Homework SourseExercise 218 Part Level Submission The following facts perta
Exercise 21-8 (Part Level Submission)
The following facts pertain to a noncancelable lease agreement between Culver Leasing Company and Larkspur Company, a lessee.
Inception date:
May 1, 2017
Annual lease payment due at the beginning of
each year, beginning with May 1, 2017
$21,763.30
Bargain-purchase option price at end of lease term
$4,200
Lease term
5
years
Economic life of leased equipment
10
years
Lessor’s cost
$61,000
Fair value of asset at May 1, 2017
$95,000
Lessor’s implicit rate
9
%
Lessee’s incremental borrowing rate
9
%
The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs. The expected residual value of the equipment at the end of 5 (10) years is $12,000 ($0).
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(c)
Your answer is correct.
Prepare a lease amortization schedule for Larkspur Company for the 5-year lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25126 and Round answers to 2 decimal places, e.g. 15.25.)
LARKSPUR COMPANY (Lessee)
Lease Amortization Schedule
Date
Annual Lease Payment Plus
BPO
Interest on
Liability
Reduction of Lease
Liability
Lease Liability
5/1/17
$
$
$
$
5/1/17
5/1/18
5/1/19
5/1/20
5/1/21
4/30/22
$
$
$
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Attempts: 1 of 3 used
(d)
Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Larkspur’s annual accounting period ends on December 31. Reversing entries are used by Larkspur. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select \"No Entry\" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and Round answers to 2 decimal places, e.g. 15.25.)
Date
Account Titles and Explanation
Debit
Credit
5/1/1712/31/171/1/185/1/1812/31/18
(To record the lease.)
(To record the first lease payment.)
5/1/1712/31/171/1/185/1/1812/31/18
(To To record interest.)
(To record depreciation.)
5/1/1712/31/171/1/185/1/1812/31/18
5/1/18
5/1/1712/31/171/1/185/1/1812/31/18
(To record interest.)
(To record depreciation.)
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Solution
Computation of lease Receivable at inception Annual rental payment= $21763.30 PV of annuity due of 1 for n = 4, i = 9%=4.2397 PV of periodic rental payments= $21763.30*4.2397 $92270 Bargain purchase option=$4200 PV of 1 for n = 5, i = 9%= 0.6499 PV of bargain purchase option=4200*0.6499=$2730 Hence, PV of periodic rental payments=$92270 PV of bargain purchase option=$2730 Lease receivable at inception=$92270+$2730=$95000 Lease Amortization Schedule ` Annual Lease Payment Plus BPO Interest (9%) on Lease Receivable Reduction of Lease Liability Lease Liability 05/01/2017 95,000.00 05/01/2017 21,763.30 21,763.30 73,236.70 05/01/2018 21,763.30 6,591.30 15,172.00 58,064.70 05/01/2022 21,763.30 5,225.82 16,537.48 41,527.23 05/01/2020 21,763.30 3,737.45 18,025.85 23,501.38 05/01/2021 21,763.30 2,115.12 19,648.18 3,853.20 4/30/2022 4,200.00 346.79 3,853.21 -0.01 113,016.50 18,016.49 95,000.01 Journal Entry Date Account Tittle Debit Credit 01/05/2017 Leased Equipment $95,000.00 Lease liability $95,000.00 To record the lease 01/05/2017 Lease liability $21,763.30 Cash $21,763.30 To record the first lease payment 31/12/2017 Interest Expense ($73236*9%*8/12) $4,394.16 Interest payable $4,394.16 To record Interest 31/12/2017 Depreciation ($95000/10) $9,500.00 Accumulated Depreciation $9,500.00 To record depreciation 01/01/2018 Interest payable $4,394.16 Interest Expense $4,394.16 01/05/2018 Lease liability $15,172.00 Interest Expense $6,591.00 Cash $21,763.00 To record the lease payment 31/12/2018 Interest Expense ($58064*9%*8/12) $3,484.00 Interest payable $3,484.00 To record Interest 31/12/2018 Depreciation $9,500.00 Accumulated Depreciation $9,500.00 To record depreciation
