Exercise 217 On January 1 2017 Oriole Company leased equipme

Exercise 21-7

On January 1, 2017, Oriole Company leased equipment to Waterway Corporation. The following information pertains to this lease.

(Both the lessor and the lessee’s accounting period ends on December 31.)
Calculate the amount of the annual rental payment. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Prepare all the necessary journal entries for Waterway for 2017. (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 the final answer to 0 decimal places e.g. 58,971.)

Date

Account Titles and Explanation

Debit

Credit

(To record the lease.)

(To record lease payment.)

(To record depreciation.)

(To record interest.)

Prepare all the necessary journal entries for Oriole for 2017. (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 the final answer to 0 decimal places e.g. 58,971.)

Date

Account Titles and Explanation

Debit

Credit

1/1/17

(To record the lease.)

(To record lease payment.)

12/31/17

(To record interest.)

1.		The term of the noncancelable 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 2017.
3.		The fair value of the equipment on January 1, 2017, is $150,000, and its cost is $120,000.
4.		The equipment has an economic life of 8 years, with an unguaranteed residual value of $10,000. Waterway depreciates all of its equipment on a straight-line basis.
5.		Oriole set the annual rental to ensure an 10% rate of return. Waterway’s incremental borrowing rate is 11%, and the implicit rate of the lessor is unknown.
6.		Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.

Solution

a Computation of annual rental payment: $150000 - (10000 x 0.56447)* ÷ 4.79079** = $30,132 *Present value of $1 at 10% for 6 periods. **Present value of an annuity due at 10% for 6 periods. b Date Account Titles and Explanation Debit Credit 1/1/17 Leased Equipment $      141,497 Lease Liability $      141,497 ($30,132 X 4.69590)*** (To record the lease.) Lease Liability $        30,132 Cash $        30,132 (To record lease payment.) ***Present value of an annuity due at 11% for 6 periods. 12/31/17 Depreciation Expense $        23,583 Accumulated Depreciation—Capital Leases $        23,583 ($141,497 ÷ 6 years) (To record depreciation.) Interest Expense $        12,250 Interest Payable $        12,250 ($141,497 – $30,132) X .11 (To record interest.) c Date Account Titles and Explanation Debit Credit 1/1/2017 Lease Receivable $      150,000 Cost of Goods Sold $      114,355 Sales Revenue $      144,355 Inventory $      120,000 (To record the lease.) *($30,132 X 4.79079) + ($10,000 X .56447), rounded **$120,000 – ($10,000 X .56447) ***$30,132 X 4.79079, rounded Cash $        30,132 Lease Receivable $        30,132 (To record lease payment.) 12/31/2017 Interest Receivable $        13,185 Interest Revenue $        13,185 [($150,000 – $30,132) X .11] (To record interest.)