Question

Rambler Company leased a machine from Basket Leasing Company. The lease is for 4 years. The...

Rambler Company leased a machine from Basket Leasing Company. The lease is for 4 years. The life of the asset is 5 years. The terms of the lease require 4 payments of $100,000 at the beginning of the year, beginning on January 1, 2017. The lease is non-cancelable. Rambler’s incremental borrowing rate is 8% and does not know Basket’s 6% rate of return. There is a guaranteed residual value of $15,000 at the end of year 4. At the end of year 4, the equipment is worth $12,000. Rambler also assumes property tax expense of $1,000 per year paid to Basket. The lease is a direct financing lease.

On the books of Basket,

Prepare an amortization schedule for the lease receivable.

Record the inception of the lease and receipt of the first payment on January 1, 2017.

Record the last payment in year 4 and the return of the equipment.

Homework Answers

Answer #1

Note: Since the current value of machine is not given, it is assumed to be as $412,000 ($100,000 * 4 + Salvage Value)

Amortization Schedule:

Jan 1st, 2017:

Cash A/C Dr. $100,000 (lease payment received)

Lease Liability A/C Dr. $312,000 (lease payment pending)

To Machine A/C Cr. $412,000 (lmachine value)

Jan 1st, 2020:

Cash A/C Dr. $115,000 (lease payment+ profit on salvage value received)

Lease Liability A/C Dr. $0

To Machine A/C Cr. $112,000 (lmachine value)

To Profit on transfer of machine A/C Cr. $3,000

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