Chapter 20, Problem 4P

Lessee Accounting Issues Timmer Company signs a lease agreement dated January 1, 2019, that provides for it to lease equipment from Landau Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows:

• The lease is noncancelable and has a term of 5 years.
• The annual rentals are $83,222.92, payable at the end of each year, and provide Landau with a 12% annual rate of return on its net investment.
• Timmer agrees to pay all executory costs directly to a third party on December 1 of each year. In 2019, these were insurance, $3,760; property taxes, $5,440. In 2020: insurance, $3,100; property taxes, $5,330.
• There is no renewal or bargain purchase option.

Timmer estimates that the equipment has a fair value of $300,000, an economic life of 5 years, and a zero residual value. Timmer’s incremental borrowing rate is 16%, it knows the rate implicit in the lease, and it uses the straightline method to record depreciation on similar equipment.

Required:

1. 1. Calculate the amount of the asset and liability of Timmer at the inception of the lease. (Round to the nearest dollar.)
2. 2. Prepare a table summarizing the lease payments and interest expense.
3. 3. Prepare journal entries on the books of Timmer for 2019 and 2020.
4. 4. Next Level Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2019. Use the present value of next year’s payment approach to classify the finance lease obligation between current and noncurrent.
5. 5. Next Level Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2019. Use the change in present value approach to classify the finance lease obligation between current and noncurrent.