Question

On January 1, 2019, Joey Co. leased a color copier from Legoria Corp. The color copier...

On January 1, 2019, Joey Co. leased a color copier from Legoria Corp. The color copier had a fair market value of $479,079. The lease agreement specifies annual payments beginning January 1, 2019, the inception of the lease, in the amount of $92,931. The lease term is 6 years and the economic life of the color copier is 7 years. At the end of the 6-year lease term, the Color copier is expected to have a residual value of $60,000, which is guaranteed by the Lessee. The probable residual value is expected to be equal to the guaranteed residual value. Joey Co’s incremental borrowing rate is 10% and Legoria Corp’s implicit rate is unknown by Joey Co.

(1) What type of Lease is this for Joey Co.? Identify all the Lease Criteria that would be used to answer the question. Show support for your answer

(2). Compute the Present value of the Minimum Lease payments [Show support for your answer, if you use calculator, document what you entered the calculator]

(3). Prepare the journal entries for Joey Co. [Lessee] for the period from January 1, 2019 [inception of the lease] through January 1, 2020 [the 2nd Lease payment].

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Answer #1

Answer:

1)

If the lease term of asset is morethan 75% of the economic life of the asset It is a Capital lease.

If the lease term of asset is lessthan 75% of the economic life of the asset It is a Operating lease.

= Lease Term / Economic Life of the asset
=6 years / 7 years
=85.71% > 75%

Therefore it is a Capital Lease

2.)

Year PV @ 10%
0 1
1 0.90909091
2 0.82644628
3 0.7513148
4 0.68301346
5 0.62092132
Cummulative PVIF 4.790787

PV of Minimum Lease Payment
=Installment x PVIFA
=92931*4.7907
=445.213

3.)

Date Particulars Debit ($) Credit ($)
Jan 1 Equipment - Asset leased 445213
Lease payable 445213
Lease payable 92931
Cash 92931
Dec 31 Depreciation (479079-60000)/7 years 20029
Accumulated Depreciation 59868
Interest expenses (479079-(92931*3))*10% 20029
Lease payble 72902
Installment payable 92931
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