Reporting Finance Lease, Purchase Option—Lessee On January 1 of Year 1, lessor Marcy and lessee Lenox contract for the lease of a machine for five payments of $7,000 each. The $7,000 payments are to be paid at the end of each year beginning on December 31 of Year 1. They also agree that at the time of the fifth payment, for an added $6,000 purchase option payment, Lenox can buy the property. Lenox reasonably expects to exercise the purchase option as the amount is well under the expected fair value at that time. Lenox’s incremental borrowing rate is 6% per year and Lenox is unaware of the implicit rate of the lease. The economic life of the asset is six years. The lease liability schedule is attached in the pictures. Prepare the entries for Lenox on (1) January 1 of Year 1, (2) December 31 of Year 1, and (3) December 31 of Year 2.
Reporting Finance Lease, Purchase Option—Lessee On January 1 of Year 1, lessor Marcy and lessee Lenox contract for the lease of a machine for five payments of $7,000 each. The $7,000 payments are to be paid at the end of each year beginning on December 31 of Year 1. They also agree that at the time of the fifth payment, for an added $6,000 purchase option payment, Lenox can buy the property. Lenox reasonably expects to exercise the purchase option as the amount is well under the expected fair value at that time. Lenox’s incremental borrowing rate is 6% per year and Lenox is unaware of the implicit rate of the lease. The economic life of the asset is six years. The lease liability schedule is attached in the pictures. Prepare the entries for Lenox on (1) January 1 of Year 1, (2) December 31 of Year 1, and (3) December 31 of Year 2.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Reporting Finance Lease, Purchase Option—Lessee
On January 1 of Year 1, lessor Marcy and lessee Lenox contract for the lease of a machine for five payments of $7,000 each. The $7,000 payments are to be paid at the end of each year beginning on December 31 of Year 1. They also agree that at the time of the fifth payment, for an added $6,000 purchase option payment, Lenox can buy the property. Lenox reasonably expects to exercise the purchase option as the amount is well under the expected fair value at that time. Lenox’s incremental borrowing rate is 6% per year and Lenox is unaware of the implicit rate of the lease. The economic life of the asset is six years. The lease liability schedule is attached in the pictures. Prepare the entries for Lenox on (1) January 1 of Year 1, (2) December 31 of Year 1, and (3) December 31 of Year 2.
Transcribed Image Text:Date
Jan. 1, Year 1
Dec. 31, Year 1 $
Dec. 31, Year 2 $
Lease
Payment
7,000
7,000
$
$
Interest
on Liability
Lease Liability
Change
2,038 $
1,740
$
Lease Liability
$ 33,970
4,962
$
29,008
5,260 $
23,748
Transcribed Image Text:Date
Jan. 1, Year 1
Dec. 31, Year 1
Dec. 31, Year 1
Account Name
Right-of-Use Asset
Lease Liability
To record asset and liability related to lease
Lease Liability
Cash
To record lease payment
Amortization Expense
Cash
To record amortization
Dec. 31, Year 2 Interest Expense
Lease Liability
Cash
To record lease payment
Dec. 31, Year 2 Depreciation Expense
Accumulated Depreciation
To record amortization
>
> >
Dr.
33,970
0
0
0
0
0
0
0
0
0
0
0
Cr.
0
33,970
0x
0 x
0 x
0 x
0 x
0x
0x
0x
0x
0x
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