The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee, for a computer system.

P21-6 The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee, for a computer system.

Inception date: January 1, 2014

Lease term: 6 years

Economic life of lease equipment: 6 years

Fair value of asset at January 1, 2014: $600,000

Residual value of equipment at end of lease term, guaranteed by the lessee $50,000

Lessor's implicit rate: 12%

Lessee's incremental borrowing rate: 12%

Annual lease payment due at the beginning of each year, beginning with January 1, 2014 $124,798

The Lessee assumes responsibility for all executory costs, which are expected to amount to $5,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straight-line depreciation method for all equipment.

Instructions: (Round to whole dollars.)

(a) Prepare an amortization schedule that would be suitable for the lessee for the lease term. The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-finance lease by the lessor.

Date: Annual lease Payment / Receipt: Interest (12%) on Unpaid Liability / Receivable: Reduction of Lease Liability / Receivable: Balance of Lease Liability / Receivable:

10/01/14 600,000.00

10/01/14 124,798.00 124,798.00 475,202.00

10/01/15 124,798.00 57,024.24 67,773.76 407,428.24

10/01/16 124,798.00 48,891.39 75,906.61 331,521.63

10/01/17 124,798.00 39,782.60 85,015.40 246,506.22

10/01/18 124,798.00 29,580.75 95,217.25 151,288.97

10/01/19 124,798.00 -26,490.97 151,288.97 0.00

748,788.00 148,788.00 600,000.00

(b) Prepare all of the journal entries for the lessee for 2014 and 2015 to record the lease agreement, the lease payments, and all expenses related to the lease.  Assume the lessee's annual accounting period ends on December 31 and reversing entries are used when appropriate.

(1) What items and amounts will appear on the lessor's income statement for the year ending September 30, 2015?

(b) Prepare all of the journal entries for the lessee for 2014 and 2015 to record the lease agreement, the lease payments, and all expenses related to the lease.  Assume the lessee's annual accounting period ends on December 31 and reversing entries are used when appropriate.

(1) What items and amounts will appear on the lessor's income statement for the year ending September 30, 2015?
(2) What items and amounts will appear on the lessor's balance sheet at September 30, 2015?
(3) What items and amounts will appear on the lessor's income statement for the year ending September 30, 2016?
(4) What items and amounts will appear on the lessor's balance sheet at September 30, 2016?
                                                                              
Assuming the lessor's accounting period ends on December 31, answer the following questions with respect to this lease agreement:
(1) What items and amounts will appear on the lessor's income statement for the year ending December 31, 2014?
(2) What items and amounts will appear on the lessor's balance sheet at December 31, 2014?
(3) What items and amounts will appear on the lessor's income statement for the year ending December 31, 2015?
(4) What items and amounts will appear on the lessor's balance sheet at December 31, 2015?

TUTORIAL PREVIEW

(2) What items and amounts will appear on the lessor's balance sheet at September 30, 2015?

Current assets:
Lease receivable	$67,774
Interest receivable	$57,024

File name: P21-6 The following facts.xls File type: xls PRICE: $12