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Glaus Leasing Company agrees to lease equipment to Jensen Corporation on January 1, 2020. 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 $525,000, and the fair value of the asset on January 1, 2017, is $700,000.
3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $50,000. Jensen estimates that the expected residual value at the end of the lease term will be $50,000. Jensen amortizes all of its leased 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 probable.
6. Glaus desires a 5% rate of return on its investments. Jensen's incremental borrowing rate is 6%, and the lessor's implicit rate is unknown. Instructions (Assume the accounting period ends on December 31.)

Required:
(a) Discuss the nature of this lease for both the lessee and the lessor.
(b) Calculate the amount of the annual rental payment required.
(c) Compute the value of the lease liability to the lessee.
(d) Prepare the journal entries Jensen would make in 2017 and 2018 related to the lease arrangement.
(e) Prepare the journal entries Glaus would make in 2017 and 2018 related to the lease arrangement.
(f) Suppose Jensen expects the residual value at the end of the lease term to be $40,000 but still guarantees a residual of $50,000. Compute the value of the lease liability at lease commencement.

Respuesta :

letmeanswer

Solution:

a. It is a capital lease to Jensen, because the leasing period is more than 75% of the economic existence of the rented asset. The leasing duration is 78% (7-9) of the economic life of the commodity. That is a capital lease to Glaus, since the collectibility of the lease fees is fairly stable, there are no significant surprises regarding the expenses remaining to be borne by the lessor, so there is a lea. If the market valuation ($700,000) of the property equals the expense of the lessor ($525,000), the contract is a sale-type deal.

b. Calculation of annual rental payment:

[tex]\frac{700,000-(100,000X.51316)}{5.35526}[/tex] = $121,130

**Present value of $1 at 10% for 7 periods.

**Present value of an annuity due at 10% for 7 periods

c. Computation of present value of minimum lease payments:

PV of annual payments: $121,130 X 5.23054 =

PV of guaranteed residual value:

$50,000 X   0.48166 = 24,083

**Present value of an annuity due at 11% for 7 periods.

**Present value of $1 at 11% for 7 periods

d. 1/1/14     Leased Equipment................................681,741

                                          Lease Liability...............................681,741

                 Lease Liability.......................................121,130

                                          Cash...............................................121,130

12/31/14         Depreciation Expense..........................  83,106

             Accumulated Depreciation—Capital Leases    

                 ($681,741 – $100,000) ÷ 7                     ..........83,106

                  Interest Expense...................................  61,667

                  Interest Payable    ($681,741 – $121,130) X .11......61,667

1/1/15            Lease Liability.......................................  59,463

                      Interest Payable....................................  61,667

                                              Cash...............................................121,130

12/31/15           Depreciation Expense..........................  83,106

         Accumulated Depreciation - Capital Leases..........................83,106

                  Interest Expense...................................  55,126

e) 1/1/14         Lease Receivable..................................700,000

                                 Cost of Goods Sold..............................525,000

                       Sales Revenue...............................700,000

                                          Inventory........................................525,000

                     Cash.......................................................121,130

                                             Lease Receivable..........................121,130

12/31/14          Interest Receivable...............................  57,887

                 Interest Revenue    [($700,000 – $121,130) X .10]....57,887

1/1/15                Cash.......................................................121,130

                                          Lease Receivable..........................63,243

                         Interest Receivable.......................57,8871

2/31/15           Interest Receivable...............................  51,563

Interest Revenue

($700,000 – $121,130 - $63,243) X .10...............................51,5635

A) The nature of this lease is Capital lease.

B) The amount of the annual rental payment required is $121,130.

C) The computation of present value of minimum lease payments is 24,083.

Glaus Leasing Company

A) The nature of this lease for both the lessee and the lessor is  a capital lease to Jensen, because the leasing period is more than 75% of the economic existence of the rented asset.

B) The calculation of annual rental payment:

[tex]70000-( 100000*0.51316)/ 5.35526[/tex] = $121,130

C) Computation of present value of minimum lease payments:

PV of annual payments: $121,130 X 5.23054 =6,33,509

PV of guaranteed residual value= $50,000 X   0.48166 = 24,083

D) The journal entries are :

Date      Entries                                            Debit                Credit

1/1/14     Leased Equipment                         681,741

                        Lease Liability                                            681,741

 1/1/14    Lease Liability                                   121,130

                        Cash                                                             121,130

12/31/14   Depreciation Expense                    83,106

            Accumulated Depreciation(Capital Leases)    

                ($681,741 – $100,000) ÷ 7                                       83,106

                 Interest Expense                              61,667

                 Interest Payable    ($681,741 – $121,130) X .11            61,667

1/1/15            Lease Liability                                 59,463

                    Interest Payable                            61,667

                             Cash                                                                  121,130

12/31/15           Depreciation Expense                83,106

        Accumulated Depreciation - Capital Leases                       83,106

                 Interest Expense                                55,126

e) 1/1/14         Lease Receivable                         700,000

                                Cost of Goods Sold                                    525,000

                 

12/31/14          Interest Receivable                          57,887

                Interest Revenue    [($700,000 – $121,130) X .10]     57,887

1/1/15                Cash                                                 121,130

                                      Lease Receivable                                63,243

                        Interest Receivable                        57,8871

2/31/15           Interest Receivable                           51,563

                         Interest Revenue

($700,000 – $121,130 - $63,243) X .10                                        51,5635

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