Accounting for Leases by Lessee and Lessor Scupper Farms, the lessee, and Tyrrell Equipment, the lessor, sign a lease agreement on January 1, 2016, 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 $56,100 (including executory costs), payable at the beginning of each year.
-Tyrrell agrees to pay all executory costs, which are expected to be $1,100 annually, including property taxes of $500, insurance of $350, and maitenance of $250.
-The cultivator has an estimated economic life of 6 years.
-Scupper guarantees a residual value of $60,000 at the end of 6 years.
-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 and rair value of the cultivator to Tyrrell is $271,154.68
-The lessor incures no material initial direct costs.
- The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be inccurred by the lessor.
Required:
1. Identify the type of lease involved for both Scupper and Tyrrell and give reasons for your classifications.
2. Prepare the journal entries for both Scupper and Tyrrell for 2016 (hint: scupper should expense executory costs when annual payments are made to tyrrell.)
Accounting for Leases by Lessee and Lessor Scupper Farms, the lessee, and Tyrrell Equipment, the lessor, sign a lease agreement on January 1, 2016, 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 $56,100 (including executory costs), payable at the beginning of each year.
-Tyrrell agrees to pay all executory costs, which are expected to be $1,100 annually, including property taxes of $500, insurance of $350, and maitenance of $250.
-The cultivator has an estimated economic life of 6 years.
-Scupper guarantees a residual value of $60,000 at the end of 6 years.
-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 and rair value of the cultivator to Tyrrell is $271,154.68
-The lessor incures no material initial direct costs.
- The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be inccurred by the lessor.
Required:
1. Identify the type of lease involved for both Scupper and Tyrrell and give reasons for your classifications.
2. Prepare the journal entries for both Scupper and Tyrrell for 2016 (hint: scupper should expense executory costs when annual payments are made to tyrrell.)
Related questions
Exercise 15-19 Executory costs; lessor and lessee [LO15-5, 15-6,15-8, 15-9]
On January 1, 2013, NRC Credit Corporation leased equipment toBrand Services under a direct financing lease designed to earn NRCa 12% rate of return for providing long-term financing. The leaseagreement specified: |
| a. | Ten annual payments of $55,000 (including executory costs)beginning January 1, 2013, the inception of the lease and eachDecember 31 thereafter through 2021. |
| b. | The estimated useful life of the leased equipment is 10 yearswith no residual value. Its cost to NRC was $316,412. |
| c. | The lease qualifies as a capital lease to Brand. |
| d. | A 10-year service agreement with Quality Maintenance Company wasnegotiated to provide maintenance of the equipment as required.Payments of $5,000 per year are specified, beginning January 1,2013. NRC was to pay this executory cost as incurred, but leasepayments reflect this expenditure. |
| e. | A partial amortization schedule, appropriate for both the lesseeand lessor, follows: |
| Payments | Effective Interest | Decreasein Balance | Outstanding Balance | |
| (12% Ã Outstanding balance) | ||||
| 316,412 | ||||
| 1/1/13 | 50,000 | 50,000 | 266,412 | |
| 12/31/13 | 50,000 | .12 (266,412)= 31,969 | 18,031 | 248,381 |
| 12/31/14 | 50,000 | .12 (248,381)= 29,806 | 20,194 | 228,187 |
| Required: |
Prepare the appropriate entries for both the lessee and lessorto record: |
| 1. | The lease at its inception. (If no entry is required fora particular transaction, select "No journal entry required" in thefirst account field. Enter your answers in wholedollars.) |
| 1. Record lease by lessee. 2. Record the cash payment. 3. Record lease by lessor. 4. Record the cash received. â2. the second lease payment and depreication straight line 1. record the cash payment 2. record depreciation 3. record cash received by lessor |
