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, 2020. 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, 2020.b) Prepare amortization schedule suitable for both the lessor and lessee
c) Prepare the journal entry at commencement of the lease for Macinski

d) Prepare the journal entry at commencement of the lease for Sharrer

e) 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

The nature of the lease arrangement is that of a finance lease. the following journal entries will be passed in the books of accounts:

Explanation:

a. This is because Sharrer Corporation (the lesse) will assume the risks of normal ownership. Maintenance is also not provided by the lessor.

Mike Macinski should, thus, use direct financing lease method. Lease receivable will be $95,000 and interest will be recognized annually.

b. Present value interest factor of annuity for 9% and 3 years = 2.531 (from PVIFA tables)

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

Interest will be calculated on the opening balance of principal, at the rate of 9%. Thus, interest for the 1st year will be = 95,000 into 0.09 = $8550.

Principal paud during the year = total amount paid - interest amount. closing principal amount = opening principal - principal amount paid.

Period  Cash due  Interest  Principal              Balance

0                                                          95,000.00

1  37,534.57  8,550.00  28,984.57         66,015.43

2  37,534.57  5,941.39           31,593.18           34,422.25

3  37,534.57  3,112.33          34,422.25            0.00

c. Entry for the signing of the lease agreement:

Fixed assets account (Dr) 95,000

Lease Payable account (Cr) 95,000

Entry on 31st December 2014:

Lease payable account (Dr) 28984.57

Interest account (Dr) 8550

Cash (Cr) 37534.57

Entry on 31st december 2015:

Lease payable account (Dr) 31593.18

Interest account (Dr) 5941.39

Cash (Cr) 37534.57

Entry on 31st december 2016:

Lease payable account (Dr) 34422.25

Interest account (Dr) 3112.33

Cash (Cr) 37534.57