Rogue Company leases a card-making machine to Gambit Inc. on January 1, 2017. The following information details the lease contract: The lease term is ten years with no renewal or purchase options. The machinery cost Rogue $300,000 to construct and has a fair value of $495,678 at the lease inception. Rogue also incurred $14,000 in legal fees directly related to the signing of the lease. The asset reverts to Rogue at the end of the lease. Rogue estimates the residual value of the asset to be $15,000. Gambit has guaranteed the residual value of the asset will be $10,000. Due to hard expected usage of the asset, Gambit anticipates the actual residual value to only be $4,000 at the end of the lease. The assets estimated economic life is twelve years with a salvage value of $1,000. The lease calls for equal payments to be made at the beginning of each year starting January 1, 2017. Both firms have December 31 fiscal year ends and use straight-line depreciation. Rogue has priced a 5% implicit rate into the lease. Gambit’s incremental borrowing rate is 7% and it does not know the implicit rate of the lease. Gambit incurred $7,000 in document preparations costs to execute the lease. Collectability of lease payments is probable. Required: Calculate the annual payments Rogue will require for the 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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Rogue Company leases a card-making machine to Gambit Inc. on January 1, 2017. The following information details the lease contract:

The lease term is ten years with no renewal or purchase options.
The machinery cost Rogue $300,000 to construct and has a fair value of $495,678 at the lease inception. Rogue also incurred $14,000 in legal fees directly related to the signing of the lease.
The asset reverts to Rogue at the end of the lease. Rogue estimates the residual value of the asset to be $15,000.
Gambit has guaranteed the residual value of the asset will be $10,000. Due to hard expected usage of the asset, Gambit anticipates the actual residual value to only be $4,000 at the end of the lease.
The assets estimated economic life is twelve years with a salvage value of $1,000.
The lease calls for equal payments to be made at the beginning of each year starting January 1, 2017.
Both firms have December 31 fiscal year ends and use straight-line depreciation.
Rogue has priced a 5% implicit rate into the lease. Gambit’s incremental borrowing rate is 7% and it does not know the implicit rate of the lease.
Gambit incurred $7,000 in document preparations costs to execute the lease.
Collectability of lease payments is probable.

Required:

Calculate the annual payments Rogue will require for the lease.

What type of lease is this for both Rogue and Gambit?

Prepare the lessor’s (Rogue’s) amortization table and show all the journal entries Rogue will make for the lease in 2017 and 2018.

Prepare the lessee’s (Gambit’s) amortization table and show all the journal entries Gambit will make for the lease in 2017 and 2018.

Make the lease termination entries both Rogue and Gambit will have to make if the asset’s residual value is $20,000 at the end of the lease.

Make the lease termination entries both Rogue and Gambit will have to make if the asset’s residual value is $8,000 at the end of the lease.

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