Scupper Farms, the lessee, and Tyrrell Equipment, the lessor, sign a lease agreement on January 1, 2019, that provides for Scupper to lease a cultivator from Tyrrell. The lease terms, provisions, and other related events are as follows: The lease is noncancelable and has a term of 6 years. The annual rentals are $55,000 payable at the beginning of each year. Scupper agrees to pay all executory costs directly to a third party, which are expected to be $1,100 annually, including property taxes of $500, insurance of $350, and maintenance of $250. These costs are paid each year on November 1. The cultivator has an estimated economic life of 6 years. Scupper guarantees a residual value of $60,000 at the end of 6 years. Scupper believes it is probable that it will pay $15,000 cash as a result of this guarantee. The interest rate implicit in the lease is 14%, which is known by Scupper. Scupper’s incremental borrowing rate is 15%, and it uses the sum-of-the-years’-digits method to record depreciation on similar equipment. The cost of the cultivator is $250,000.00. The fair value of the cultivator to Tyrrell is $271,154.68. The lessor incurs no material initial direct costs. Tyrell expects to collect all lease payments from Scupper. Next Level Identify the type of lease involved for both Scupper and Tyrrell and give reasons for your classifications. Prepare the journal entries for both Scupper and Tyrrell for 2019.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Scupper Farms, the lessee, and Tyrrell Equipment, the lessor, sign a lease agreement on January 1, 2019, that provides for Scupper to lease a cultivator from Tyrrell. The lease terms, provisions, and other related events are as follows:

The lease is noncancelable and has a term of 6 years.
The annual rentals are $55,000 payable at the beginning of each year.
Scupper agrees to pay all executory costs directly to a third party, which are expected to be $1,100 annually, including property taxes of $500, insurance of $350, and maintenance of $250. These costs are paid each year on November 1.
The cultivator has an estimated economic life of 6 years.
Scupper guarantees a residual value of $60,000 at the end of 6 years. Scupper believes it is probable that it will pay $15,000 cash as a result of this guarantee.
The interest rate implicit in the lease is 14%, which is known by Scupper.
Scupper’s incremental borrowing rate is 15%, and it uses the sum-of-the-years’-digits method to record depreciation on similar equipment.
The cost of the cultivator is $250,000.00. The fair value of the cultivator to Tyrrell is $271,154.68.
The lessor incurs no material initial direct costs.
Tyrell expects to collect all lease payments from Scupper.

Next Level Identify the type of lease involved for both Scupper and Tyrrell and give reasons for your classifications.
Prepare the journal entries for both Scupper and Tyrrell for 2019.

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