On January 1, Lessee Inc. leased equipment at an annual payment of $85,099 payable at the beginning of each year for 4 years. The equipment had a fair value of $400,000, a book value of $375,000, and was commonly purchased or leased by customers. The lessor estimates that the equipment has an estimated useful life of 8 years and an estimated residual value of $125,000, not guaranteed by the lessee. Lessor’s implicit rate is 7.5%, which is unknown to the lessee. The lessee’s incremental borrowing rate is 8%. The lease does not contain a purchase option or a renewal option. The lessee had no other costs associated with this lease.
On January 1, Lessee Inc. leased equipment at an annual payment of $85,099 payable at the beginning of each year for 4 years. The equipment had a fair value of $400,000, a book value of $375,000, and was commonly purchased or leased by customers. The lessor estimates that the equipment has an estimated useful life of 8 years and an estimated residual value of $125,000, not guaranteed by the lessee. Lessor’s implicit rate is 7.5%, which is unknown to the lessee. The lessee’s incremental borrowing rate is 8%. The lease does not contain a purchase option or a renewal option. The lessee had no other costs associated with this lease.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
On January 1, Lessee Inc. leased equipment at an annual payment of $85,099 payable at the beginning of each year for 4 years. The equipment had a fair value of $400,000, a book value of $375,000, and was commonly purchased or leased by customers. The lessor estimates that the equipment has an estimated useful life of 8 years and an estimated residual value of $125,000, not guaranteed by the lessee. Lessor’s implicit rate is 7.5%, which is unknown to the lessee. The lessee’s incremental borrowing rate is 8%. The lease does not contain a purchase option or a renewal option. The lessee had no other costs associated with this lease.
![Required
a.
Recalculate the lessor's lease payment.
• Note: Round answer to the nearest dollar.
• Note: Do not use a negative sign with your answer.
Lease payment $ 85,099
b. Prepare the entries for the lessor for the year, assuming that the lessor uses the straight-line method to depreciate fixed assets.
Account Name
Cr.
Date
Jan. 1
Cash
Deferred Lease Revenue
To record receipt of lease payment
Dec. 31 Deferred Lease Revenue
Lease Revenue
To record revenue
Dec. 31 Depreciation Expense
Jan. 1
Accumulated Depreciation
To record depreciation
Account Name
Initial Direct Cost
Cash
Dec. 31 Selling Expense
◆
Initial Direct Cost
→
◆
✓
✓
✓
Dr.
85,099 ✔
0✔
c. If the lessor incurred a commission to secure the acceptance of the lease agreement for $1,000, what entry would be required by the lessor on January 1 and December 31?
Date
Dr.
Cr.
→ ✓
= ✓
✓
◆ ✓
85,099 ✔
0✔
X
0✔
0
85,099 ✓
1,000 ✓
0✔
x
0 ✓
0✔
85,099 ✓
0✓
x
0✔
1,000 ✓
0✓
x
d. How would the lease be classified if instead, the lessee guaranteed a residual value of $80,000?
Lease classification considering guaranteed residual value Sales-Type Lease](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F27b61fd3-5964-4c97-873d-b8fce32fc28f%2Fbf76ab0d-452f-46be-965f-2ebd77d82ba6%2Fx4q296_processed.png&w=3840&q=75)
Transcribed Image Text:Required
a.
Recalculate the lessor's lease payment.
• Note: Round answer to the nearest dollar.
• Note: Do not use a negative sign with your answer.
Lease payment $ 85,099
b. Prepare the entries for the lessor for the year, assuming that the lessor uses the straight-line method to depreciate fixed assets.
Account Name
Cr.
Date
Jan. 1
Cash
Deferred Lease Revenue
To record receipt of lease payment
Dec. 31 Deferred Lease Revenue
Lease Revenue
To record revenue
Dec. 31 Depreciation Expense
Jan. 1
Accumulated Depreciation
To record depreciation
Account Name
Initial Direct Cost
Cash
Dec. 31 Selling Expense
◆
Initial Direct Cost
→
◆
✓
✓
✓
Dr.
85,099 ✔
0✔
c. If the lessor incurred a commission to secure the acceptance of the lease agreement for $1,000, what entry would be required by the lessor on January 1 and December 31?
Date
Dr.
Cr.
→ ✓
= ✓
✓
◆ ✓
85,099 ✔
0✔
X
0✔
0
85,099 ✓
1,000 ✓
0✔
x
0 ✓
0✔
85,099 ✓
0✓
x
0✔
1,000 ✓
0✓
x
d. How would the lease be classified if instead, the lessee guaranteed a residual value of $80,000?
Lease classification considering guaranteed residual value Sales-Type Lease
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