On January 1, 2020, Horatio Inc. leased a tractor trailer from Hamlet Ltd. Under the terms of the contract, annual lease payments are due at the beginning of each year. At the end of the lease term the leased asset reverts back to Hamlet. Horatio has a December 31 year end. Other terms of the lease are as follows: Annual lease payment amount $ 31,805 Amount of residual value guarantee made by Horatio $ 10,289 Implicit rate in lease (known by Horatio) 6% Lease term (in years) 5 Estimated useful life of tractor trailer (in years) 7 Fair value of tractor trailer $ 149,700 Horatio's incremental borrowing rate 10% Assume that Horatio Inc. follows IFRS, and depreciates all automotive equipment using the straight-line method. Required: a) Calculate the present value of the minimum lease payments from the perspective of Horatio. b) What kind of lease is this to Horatio? Why? c) Prepare an amortization schedule covering the entire lease term. d) Prepare the journal entries that Horatio Inc. would record for the lease during the 2020 year.
On January 1, 2020, Horatio Inc. leased a tractor trailer from Hamlet Ltd. Under the terms of the contract, annual lease payments are due at the beginning of each year. At the end of the lease term the leased asset reverts back to Hamlet. Horatio has a December 31 year end. Other terms of the lease are as follows: Annual lease payment amount $ 31,805 Amount of residual value guarantee made by Horatio $ 10,289 Implicit rate in lease (known by Horatio) 6% Lease term (in years) 5 Estimated useful life of tractor trailer (in years) 7 Fair value of tractor trailer $ 149,700 Horatio's incremental borrowing rate 10% Assume that Horatio Inc. follows IFRS, and depreciates all automotive equipment using the straight-line method. Required: a) Calculate the present value of the minimum lease payments from the perspective of Horatio. b) What kind of lease is this to Horatio? Why? c) Prepare an amortization schedule covering the entire lease term. d) Prepare the journal entries that Horatio Inc. would record for the lease during the 2020 year.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
On January 1, 2020, Horatio Inc. leased a tractor trailer from Hamlet Ltd. Under the terms of the contract, annual lease payments are due at the beginning of each year. At the end of the lease term the leased asset reverts back to Hamlet. Horatio has a December 31 year end. Other terms of the lease are as follows:
|
Annual lease payment amount |
$ 31,805 |
|
Amount of residual value guarantee made by Horatio |
$ 10,289 |
|
Implicit rate in lease (known by Horatio) |
6% |
|
Lease term (in years) |
5 |
|
Estimated useful life of tractor trailer (in years) |
7 |
|
Fair value of tractor trailer |
$ 149,700 |
|
Horatio's incremental borrowing rate |
10% |
Assume that Horatio Inc. follows IFRS, and
|
Required: |
|
|
a) |
Calculate the present value of the minimum lease payments from the perspective of Horatio. |
|
b) |
What kind of lease is this to Horatio? Why? |
|
c) |
Prepare an amortization schedule covering the entire lease term. |
|
d) |
Prepare the |
|
|
2020 year. |
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