Question

Crane Incorporated leases a piece of machinery to Blue Company on January 1, 2020, under the...

Crane Incorporated leases a piece of machinery to Blue Company on January 1, 2020, under the following terms.

1. The lease is to be for 4 years with rental payments of $13,046 to be made at the beginning of each year.
2. The machinery’ has a fair value of $68,934, a book value of $51,440, and an economic life of 10 years.
3. At the end of the lease term, both parties expect the machinery to have a residual value of $25,720. To protect against a large loss, Crane requests Blue to guarantee $18,040 of the residual value, which Irving agrees to do.
4. The lease does not transfer ownership at the end of the lease term, does not have any bargain purchase options, and the asset is not of a specialized nature.
5. The implicit rate is 5%, which is known by Blue.
6. Collectibility of the payments is probable.

Suppose Blue did not guarantee any amount of the expected residual value. Prepare the journal entries for Blue for the year 2020.

Suppose Blue did not guarantee any amount of the expected residual value. Prepare the journal entries for Crane for the year 2020

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Answer #1

Suppose Blue did not guarantee any amount of the expected residual value. Prepare the journal entries for Blue for the year 2020.

Lease Liability
PV of Lease Payments
Lease Payment 13046
No of periods 4
Interest rate per period 5.00%
PV annuity due Factor @ 5% for 4 years 3.72325
PV of Lease Payments (13046* PV factor for annuity due) 48573
₹ 0.00
PV of Minimum Lease Payments 48573
Lease Amortisation Schedule
Date Lease Payment Interest Expense Reduction in Liability Lease Liability
01-01-2020 48573
01-01-2020 13046.00 13046 35527
01-01-2021 13046.00 1776 11270 24258
01-01-2022 13046.00 1213 11833 12425
01-01-2023 13046.00 621 12425 0
Journal Entries - In Lessee Books
Jan 01 2020 Right to use Asset 48573
    Lease Liability 48573
(To record Liability)
Lease Liability 13046.00
   Cash 13046.00
(To record lease payments)
31-Dec-20 Interest Expense 1776
    Interest Payable 1776
( To record accrued interest)
Depreciation Expense 12143
Accumulated Depreciation - Right-to- Use Asset 12143
(To record Depreciation Expense = (48573)/4

Suppose Blue did not guarantee any amount of the expected residual value. Prepare the journal entries for Crane for the year 2020

Here we will consider the amount guaranteed by Irving $18040

Lease Liability
PV of Lease Payments
Lease Payment 13046
No of periods 4
Interest rate per period 5.00%
PV annuity due Factor @ 5% for 4 years 3.72325
PV of Lease Payments (13046* PV factor for annuity due) 48573
PV of Residual Value of $18040 PV factor @ 5% for 4 years = .822702) ₹ 14,841.55
PV of Minimum Lease Payments 63415
Journal Entries - In the Books of Lessor
01-Jan-20 Lease Receivable 63415
   Machinery 63415
( To record the inception of lease)
Cash 13046
   Lease Receivable 13046

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