Sheffield Leasing Company agrees to lease equipment to TamariskCorporation on January 1, 2020. The following information relatesto the lease agreement.
| 1. | | The term of the lease is 7 yearswith no renewal option, and the machinery has an estimated economiclife of 9 years. |
| 2. | | The cost of the machinery is$483,000, and the fair value of the asset on January 1, 2020, is$757,000. |
| 3. | | At the end of the lease term, theasset reverts to the lessor and has a guaranteed residual value of$55,000. Tamarisk estimates that the expected residual value at theend of the lease term will be 55,000. Tamarisk amortizes all of itsleased equipment on a straight-line basis. |
| 4. | | The lease agreement requires equalannual rental payments, beginning on January 1, 2020. |
| 5. | | The collectibility of the leasepayments is probable. |
| 6. | | Sheffield desires a 10% rate ofreturn on its investments. Tamarisk’s incremental borrowing rate is11%, and the lessor’s implicit rate is unknown. |
(Assume the accounting period ends on December 31.)
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Discuss the nature of this lease for both the lessee and thelessor.
This is a _________for Tamarisk.
This is a _________ for Sheffield.
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List of Accounts
Calculate the amount of the annual rental payment required.(Round present value factor calculations to 5 decimalplaces, e.g. 1.25124 and the final answer to 0 decimal places e.g.58,972.)
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List of Accounts
Compute the value of the lease liability to the lessee.(Round present value factor calculations to 5 decimalplaces, e.g. 1.25124 and the final answer to 0 decimal places e.g.58,972.)
| Present value of minimum leasepayments | | $ |
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List of Accounts
Prepare the journal entries Tamarisk would make in 2020 and 2021related to the lease arrangement. (Credit accounttitles are automatically indented when amount is entered. Do notindent manually. If no entry is required, select "No Entry" for theaccount titles and enter 0 for the amounts. Round answers to 0decimal places e.g. 58,972. Record journal entries in the orderpresented in the problem.)
Date | Account Titles and Explanation | Debit | Credit |
1/1/2012/31/201/1/2112/31/21 | | | |
| | | |
| (To record the lease.) | | |
| | | |
| | | |
| (To record lease payment.) | | |
1/1/2012/31/201/1/2112/31/21 | | | |
| | | |
| (To record amortization.) | | |
| | | |
| | | |
| (To record interest.) | | |
1/1/2012/31/201/1/2112/31/21 | | | |
| | | |
1/1/2012/31/201/1/2112/31/21 | | | |
| | | |
| (To record amortization.) | | |
| | | |
| | | |
| (To record interest.) |
