On January 1, Lessee Inc. leased equipment at an annual payment of $85,099 payable at the beginning of each year for 4 years. The equipment had a fair value of $400,000, a book value of $375,000, and was commonly purchased or leased by customers. The lessor estimates that the equipment has an estimated useful life of 8 years and an estimated residual value of $125,000, not guaranteed by the lessee. Lessor’s implicit rate is 7.5%, which is unknown to the lessee. The lessee’s incremental borrowing rate is 8%. The lease does not contain a purchase option or a renewal option. The lessee had no other costs associated with this lease. Requireda.Recalculate the lessor's lease payment.• Note: Round answer to the nearest dollar.• Note: Do not use a negative sign with your answer.Lease payment $ 85,099 ✔b. Prepare the entries for the lessor for the year, assuming that the lessor uses the straight-line method to depreciate fixed assets.Account NameCr.DateJan. 1CashDeferred Lease RevenueTo record receipt of lease paymentDec. 31 Deferred Lease RevenueLease RevenueTo record revenueDec. 31 Depreciation ExpenseJan. 1Accumulated DepreciationAccount NameInitial Direct Cost+CashDec. 31 Selling Expense◆Initial Direct Cost◆✓Dr.85,099✔0✔To record depreciationc. If the lessor incurred a commission to secure the acceptance of the lease agreement for $1,000, what entry would be required by the lessor on January 1 and December 31?DateDr.Cr.85,099 ✔0✔◆ ✓♦ ✓x0✔0✓85,099✔0✔85,099 ✔0✔x1,000 ✓0 ✓x0✔d. How would the lease be classified if instead, the lessee guaranteed a residual value of $80,000?Lease classification considering guaranteed residual value Sales-Type Lease0✔1,000 ✓0 ✓x

Lease - In a lease, the owner (also known as the lessor) receives payment from the user (also known…

Answered: essee Inc. leased equipment at an…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On January 1, Lessee Inc. leased equipment at an annual payment of $85,099 payable at the beginning of each year for 4 years. The equipment had a fair value of $400,000, a book value of $375,000, and was commonly purchased or leased by customers. The lessor estimates that the equipment has an estimated useful life of 8 years and an estimated residual value of $125,000, not guaranteed by the lessee. Lessor’s implicit rate is 7.5%, which is unknown to the lessee. The lessee’s incremental borrowing rate is 8%. The lease does not contain a purchase option or a renewal option. The lessee had no other costs associated with this lease.

Required
a.
Recalculate the lessor's lease payment.
• Note: Round answer to the nearest dollar.
• Note: Do not use a negative sign with your answer.
Lease payment $ 85,099 ✔
b. Prepare the entries for the lessor for the year, assuming that the lessor uses the straight-line method to depreciate fixed assets.
Account Name
Cr.
Date
Jan. 1
Cash
Deferred Lease Revenue
To record receipt of lease payment
Dec. 31 Deferred Lease Revenue
Lease Revenue
To record revenue
Dec. 31 Depreciation Expense
Jan. 1
Accumulated Depreciation
Account Name
Initial Direct Cost
+
Cash
Dec. 31 Selling Expense
◆
Initial Direct Cost
◆
✓
Dr.
85,099✔
0✔
To record depreciation
c. If the lessor incurred a commission to secure the acceptance of the lease agreement for $1,000, what entry would be required by the lessor on January 1 and December 31?
Date
Dr.
Cr.
85,099 ✔
0✔
◆ ✓
♦ ✓
x
0✔
0✓
85,099✔
0✔
85,099 ✔
0✔
x
1,000 ✓
0 ✓
x
0✔
d. How would the lease be classified if instead, the lessee guaranteed a residual value of $80,000?
Lease classification considering guaranteed residual value Sales-Type Lease
0✔
1,000 ✓
0 ✓
x

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