Leasing AG agrees to lease equipment to Fat Choi Furniture on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 8 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $1,312,500, and the fair value of the asset on January 1, 2020, is $1,750,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $125,000. Fat Choi Furniture estimates that the expected residual value at the end of the lease term will be $100,000. Fat Choi Furniture amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Fat Choi Furniture's incremental borrowing rate is 6%. Leasing AG desires a 5% rate of return on its investments, and Fat Choi Furniture is aware of it. Both companies consider the lease as finance lease. Required (Assume the accounting period ends on December 31.) a) Calculate the amount of the annual rental payment required. b) Compute the value of the lease liability to Fat Choi Furniture. c) Prepare an 8-year lease amortization schedule for the lessee, Fat Choi Furniture.
Leasing AG agrees to lease equipment to Fat Choi Furniture on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 8 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $1,312,500, and the fair value of the asset on January 1, 2020, is $1,750,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $125,000. Fat Choi Furniture estimates that the expected residual value at the end of the lease term will be $100,000. Fat Choi Furniture amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Fat Choi Furniture's incremental borrowing rate is 6%. Leasing AG desires a 5% rate of return on its investments, and Fat Choi Furniture is aware of it. Both companies consider the lease as finance lease. Required (Assume the accounting period ends on December 31.) a) Calculate the amount of the annual rental payment required. b) Compute the value of the lease liability to Fat Choi Furniture. c) Prepare an 8-year lease amortization schedule for the lessee, Fat Choi Furniture.
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 1E: Determining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a...
Related questions
Question
Transcribed Image Text:Leasing AG agrees to lease equipment to Fat Choi Furniture on January 1, 2020. The following
information relates to the lease agreement.
1. The term of the lease is 8 years with no renewal option, and the machinery has an estimated
economic life of 9 years.
2. The cost of the machinery is $1,312,500, and the fair value of the asset on January 1, 2020, is
$1,750,000.
3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual
value of $125,000. Fat Choi Furniture estimates that the expected residual value at the end
of the lease term will be $100,000. Fat Choi Furniture amortizes all of its leased equipment
on a straight-line basis.
4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020.
5. The collectibility of the lease payments is probable.
6. Fat Choi Furniture's incremental borrowing rate is 6%. Leasing AG desires a 5% rate of
return on its investments, and Fat Choi Furniture is aware of it. Both companies consider the
lease as finance lease.
Required
(Assume the accounting period ends on December 31.)
a) Calculate the amount of the annual rental payment required.
b) Compute the value of the lease liability to Fat Choi Furniture.
c) Prepare an 8-year lease amortization schedule for the lessee, Fat Choi Furniture.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps with 6 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:
9781337788281
Author:
James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:
Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:
9781337788281
Author:
James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:
Cengage Learning