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Chapter 21: 11IFRS_b (page 1264)

A lease agreement between Lennox Leasing Company and Gill Company is described in IFRS21-10. Refer to the data in IFRS21-10 and do the following for the lessor.

Inception date: May 1, 2017

Annual lease payment due at the beginning of each year, beginning with May 1, 2017: \(18,829.49

Bargain-purchase option price at end of lease term: \)4,000.00

Lease term: 5 years

Economic life of leased equipment: 10 years

Lessor’s cost: \(65,000.00; fair value of asset at May 1, 2017, \)81,000.00

Lessor’s implicit rate: 10%; lessee’s incremental borrowing rate 10%

The lessee assumes responsibility for all executory costs.

Instructions

(Round all numbers to the nearest cent.)

(b) Prepare a lease amortization schedule for Lennox Leasing Company for the 5-year lease term.

Short Answer

Expert verified

Answer

The total reduction of the lease liability is $81,000.

Step by step solution

01

Meaning of Lease Asset

Assets rights that are transferred by the lessor to the lessee by mutual agreementare term leased assets. The leased asset is used by the lessee and rental payments are made in accordance with the lease agreement.

02

Preparing lease amortization schedule

LENNOX LEASING COMPANY (LESSOR)
Lease Amortization Schedule

Date

Annual Lease Payment Plus

BPO

Interest (10%) in Liability

Reduction of Lease Liability

Lease Liability

5/1/17

$81,000.000

5/1/17

18,829.49

$ 0

$18,829.49

62,170.51

5/1/18

18,829.49

6,217.05

12,612.44

49,558.07

5/1/19

18,829.49

4,955.81

13,873.68

35,684.39

5/1/20

18,829.49

3,568.44

15,261.05

20,423.34

5/1/21

18,829.49

2,042.33

16,787.16

3,636.18

4/30/22

4,000.00

363.82

3,636.18

0

$98,147.45

$17,147.45

$81,000.00

Note: There is a rounding error in interest (10%) in liability on 4/30/22.

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Most popular questions from this chapter

Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston’s specifications. Upon completion of the engines, Winston has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is noncancelable, becomes effective on January 1, 2017, and requires annual rental payments of \(413,971 each January 1, starting January 1, 2017.

Winston’s incremental borrowing rate is 10%. The implicit interest rate used by Ewing Inc. and known to Winston is 8%. The total cost of building the three engines is \)2,600,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Winston depreciates similar equipment on a straight-line basis. At the end of the lease, Winston assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs.

Instructions

(f) Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2017, for both the lessee and the lessor.

A lease agreement between Mooney Leasing Company and Rode Company is described in E21-8.

Inception date

May 1, 2017

Annual lease payment due at the beginning

of each year, beginning with May 1, 2017

\(21,227.65

Bargain-purchase option price at end of lease term

\) 4,000.00

Lease term

5 years

Economic life of leased equipment

10 years

Lessor’s cost

\(65,000.00

Fair value of asset at May 1, 2017

\)91,000.00

Lessor’s implicit rate

10%

Lessee’s incremental borrowing rate

10%

Instructions

(Round all numbers to the nearest cent.) Refer to the data in E21-8 and do the following for the lessor.

(a) Compute the amount of the lease receivable at the inception of the lease.

(Amortization Schedule and Journal Entries for Lessee) Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Plote Company. The following information relates to this agreement.

  1. The term of the noncancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years.
  2. The fair value of the asset at January 1, 2017, is \(80,000.
  3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of \)7,000, none of which is guaranteed.
  4. Plote Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) \(900 to Rocky Mountain Insurance Company for insurance and (2) \)1,600 to Laclede County for property taxes.
  5. The agreement requires equal annual rental payments of $18,142.95 to the lessor, beginning on January 1, 2017.
  6. The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10% and is known to the lessee.
  7. Plote Company uses the straight-line depreciation method for all equipment.
  8. Plote uses reversing entries when appropriate.

Instructions

(Round all numbers to the nearest cent.)

(b) Prepare all of the journal entries for the lessee for 2017 and 2018 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31.

(Lessor Entries; Direct-Financing Lease with Option to Purchase) Castle Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Jan Way Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

  1. Jan Way Company has the option to purchase the equipment for \(16,000 upon termination of the lease.
  2. The equipment has a cost and fair value of \)160,000 to Castle Leasing Company. The useful economic life is 2 years, with a salvage value of \(16,000.
  3. Jan Way Company is required to pay \)5,000 each year to the lessor for executory costs.
  4. Castle Leasing Company desires to earn a return of 10% on its investment.
  5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

Instructions

  1. Prepare the journal entries on the books of Castle Leasing to reflect the payments received under the lease and to recognize income for the years 2017 and 2018.

The following are four independent situations.

(a) On December 31, 2017, Zarle Inc. sold computer equipment to Daniell Co. and immediately leased it back for 10 years. The sales price of the equipment was \(520,000, its carrying amount is \)400,000, and its estimated remaining economic life is 12 years. Determine the amount of deferred revenue to be reported from the sale of the computer equipment on December 31, 2017.
See all solutions

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