Question

# On 1/1//2018, XYZ leases a machine from Super LeaseCo for two years. The estimated economic life...

On 1/1//2018, XYZ leases a machine from Super LeaseCo for two years. The estimated economic life of the machine is 5 years. At the end of the two-years, XYZ must return the machine to Super LeaseCo. XYZ has agreed to guarantee Super LeaseCo that the residual value at that time will be at least \$4,000. The annual lease payment is \$5,000 per year and are payable at the BEGINNING of each year (assume payments are made on 1/1/18 and 12/31/18). Assume both parties use straight-line depreciation and/or amortization and that the estimated salvage value of the machine after five years is zero.

Super LeaseCo is a financing company and uses an implicit rate of 6% to compute the annual lease payments and the Super LeaseCo paid \$13,277 to purchase the machine. Super LeaseCo believes that it will have no difficulty reselling the used machine for \$4,000.

XYZ’s incremental borrowing rate is also 6% and also estimates that the fair value of the machine is also \$13,277. However, XYZ believes that the expected value of the machine after two years will be only \$3,500 and therefore, expects to pay an additional \$500 under the guarantee.

Required -

Part 1 - Prepare all required journal entries for XYZ and Super LeaseCo for 2018 and 2019. You should assume that the actual value of machine on 12/31/19 was \$3,300 (Round all numbers to the nearest dollar)

Part 2 - Now assume that SuperLeaseCo is an equipment dealer and that the paid only 12,100 for the machine. What entry will SuperLeaseCo record on 1/1/18?

Part 3 - Now assume that the residual value in this problem was not guaranteed by XYZ. Prepare all required journal entries for XYZ and SuperLeaseCo for 2018. Do not do 2019.

Part-1

Journal Entry for XYZ and Super Lease Co for 2018 and 2019

Lease Asset A/c Dr 13277

To Lessor A/c 13277

(Being Leased asset recorded in tht books)

Lessor A/c Dr 5000

To Bank A/c 5000

(Being amount paid to lessor)

In the books of Super Leasing Co

Lessee A/c Dr 13277

To Leased Asset A/c 13277

(Being total lease payments in books)

Bank A/c Dr 5000

To Lessee A/c 5000

Part-2 Lessee a/c (121000*5/100) Dr 605

To Finance income a/c 605

(Being leased asset recorded in books)

Part-3 In the books of XYZ A/c

Bank A/c Dr 3300

Lessor A/c Dr 700

To Leased Asset a/c 4000

(Being asset sold at residual value)

Lessor a/c Dr 5000

To bank a/c 5000

(Being lease payments paid)

In the books of Super lease Co

Bank A/c Dr 5000

To Lessee a/c 5000

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