AC 302 WEEK 7 Problem 21 Question 1
Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2014. The following information relates to the lease agreement.
1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2. The cost of the machinery is $508,000, and the fair value of the asset on January 1, 2014, is $781,000.
3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $133,000. Jensen depreciates all of its equipment on a straight-line basis.
4. The lease agreement requires equal annual rental payments, beginning on January 1, 2014.
5. The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
6. Glaus desires a 11% rate of return on its investments. Jensen- incremental borrowing rate is 12%, and the lessor- implicit rate is unknown.
(Assume the accounting period ends on December 31.)
Your answer is correct.
Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
Annual rental payment $
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Your answer is correct.
Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
Present value of minimum lease payments $
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Your answer is partially correct.
Prepare the journal entries Jensen would make in 2014 and 2015 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 58,971.)
Date Account Titles and Explanation Debit Credit
1/1/14
(To record the lease.)
(To record lease payment.)
12/31/14
(To record depreciation.)
(To record interest.)
1/1/15
12/31/15
(To record depreciation.)
(To record interest.)
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Your answer is correct.
Prepare the journal entries Glaus would make in 2014 and 2015. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 58,971.)
Date Account Titles and Explanation Debit Credit
1/1/14
(To record the lease.)
(To record lease payment.)
12/31/14
1/1/15
12/31/15
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Problem 21-1
12/31/14 Accumulated Depreciation-Capital Leases = ($760,774 - $133,000) ÷ 7 = $89,682
Interest Payable = ($760,774 - $137,068) x 0.12 = $74,845
12/31/15 Interest Payable = [($760,774 - $137,068 - $62,223) x 0.12] = $67,378
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