Question

Macinski Leasing Company Leases a new machine to Sharrer Corporation. The machine has a cost of $70,000 and fair value of $95,000. Under the 3 year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3 year useful life and no residual value. The lease was signed on January 1, 2017. Macinski expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals are payable on each December 31, beginning December 31, 2017.a) Discuss the nature of the lease agreement and the accounting method that each party to the lease should applyb) Prepare amortization schedule suitable for both the lessor and lesseec) Prepare the journal entry at commencement of the lease for Macinskid) Prepare the journal entry at commencement of the lease for Sharrere) Prepare the journal entry at commencement of the lease for Sharrer, assuming (1) Sharrer does not know Macinski's implicit rate (Sharrer's incremental borrowing rate is 9%), and (2) Sharrer incurs initial direct costs of $10,000.

Answer 1

Answer:

Explanation:

amortization schedule:

Date      Lease PMT    Interest    Principal                   Lease Balance

01.01.17                                                                                    95,000

12.31.17  37,534.57     8550         28,984.57                         66,015.43

12.31.18  37,534.57     5,941.39    31,593.18                           34,422.25

12.31.19  37,534.57     3,112.33     34,422.25                                 0

Present value interest factor of annuity for 9% and 3 years = 2.531

Annual payment will be = 95,000/2.531 = $37,534.57

Interest for the 1st year will be = 95,000*0.09 = $8550

Dr Fixed Asset 95,000

Cr Lease Paybale 95,000

31/12/17

Dr Lease Payable  28,984.57                        

Dr Interest 8550

Cr Cash 37,534.57

31/12/18

Dr Lease Payable  31,593.18                          

Dr Interest 5,941.39    

Cr Cash 37,534.57

31/12/19

Dr Lease Payable  34,422.25                                

Dr Interest 3,112.33    

Cr Cash 37,534.57