E21.14 (LO 2) (Lessee Entries) Use the information for the Phelps/Walsh lease in E21.13. In this instance, however, Walsh is unaware of the implicit rate used in the lease by Phelps and has an incremental borrowing rate of 9%. Instructions How would your answer to E21.13(a) change?
E21.14 (LO 2) (Lessee Entries) Use the information for the Phelps/Walsh lease in E21.13. In this instance, however, Walsh is unaware of the implicit rate used in the lease by Phelps and has an incremental borrowing rate of 9%. Instructions How would your answer to E21.13(a) change?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Please answer E21-14.
Transcribed Image Text:E21.14 (LO 2) (Lessee Entries) Use the information for the Phelps/Walsh
lease in E21.13. In this instance, however, Walsh is unaware of the implicit rate
used in the lease by Phelps and has an incremental borrowing rate of 9%.
Instructions
How would your answer to E21.13(a) change?
Transcribed Image Text:E21.13 (LO 2, 3) (Lessee-Lessor Entries, Sales-Type Lease; Guaranteed
Residual Value) Phelps plc leases a building to Walsh Ltd. on January 1, 2022.
The following facts pertain to the lease agreement.
1. The lease term is 5 years, with equal annual rental payments of £4,703 at the
beginning of each year.
2. Ownership does not transfer at the end of the lease term, there is no bargain
purchase option, and the asset is not of a specialized nature.
3. The building has a fair value of £23,000, a book value to Phelps of £16,000,
and a useful life of 6 years.
4. At the end of the lease term, Phelps and Walsh expect there to be an
unguaranteed residual value of £4,000.
5. Phelps wants to earn a return of 8% on the lease, and collectibility of the
payments is probable. This rate is known by Walsh.
Instructions
a. How would Phelps (lessor) classify this lease? How would Phelps initially
measure the lease receivable, and how would Walsh initially measure the
lease liability and right-of-use asset?
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