P21.14 (LO 2, 3, 4) (Lessor Operating Lease) Lewis Machinery Works entered into a lease agreement on January 1, 2022, to provide Garcia SA with a piece of machinery. The terms of the lease agreement were as follows. 1. The lease is to be for 3 years with rental payments of R$10,521 to be made at the beginning of each year. 2. The machinery has a fair value of R$55,000, a book value of R$40,000, and an economic life of 8 years. 3. At the end of the lease term, both parties expect the machinery to have a residual value of R$30,000, none of which is guaranteed. 4. The lease does not transfer ownership at the end of the lease term, and does not have a bargain purchase option, and the asset is not of a specialized nature. 5. Garcia knows that the implicit rate is 6%. 6. Collectibility of the payments is probable. Instructions a. Evaluate the criteria for classification of the lease, and describe the nature of the lease. b. Prepare the amortization schedule Garcia will use over the lease term. c. Prepare the 2022 journal entries for Garcia. d. Prepare the 2022 journal entries for Lewis. e. Suppose the lease were only for 1 year instead of 3 years, with just one lease payment at the beginning of the lease term. Prepare any journal entries Garcia would need, assuming it elects to use the short-term lease option.
P21.14 (LO 2, 3, 4) (Lessor Operating Lease) Lewis Machinery Works entered into a lease agreement on January 1, 2022, to provide Garcia SA with a piece of machinery. The terms of the lease agreement were as follows. 1. The lease is to be for 3 years with rental payments of R$10,521 to be made at the beginning of each year. 2. The machinery has a fair value of R$55,000, a book value of R$40,000, and an economic life of 8 years. 3. At the end of the lease term, both parties expect the machinery to have a residual value of R$30,000, none of which is guaranteed. 4. The lease does not transfer ownership at the end of the lease term, and does not have a bargain purchase option, and the asset is not of a specialized nature. 5. Garcia knows that the implicit rate is 6%. 6. Collectibility of the payments is probable. Instructions a. Evaluate the criteria for classification of the lease, and describe the nature of the lease. b. Prepare the amortization schedule Garcia will use over the lease term. c. Prepare the 2022 journal entries for Garcia. d. Prepare the 2022 journal entries for Lewis. e. Suppose the lease were only for 1 year instead of 3 years, with just one lease payment at the beginning of the lease term. Prepare any journal entries Garcia would need, assuming it elects to use the short-term lease option.
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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P21-14. Please answer c,d,e, and SHOW ALL WORKINGS CLEARLY.
Transcribed Image Text:P21.14 (LO 2, 3, 4) (Lessor Operating Lease) Lewis Machinery Works
entered into a lease agreement on January 1, 2022, to provide Garcia SA with a
piece of machinery. The terms of the lease agreement were as follows.
1. The lease is to be for 3 years with rental payments of R$10,521 to be made at
the beginning of each year.
2. The machinery has a fair value of R$55,000, a book value of R$40,000, and
an economic life of 8 years.
3. At the end of the lease term, both parties expect the machinery to have a
residual value of R$30,000, none of which is guaranteed.
4. The lease does not transfer ownership at the end of the lease term, and does
not have a bargain purchase option, and the asset is not of a specialized
nature.
5. Garcia knows that the implicit rate is 6%.
6. Collectibility of the payments is probable.
Instructions
a. Evaluate the criteria for classification of the lease, and describe the nature of
the lease.
b. Prepare the amortization schedule Garcia will use over the lease term.
c. Prepare the 2022 journal entries for Garcia.
d. Prepare the 2022 journal entries for Lewis.
e. Suppose the lease were only for 1 year instead of 3 years, with just one lease
payment at the beginning of the lease term. Prepare any journal entries
Garcia would need, assuming it elects to use the short-term lease option.
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