Answered: eal Leasing Company agrees to lease…

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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Question

Teal Leasing Company agrees to lease equipment to Flint Corporation on January 1, 2020. The following information relates to the lease agreement.

1.		The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2.		The cost of the machinery is $510,000, and the fair value of the asset on January 1, 2020, is $717,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Flint estimates that the expected residual value at the end of the lease term will be 60,000. Flint amortizes all of its leased equipment on a straight-line basis.
4.		The lease agreement requires equal annual rental payments, beginning on January 1, 2020.
5.		The collectibility of the lease payments is probable.
6.		Teal desires a 11% rate of return on its investments. Flint’s incremental borrowing rate is 12%, and the lessor’s implicit rate is unknown.

(Assume the accounting period ends on December 31.)

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(a)

Discuss the nature of this lease for both the lessee and the lessor.

This is a for Flint.

This is a for Teal.

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(b)

Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,972.)

Annual rental payment

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(c)

Compute the value of the lease liability to the lessee. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,972.)

Present value of minimum lease payments

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(d)

Prepare the journal entries Flint would make in 2020 and 2021 related to the lease arrangement. (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 answers to 0 decimal places e.g. 58,972. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit


	(To record the lease.)


	(To record lease payment.)


	(To record amortization.)


	(To record interest.)




	(To record amortization.)


	(To record interest.)

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(e)

Prepare the journal entries Teal would make in 2020 and 2021 related to the lease arrangement. (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 answers to 0 decimal places e.g. 58,972. Record journal entries in the order presented in the problem.)

Date

Account Titles and Explanation

Debit

Credit

(To record the lease.)

(To record lease payment.)

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(f)

Suppose Flint expects the residual value at the end of the lease term to be $50,000 but still guarantees a residual of $60,000. Compute the value of the lease liability at lease commencement.

Lease liability

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