E21.12 (LO 2, 3, 4) (Lessee-Lessor Entries, Sales-Type Lease with Bargain Purchase Option) On January 1, 2022, Bensen Company leased equipment to Flynn Corporation. The following information pertains to this lease. 1. The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $1,000, while the expected residual value at the end of the lease is $5,000. 2. Equal rental payments are due on January 1 of each year, beginning in 2022. 3. The fair value of the equipment on January 1, 2022, is $150,000, and its cost is $120,000. 4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis. 5. Bensen set the annual rental to ensure a 5% rate of return. Flynn's incremental borrowing rate is 6%, and the implicit rate of the lessor is unknown. 6. Collectibility of lease payments by the lessor is probable. Instructions (Both the lessor and the lessee's accounting periods end on December 31.) a. Discuss the nature of this lease for Bensen. b. Calculate the amount of the annual rental payment. c. Prepare all the necessary journal entries for Bensen for 2022. d. Suppose the collectibility of the lease payments was not probable for Bensen. Prepare all necessary journal entries for the company in 2022. e. Prepare all the necessary journal entries for Flynn for 2022. f. Discuss the effect on the journal entry for Flynn at lease commencement, assuming initial direct costs of $2,000 are incurred by Flynn to negotiate the
E21.12 (LO 2, 3, 4) (Lessee-Lessor Entries, Sales-Type Lease with Bargain Purchase Option) On January 1, 2022, Bensen Company leased equipment to Flynn Corporation. The following information pertains to this lease. 1. The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $1,000, while the expected residual value at the end of the lease is $5,000. 2. Equal rental payments are due on January 1 of each year, beginning in 2022. 3. The fair value of the equipment on January 1, 2022, is $150,000, and its cost is $120,000. 4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis. 5. Bensen set the annual rental to ensure a 5% rate of return. Flynn's incremental borrowing rate is 6%, and the implicit rate of the lessor is unknown. 6. Collectibility of lease payments by the lessor is probable. Instructions (Both the lessor and the lessee's accounting periods end on December 31.) a. Discuss the nature of this lease for Bensen. b. Calculate the amount of the annual rental payment. c. Prepare all the necessary journal entries for Bensen for 2022. d. Suppose the collectibility of the lease payments was not probable for Bensen. Prepare all necessary journal entries for the company in 2022. e. Prepare all the necessary journal entries for Flynn for 2022. f. Discuss the effect on the journal entry for Flynn at lease commencement, assuming initial direct costs of $2,000 are incurred by Flynn to negotiate the
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 3E: Lessee Accounting Issues Sax Company signs a lease agreement dated January 1, 2019, that provides...
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Question
E21-12. Please answer part d,e,f and show all workings clearly.
Transcribed Image Text:E21.12 (LO 2, 3, 4) (Lessee-Lessor Entries, Sales-Type Lease with
Bargain Purchase Option) On January 1, 2022, Bensen Company leased
equipment to Flynn Corporation. The following information pertains to this lease.
1. The term of the non-cancelable lease is 6 years. At the end of the lease term,
Flynn has the option to purchase the equipment for $1,000, while the
expected residual value at the end of the lease is $5,000.
2. Equal rental payments are due on January 1 of each year, beginning in 2022.
3. The fair value of the equipment on January 1, 2022, is $150,000, and its cost
is $120,000.
4. The equipment has an economic life of 8 years. Flynn depreciates all
equipment on a straight-line basis.
5. Bensen set the annual rental to ensure a 5% rate of return. Flynn's
incremental borrowing rate is 6%, and the implicit rate of the lessor is
unknown.
6. Collectibility of lease payments by the lessor is probable.
Instructions
(Both the lessor and the lessee's accounting periods end on December 31.)
a. Discuss the nature of this lease for Bensen.
b. Calculate the amount of the annual rental payment.
c. Prepare all the necessary journal entries for Bensen for 2022.
d. Suppose the collectibility of the lease payments was not probable for Bensen.
Prepare all necessary journal entries for the company in 2022.
e. Prepare all the necessary journal entries for Flynn for 2022.
f. Discuss the effect on the journal entry for Flynn at lease commencement,
assuming initial direct costs of $2,000 are incurred by Flynn to negotiate the
lease.
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