Exercise 21-2 Pat Delaney Company leases an automobile with a fair value of $8,725 from John Simon Motors, Inc., on the following terms.
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Exercise 21-8
The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee.
Inception date: | May 1, 2014 | ||
Annual lease payment due at the beginning of | |||
each year, beginning with May 1, 2014 | $21,227.60 | ||
Bargain-purchase option price at end of lease term | $4,000 | ||
Lease term | 5 | years | |
Economic life of leased equipment | 10 | years | |
Lessor’s cost | $65,000 | ||
Fair value of asset at May 1, 2014 | $91,000 | ||
Lessor’s implicit rate | 10 | % | |
Lessee’s incremental borrowing rate | 10 | % |
The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.
Prepare a lease amortization schedule for Rode Company for the 5-year lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25125 and Round answers to 2 decimal places, e.g. 15.25.)
RODE COMPANY (Lessee) | ||||||||
Date | Annual Lease Payment Plus | Interest on | Reduction of Lease | Lease Liability | ||||
5/1/14 | $ | |||||||
5/1/14 | $ | $ | $ |
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5/1/15 |
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5/1/16 |
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5/1/17 |
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5/1/18 |
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4/30/19 |
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$ | $ | $ | ||||||
Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2014 and 2015. Rode’s annual accounting period ends on December 31. Reversing entries are used by Rode. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and Round answers to 2 decimal places, e.g. 15.25.)
Date | Account Titles and Explanation | Debit | Credit |
5/1/14 |
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(To record the lease.) | |||
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(To record the first lease payment.) | |||
12/31/14 |
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(To To record interest.) | |||
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(To record depreciation.) | |||
1/1/15 |
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5/1/15 |
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12/31/15 |
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(To record interest.) | |||
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(To record depreciation.) |
Exercise 21-13
On January 1, 2014, a machine was purchased for $900,000 by Young Co. The machine is expected to have an 8-year life with no salvage value. It is to be depreciated on a straight-line basis. The machine was leased to St. Leger Inc. on January 1, 2014, at an annual rental of $210,000. Other relevant information is as follows.
1. | The lease term is for 3 years. | |
2. | Young Co. incurred maintenance and other executory costs of $25,000 in 2014 related to this lease. | |
3. | The machine could have been sold by Young Co. for $940,000 instead of leasing it. | |
4. | St. Leger is required to pay a rent security deposit of $35,000 and to prepay the last month’s rent of $17,500. |
(a) How much should Young Co. report as income before income tax on this lease for 2014?
Income before income tax | $ |
(b) What amount should St. Leger Inc. report for rent expense for 2014 on this lease?
Rent expense | $ |
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