Question

Oriole Company leases a building to Walsh, Inc. on January 1, 2020. The following facts pertain to the lease agreement.

1.		The lease term is 5 years, with equal annual rental payments of $3,508 at the beginning of each year.
2.		Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature.
3.		The building has a fair value of $16,400, a book value to Oriole of $9,400, and a useful life of 6 years.
4.		At the end of the lease term, Oriole and Walsh expect there to be an unguaranteed residual value of $2,350.
5.		Oriole wants to earn a return of 9% on the lease, and collectibility of the payments is probable. This rate is known by Walsh.

Using the original facts of the lease, show the journal entries to be made by both Oriole and Walsh in 2020.

Answer 1

PV of lease payments (Payments made in year 0-4 i.e. 5years) = 3,508 x PVAF(9%,4 years) + 3,508 x 1

= (3,508 x 3.2397) + 3,508 = $14,873

Oriole Journal Entries

1. Jan 1

Lease receivable Dr. 14,873

To buiilding 14,873

2. Jan 1

Cash Dr. 3,508

To Finance Income 3,508

Walsh Journal Entries

1. Jan 1

Right to use asset Dr. 14,873

To lease liablity 14,873

2. Lease liabilty Dr. 3,508

To cash 3,508

3. Interest expense Dr. 1,023

To interest payable 1,023

[14,873 - 3,508] x 9%

4. Depreciation Dr. 2,975

To right to use asset 2,975

[14,873/5]