On January 1, 2020, Lessee Company entered into a lease with Lessor Company for a new equipment. The lease stipulates that annual payments of P1,000,000 will be made for five years startingbDecember 31,2020. Lessee Company guaranteed a residual value of P474,060 at the end of the 5 year period. Th equipment will revert to the lessor at the lease expiration. The omplicit interest rate for the lease is 16% after considering the guaranteed residual value. The economic life of the equipment is 10 years. The present value factors at 16% for five periods are: Present value of 1 0.4761 Present value of an ordinary annuity of 1 3.2743 Required: Prepare a schedule of the annual payments showing reduction of liablity every year. Prepare a journal entries on the bools of Leese Company for 2020 and 2021. Prepare a journal entry on December 31,2024, end of lease term, to record the return of the requirement to the lessor. Assume the fair value of the equipment is equal to the guaranteed residual value. Prepare journal entry on December 31,2024 to record the return of the equipment to the lessor assuming the fair value of the equipment is only P300,000. Prepare journal entry on December 31,2024 to record the return of the equipment to the lessor assuming the fair value of the equipment is P500,000.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 6P: Sales-Type Lease with Unguaranteed Residual Value Lessor Company and Lessee Company enter into a...

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Problem 10-5

On January 1, 2020, Lessee Company entered into a lease with Lessor Company for a new equipment.

The lease stipulates that annual payments of P1,000,000 will be made for five years startingbDecember 31,2020.

Lessee Company guaranteed a residual value of P474,060 at the end of the 5 year period. Th equipment will revert to the lessor at the lease expiration.

The omplicit interest rate for the lease is 16% after considering the guaranteed residual value.

The economic life of the equipment is 10 years. The present value factors at 16% for five periods are:

Present value of 1 0.4761

Present value of an ordinary annuity of 1 3.2743

Required:

Prepare a schedule of the annual payments showing reduction of liablity every year.
Prepare a journal entries on the bools of Leese Company for 2020 and 2021.
Prepare a journal entry on December 31,2024, end of lease term, to record the return of the requirement to the lessor. Assume the fair value of the equipment is equal to the guaranteed residual value.
Prepare journal entry on December 31,2024 to record the return of the equipment to the lessor assuming the fair value of the equipment is only P300,000.
Prepare journal entry on December 31,2024 to record the return of the equipment to the lessor assuming the fair value of the equipment is P500,000.

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