Wednesday, February 17, 2016

On January 1, 2011, Irwin Animation sold a truck to Peete Finance for $33,000 and immediately leased it back. The truck was carried on Irwin’s books at $28,000. The term of the lease is 5 years, and title transfers to Irwin at lease-end. The lease requires five equal rental payments of $8,705 at the end of each year. The appropriate rate of interest is 10%, and the truck has a useful life of 5 years with no salvage value. Prepare Irwin’s 2011 journal entries.

The following facts pertain to a noncollectable 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 ........ $21,227.65
Bargain-purchase option price at end of lease term ...... $ 4,000.00
Lease term ........................ 5 years
Economic life of leased equipment .............. 10 years
Lessor’s cost ..................... $65,000.00
Fair value of asset at May 1, 2014 ............ $91,000.00
Lessor implicit rate .................... 10%
Lessee incremental borrowing rate .............. 10%

The conductibility 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 executor costs.

Instructions
(a) Discuss the nature of this lease to Rode Company.
(b) Discuss the nature of this lease to Mooney Company.
(c) Prepare a lease amortization schedule for Rode Company for the 5-year lease term.
(d) Prepare the journal entries on the lessee 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 annual accounting period ends on December 31. Reversing entries are used by Rode.

1 comment:

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