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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Lessee and Lessor Accounting Issues Diego Leasing Company agrees to provide La Jolla Company with equipment under a noncancelable lease for 5 years. The equipment has a 5-year life, cost Diego $25,000, and will have no residual value when the lease term ends. The fair value of the equipment is $30,000. La Jolla agrees to pay all executory costs ($500 per year) throughout the lease period directly to a third party. On January 1, 2019, the equipment is delivered. Diego expects a 14% return on its net investment. The five equal annual rents are payable in advance starting January 1, 2019.

Required:

  1. 1. Assuming this is a sales-type lease for the Diego and a finance lease for the La Jolla, prepare a table summarizing the lease and interest payments suitable for use by either party.
  2. 2. Next Level On the assumption that both companies adjust and close books each December 31, prepare journal entries relating to the lease for both companies through December 31, 2020, based on data derived in the table. Assume that La Jolla depreciates similar equipment by the straight line method

1.

To determine

Prepare a common table summarizing the lease payments and interest payments.

Explanation

Sale type Lease: In a Sales-Type lease, the lessor sells the asset to the lessee and records a receivable. In this type of lease, the lessor records a dealer’s or manufacturer’s profit or loss depending upon the difference between the fair value of the asset and the carrying value of the asset.

Prepare a common table summarizing the lease payments and interest payments:

Summary Table
Lessee Company (Company L)
 Lease payment requiredInterest at 14% 0n Unpaid ObligationBalance of Lease Obligation
January1,2019  $30,000.00
January1,2019$7,665.36 022,334.64
December 31,2019$0.00 $3,126.85 25,461.49
January1,20207,665.36017,796.13
December 31,202002,491.4620,287.59
January1,20217,665.36012,622.23
December 31,202101,767.1114,389.34
January1,20227,665.3606,723.98
December 31,20220941.387,665.36
January1,20237,665.3600.00
    
Lessor Company (Company D)
DateLease Rental CollectedInterest at 14% on Net InvestmentNet Investment
January1,2019  $30,000.00
January1,2019$7,665.36 022,334.64
December 31,2019$0.00 $3,126.85 25,461.49
January1,20207,665.36017,796.13
December 31,202002,491.4620,287.59
January1,20217,665.36012,622.23
December 31,202101,767.1114,389.34
January1,20227,665.3606,723.98
December 31,20220941.387,665.36
January1,20237,665.3600...

2.

To determine

Prepare journal entries relating to the lease for both Lessor Company and Lessee Company through December 31, 2019.

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