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.

Homework Answers

Answer #1

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

(Being amount received on lease)

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

(Being installment amount received)

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