Leasing AG agrees to lease equipment to Fat Choi Furniture on January 1, 2020. The following information relates to the lease agreement. (Assume the accounting period ends on December 31.) a) Calculate the amount of the annual rental payment required. b) Compute the value of the lease liability to Fat Choi Furniture. c) Prepare an 8-year lease amortization schedule for the lessee, Fat Choi Furniture
Leasing AG agrees to lease equipment to Fat Choi Furniture on January 1, 2020. The following information relates to the lease agreement. (Assume the accounting period ends on December 31.) a) Calculate the amount of the annual rental payment required. b) Compute the value of the lease liability to Fat Choi Furniture. c) Prepare an 8-year lease amortization schedule for the lessee, Fat Choi Furniture
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter20: Accounting For Leases
Section: Chapter Questions
Problem 10GI: Owens Company leased equipment for 4 years at 50,000 a year with an option to renew the lease for 6...
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Leasing AG agrees to lease equipment to Fat Choi Furniture on January 1, 2020. The following information relates to the lease agreement.
(Assume the accounting period ends on December 31.)
a) Calculate the amount of the annual rental payment required.
b) Compute the value of the lease liability to Fat Choi Furniture.
c) Prepare an 8-year lease amortization schedule for the lessee, Fat Choi Furniture.
![1. The term of the lease is 8 years with no renewal option, and the machinery has an estimated
economic life of 9 years.
2. The cost of the machinery is $1,312,500, and the fair value of the asset on January 1, 2020, is
$1,750,000.
3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual
value of $125,000. Fat Choi Furniture estimates that the expected residual value at the end
of the lease term will be $100,000. Fat Choi Furniture 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. Fat Choi Furniture's incremental borrowing rate is 6%. Leasing AG desires a 5% rate of
return on its investments, and Fat Choi Furniture is aware of it. Both companies consider the
lease as finance lease.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd8739e6c-a08d-43d9-afa3-63a2b0fc82b7%2F01bbe0df-cf9e-4313-91c7-2abe7f91bc4d%2Fjxr11jj_processed.png&w=3840&q=75)
Transcribed Image Text:1. The term of the lease is 8 years with no renewal option, and the machinery has an estimated
economic life of 9 years.
2. The cost of the machinery is $1,312,500, and the fair value of the asset on January 1, 2020, is
$1,750,000.
3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual
value of $125,000. Fat Choi Furniture estimates that the expected residual value at the end
of the lease term will be $100,000. Fat Choi Furniture 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. Fat Choi Furniture's incremental borrowing rate is 6%. Leasing AG desires a 5% rate of
return on its investments, and Fat Choi Furniture is aware of it. Both companies consider the
lease as finance lease.
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
Step 1
Annual lease rental = {(Fair value) - (Guaranteed residual value * Present value factor @given rate for last year)} / (Present value annutiy factor @given rate for given years)
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