Kingbird Leasing Company agrees to lease machinery to OrioleCorporation on January 1, 2017. The following information relatesto the lease agreement.
1. The term of the lease is 7 years with no renewal option, andthe machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $500,000, and the fair value ofthe asset on January 1, 2017, is $659,000. 3. At the end of the lease term, the asset reverts to the lessorand has a guaranteed residual value of $103,000. Oriole depreciatesall of its equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments,beginning on January 1, 2017. 5. The collectibility of the lease payments is reasonablypredictable, and there are no important uncertainties surroundingthe amount of costs yet to be incurred by the lessor. 6. Kingbird desires a 9% rate of return on its investments.Orioleâs incremental borrowing rate is 10%, and the lessorâsimplicit rate is unknown.
(Assume the accounting period ends on December 31.)
a. Calculate the amount of the annual rental paymentrequired.
b. Compute the present value of the minimum lease payments.
c. Prepare the journal entries Oriole would make in 2017 and2018 related to the lease arrangement.
d. Prepare the journal entries Kingbird would make in 2017 and2018.
Kingbird Leasing Company agrees to lease machinery to OrioleCorporation on January 1, 2017. The following information relatesto the lease agreement.
| 1. | The term of the lease is 7 years with no renewal option, andthe machinery has an estimated economic life of 9 years. | |
| 2. | The cost of the machinery is $500,000, and the fair value ofthe asset on January 1, 2017, is $659,000. | |
| 3. | At the end of the lease term, the asset reverts to the lessorand has a guaranteed residual value of $103,000. Oriole depreciatesall of its equipment on a straight-line basis. | |
| 4. | The lease agreement requires equal annual rental payments,beginning on January 1, 2017. | |
| 5. | The collectibility of the lease payments is reasonablypredictable, and there are no important uncertainties surroundingthe amount of costs yet to be incurred by the lessor. | |
| 6. | Kingbird desires a 9% rate of return on its investments.Orioleâs incremental borrowing rate is 10%, and the lessorâsimplicit rate is unknown. |
(Assume the accounting period ends on December 31.)
a. Calculate the amount of the annual rental paymentrequired.
b. Compute the present value of the minimum lease payments.
c. Prepare the journal entries Oriole would make in 2017 and2018 related to the lease arrangement.
d. Prepare the journal entries Kingbird would make in 2017 and2018.
Related questions
| Red Leasing Company agrees to lease machinery to Fisher Corporation on January 1, 2017. The following information relates to the lease agreement. | ||||||||||||||||||||
| The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. | ||||||||||||||||||||
| The cost of the machinery is $473,000, and the fair value of the asset on January 1, 2017, is $746,000. | ||||||||||||||||||||
| At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $91,000. Fisher depreciates all of its equipment on a straight-line basis. | ||||||||||||||||||||
| The lease agreement requires equal annual rental payments, beginning on January 1, 2017. | ||||||||||||||||||||
| The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. | ||||||||||||||||||||
| Red desires a 10% rate of return on its investments. Fisherâs incremental borrowing rate is 11%, and the lessorâs implicit rate is unknown. | ||||||||||||||||||||
| (Assume the accounting period ends on December 31.) | ||||||||||||||||||||
| 1. Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.) | ||||||||||||||||||||
| 2. Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.) | ||||||||||||||||||||
Problem 21-1 Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2014. The following information relates to the lease agreement.
1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2. The cost of the machinery is $475,000, and the fair value of the asset on January 1, 2017, is $681,000.
3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $91,000. Jensen depreciates all of its equipment on a straight-line basis.
4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017.
5. The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. 6. Glaus desires a 9% rate of return on its investments. Jensenâs incremental borrowing rate is 10%, and the lessorâs implicit rate is unknown. Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
Annual rental payment $
Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
Present value of minimum lease payments $
Prepare the journal entries Jensen would make in 2017 and 2018 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 58,971.)
| Date | Account Titles and Explanation | Debit | Credit | |||||
| 1/1/2017 | Leased Asset | $ | ||||||
| Lease Liabilty | $ | |||||||
| (to record the lease) | ||||||||
| Lease Liabilty | $ | |||||||
| Cash | $ | |||||||
| (to record lease payment) | ||||||||
| 12/31/2017 | Depreciation expense | $ | ||||||
| Accumulated depreciation -Capital Lease | $ | |||||||
| (to record depreciation) | ||||||||
| Interest Expense | $ | |||||||
| Interest Payable | $ | |||||||
| (to record interest) | ||||||||
| 1/1/2018 | Lease Liablity | $ | ||||||
| Interest Payable | $ | |||||||
| Cash | $ | |||||||
| 12/31/2018 | Depreciation expense | $ | ||||||
| Accumulated depreciation -Capital Lease | $ | |||||||
| (to record depreciation) | ||||||||
| Interest Expense | $ | |||||||
| Interest Payable | $ | |||||||
| (to record interest) | ||||||||
| (d) | ||||||||
| Date | Account Titles and Explanation | Debit | Credit | |||||
| 1/1/2017 | Lease Receivables | $681,000 | ||||||
| Cost of Goods Sold | $475,000 | |||||||
| Sales | $681000 | |||||||
| Inventory | $475000 | |||||||
| (Sales-type Lease) | ||||||||
| Cash | $ | |||||||
| Lease Receivable | $ | |||||||
| (to record lease payment) | ||||||||
| 12/31/2017 | Interest Receivable | $ | ||||||
| Interest Revenue | $ | |||||||
| 1/1/2018 | Cash | $ | ||||||
| Lease receivable | $ | |||||||
| Interest Receivable | $ | |||||||
| 12/31/2018 | Interest Receivable | $ | ||||||
| Interest Revenue | $ | |||||||
