3. Lessee Capital Lease; LessorResidual Value - Guaranteed-Instructions:Direct Financing Lease;On January 1, 2010, Velde Company (lessee) entered into a 4year, noncancellable contract to lease a computer fromExceptional Computer Company (lessor). Annual rentals of$16,228 are to be paid each January 1, Velde will assumeresponsibility for all normal ownership costs, and at the end ofthe lease period the computer will be returned back toExceptional Computer Company. The cost of the computer toExceptional Computer Company was $60,000 and it had anestimated useful life of four years and a guaranteed residualvalue of $5,000. Velde has an incremental borrowing rate of12%, but has knowledge that Exceptional Computer Companyused a rate 10% in setting annual rentals. Collection of therentals is reasonably predictable and there are no importantuncertainties regarding future unreimbursable costs to beincurred by the lessor. PVIFAD(10%,4) - 3.48685; PVIF(10%,4)- 0.68301a. What type of lease is this? Explainb. Record the journal entries in the book of lessee.c. Record the journal entries in the book of lessor.

Given in the question: Lease Date January 1, 2010 Term (in Years) 4 Annual Rentals…

Answered: a. What type of lease is this? Explain…

a. What type of lease is this? Explain b. Record the journal entries in the book of lessee. c. Record the journal entries in the book of lessor.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.

Question

3. Lessee Capital Lease; Lessor
Residual Value - Guaranteed
-
Instructions:
Direct Financing Lease;
On January 1, 2010, Velde Company (lessee) entered into a 4
year, noncancellable contract to lease a computer from
Exceptional Computer Company (lessor). Annual rentals of
$16,228 are to be paid each January 1, Velde will assume
responsibility for all normal ownership costs, and at the end of
the lease period the computer will be returned back to
Exceptional Computer Company. The cost of the computer to
Exceptional Computer Company was $60,000 and it had an
estimated useful life of four years and a guaranteed residual
value of $5,000. Velde has an incremental borrowing rate of
12%, but has knowledge that Exceptional Computer Company
used a rate 10% in setting annual rentals. Collection of the
rentals is reasonably predictable and there are no important
uncertainties regarding future unreimbursable costs to be
incurred by the lessor. PVIFAD(10%,4) - 3.48685; PVIF(10%,4)
- 0.68301
a. What type of lease is this? Explain
b. Record the journal entries in the book of lessee.
c. Record the journal entries in the book of lessor.

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