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Chapter 21: Q11P_b. (page 1248)

(Lessee Computations and Entries, Capital Lease with Unguaranteed Residual Value) Assume the same data as in P21-10 with National Airlines having an incremental borrowing rate of 10%.

George Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is \(278,072, and its unguaranteed residual value at the end of the lease term is estimated to be \)20,000. National will pay annual payments of \(40,000 at the beginning of each year and all maintenance, insurance, and taxes. George incurred costs of \)180,000 in manufacturing the equipment and $4,000 in negotiating and closing the lease. George has determined that the collectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 10%.

Instructions

(b) Prepare a 10-year lease amortization schedule.

Short Answer

Expert verified

Total reduction of lease liability = $270,361

Step by step solution

01

Meaning of Lease asset Amortization

The amortization of a leased asset is determined bythe asset's historical cost, expected economic life, residual value, and the amortization method chosen. Most finance leases are amortized using consistent payments over the lease period and are customized to meet the lessee's specific needs.

02

Preparing 10-year lease amortization schedule

NATIONAL AIRLINES (Lessee)

Lease Amortization Schedule

(Annuity-due basis and URV)


Beginning of year

Annual Lease payment

Interest (10%) on Lease Liability

Reduction of the lease liability

Lease Liability

(a)

(b)

(c)

(d)

Initial PV

$ 0

-

-

$ 270,361

1

40,000

-

$ 40,000

230,361

2

40,000

$ 23,036

16,964

213,397

3

40,000

21,340

18,660

194,737

4

40,000

19,474

20,526

174,211

5

40,000

17,421

22,579

151,632

6

40,000

15,163

24,837

126,795

7

40,000

12,680

27,320

99,475

8

40,000

9,948

30,052

69,423

9

40,000

6,942

33,058

36,365

10

40,000

3,635

36,365

0

$420,000

$129,639

$270,361

Notes:

  1. The rounding error is $1.00 in Interest (10%) on the Lease Receivable at 10 Initial PV
  2. Annual lease payment is required by the lease contract.
  3. Preceding balance of (d) X 10%, except the beginning of the first year of the lease term.
  4. (a) Minus (b).
  5. Preceding balance minus (c).

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Most popular questions from this chapter

Question: (Lessee Entries and Balance Sheet Presentation, Capital Lease) On January 1, 2017, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of \(137,899 (including the executory costs of \)6,000) at the beginning of each year, starting January 1, 2017. The taxes, the insurance, and the maintenance, estimated at \(6,000 a year, are the obligations of the lessee. The leased equipment is to be capitalized at \)550,000. The asset is to be depreciated on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cage’s incremental borrowing rate is 12%, and the implicit rate in the lease is 10%, which is known by Cage. Title to the equipment transfers to Cage when the lease expires. The asset has an estimated useful life of 5 years and no residual value.

Instructions

(a) Explain the probable relationship of the $550,000 amount to the lease arrangement.

Question: (Lessee Entries and Balance Sheet Presentation, Capital Lease) On January 1, 2017, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of \(137,899 (including the executory costs of \)6,000) at the beginning of each year, starting January 1, 2017. The taxes, the insurance, and the maintenance, estimated at \(6,000 a year, are the obligations of the lessee. The leased equipment is to be capitalized at \)550,000. The asset is to be depreciated on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cage’s incremental borrowing rate is 12%, and the implicit rate in the lease is 10%, which is known by Cage. Title to the equipment transfers to Cage when the lease expires. The asset has an estimated useful life of 5 years and no residual value.

Instructions

(c) Prepare the journal entry to record depreciation of the leased asset for the year 2017.

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

(c) Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Ewing Inc.

Use the information for Indiana Jones Corporation from BE21-9. Assume that for Lost Ark Company, the lessor, collectibility is reasonably predictable, there are no important uncertainties concerning costs, and the carrying amount of the equipment is \(202,921. Prepare Lost Ark’s January 1, 2017, journal entries.

Indiana Jones Corporation enters into a 6-year lease of equipment on January 1, 2017, which requires 6 annual payments of \)40,000 each, beginning January 1, 2017. In addition, Indiana Jones guarantees the lessor a residual value of $20,000 at lease-end. The equipment has a useful life of 6 years. Prepare Indiana Jones’ January 1, 2017, journal entries assuming an interest rate of 10%.

Assume that on January 1, 2017, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement. 1. The agreement requires equal rental payments of \(72,000 beginning on January 1, 2017. 2. The fair value of the building on January 1, 2017, is \)440,000. 3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of \(10,000. Kimberly-Clark depreciates similar buildings on the straight-line method. 4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. 5. Kimberly-Clark’s incremental borrowing rate is 12% per year. The lessor’s implicit rate is not known by Kimberly-Clark. 6. The yearly rental payment includes \)2,471 of executory costs related to taxes on the property.

Instructions

Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Kimberly-Clark’s corporate year-end is December 31.
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