Question

Watson Co. entered into a lease arrangement for a truck on 1 April 2012 that had the following terms: The lease payments are $13,500 per year, payable each 1 April for four years. The lease may be renewed at the option of the lessor for a further five years for $3,900 per year. Based on an allocation of the lease payment on relative stand-alone prices, the lease and non-lease components (maintenance) are $12,200 and $1,300 respectively. Expected amounts to be paid under the residual value guarantee is $14,000 at the end of the first lease term and $4,700 at the end of the second lease term. The leased asset has a useful life of ten years and a fair value of $63,800. The interest rate implicit in the lease is 9%. (PV of $1, PVA of $1, and PVAD of $1.) (Use appropriate factor(s) from the tables provided.)

Required:

1-a. Calculate the right-of-use asset. (Round the intermediate and final answer to the nearest whole dollar amount.)

1-b. Record the initial journal entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round intermediate calculations and final answers to the nearest whole dollar amount.)

2. Prepare a lease liability amortization table for only the first four payments. (Round the intermediate and final answers to the nearest whole dollar amount.)

3. List the items that would appear in the lessee’s SCI for the year ended 31 December 2013. (Round the intermediate and final answers to the nearest whole dollar amount.)

4. What is the amount of the total lease liability on the balance sheet on 31 December 2013? Split this amount into the current and long-term portions. (Round the intermediate and final answers to the nearest whole dollar amount.)

Answer 1

1 a)
Present value of Lease Payment = $12,200 x PVAD(9%,4)	$43,082
Present value of Lease Payment  for further 5 years = $3900 x PVAD(9%,5) x PV(9%,4)	$11,714
Present value of Guranteed Residual end of second lease term  = $4,700 x PV(9%,9)	$2,164
Total Right of use asset	$56,960
b)
Account titles	Debit	Credit
Right of use Assets	$      56,960
Maintenance Expense	$        1,300
Cash		$      13,500
Lease liability		$      44,760
2))
Lease  Liability Amortization Schedule
	(a)	(b) Preceding balance of (d) X 3%	(c) (a) minus (b)	(d) Preceding balance minus ©
Payment Period	Annual Lease Payment	Interest (9%) on Unpaid Liability	Reduction of Lease Liability	Lease Liability
April 1 2012	$      12,200		$                         12,200	$                     44,760
April 1 2013	$      12,200	$        4,028	$                           8,172	$                     36,588
April 1 2014	$      12,200	$        3,293	$                           8,907	$                     27,681
April 1 2015	$      12,200	$        2,491	$                           9,709	$                     17,972
3)
Statement of Comphrehensive Income
Depreciation Expenses = ($56,960/9 years)	$6,329
Maintenance Expense	$1,300
Interest Expense = (4028 x 3/12 + 3293 x 9/12)	$3,477
4)
Lease liability
Current portion: (3293 x 9/12) + 8907	$      11,377
Long term portion	$      27,681
Total	$      39,058