s implicit rate

10%

Lessee’s incremental borrowing rate

10%

Instructions

(Round all numbers to the nearest cent.) Refer to the data in E21-8 and do the following for the lessor.

(b) Prepare a lease amortization schedule for Mooney Leasing Company for the 5-year lease term.

Short Answer

Expert verified

Recovery of Lease receivable is $91,000.00.

Step by step solution

01

Meaning of Lease Asset Amortization

The amortization of a leased asset is determined by the asset's historical cost, expected economic life, residual value, and the amortization method. Most finance leases are amortized with continuous payments over the term of the lease and are customized to meet the specific needs of the lessee.

02

Preparation of a lease amortization schedule for Mooney Leasing Company for the 5-year lease term

RODE COMPANY (Lessee)

Lease Amortization Schedule


Date

Annual Lease Payment

Plus BPO

Interest (10%) on Lease Receivable

Recovery of Lease Receivable

Lease Receivable

5/1/17

$91,000.00

5/1/17

$ 21,227.65

$21,227.65

69,772.35

5/1/18

21,227.65

$6,977.24

14,250.41

55,521.94

5/1/19

21,227.65

5,552.19

15,675.46

29,846.48

5/1/20

21,227.65

3984.65

17,243.00

22,603.48

5/1/21

21,227.65

2,260.35

18,967.30

3,636.18

4/30/22

4,000.00

363.82

3,636.18

0

$110,138.25

$19,138.25

$91,000.00

Note: Rounding error is 20 cents.

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Most popular questions from this chapter

(Lessee Computations and Entries, Capital Lease with Guaranteed Residual Value) Assume the same data as in P21-13 and that Chambers Medical Center has an incremental borrowing rate of 10%.

Lessor Computations and Entries, Sales-Type Lease with Guaranteed Residual Value) Amirante Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is \(411,324, and its guaranteed residual value at the end of the noncancelable lease term is estimated to be \)15,000. The hospital will pay rents of \(60,000 at the beginning of each year and all maintenance, insurance, and taxes. Amirante Inc. incurred costs of \)250,000 in manufacturing the machine and $14,000 in negotiating and closing the lease. Amirante Inc. has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that the implicit interest rate is 10%.

Instructions

b) Prepare a 10-year lease amortization schedule.

Alice Foyle, M.D. (lessee), has a noncancelable 20-year lease with Brownback Realty, Inc. (lessor) for the use of a medical building. Taxes, insurance, and maintenance are paid by the lessee in addition to the fixed annual payments, of which the present value is equal to the fair value of the leased property. At the end of the lease period, title becomes the lessee’s at a nominal price. Considering the terms of the lease described above, comment on the nature of the lease transaction and the accounting treatment that should be accorded it by the lessee.

(Lessor Computations and Entries, Sales-Type Lease with Unguaranteed Residual Value) George Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is \(278,072, and its unguaranteed residual value at the end of the lease term is estimated to be \)20,000. National will pay annual payments of \(40,000 at the beginning of each year and all maintenance, insurance, and taxes. George incurred costs of \)180,000 in manufacturing the equipment and $4,000 in negotiating and closing the lease. George has determined that the collectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 10%.

Instructions

(a) Discuss the nature of this lease in relation to the lessor and compute the amount of each of the following items.

  1. Lease receivable.

The following are four independent situations.

On December 31, 2017, Wasicsko Co. sold a machine to Cross Co. and simultaneously leased it back for one year. The sales price of the machine was \(480,000, the carrying amount is \)420,000, and it had an estimated remaining useful life of 14 years. The present value of the rental payments for the one year is $35,000. At December 31, 2017, how much should Wasicsko report as deferred revenue from the sale of the machine?

(Lessee Accounting and Reporting) On January 1, 2017, Evans Company entered into a noncancelable lease for a machine to be used in its manufacturing operations. The lease transfers ownership of the machine to Evans by the end of the lease term. The term of the lease is 8 years. The minimum lease payment made by Evans on January 1, 2017, was one of eight equal annual payments. At the inception of the lease, the criteria established for classification as a capital lease by the lessee were met.

Instructions

(d) How should Evans report the lease transaction on its December 31, 2017, balance sheet?
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