A lease agreement between Hebert Corporation and Russell Corporation is described in E20-17.
In E The following facts are for a non-cancellable lease agreement between Hebert Corporation and Russell Corporation, a lessee:
Inception dateJuly ..................... 1, 2011
Annual lease payment due at the
beginning of each year, starting July 1, 2011 ...........$20,066.26
Bargain purchase option price at end of lease term ........ $ 4,500.00
Lease term ......................... 5 years
Economic life of leased equipment .............. 10 years
Lessor’s cost ......................$60,000.00
Fair value of asset at July 1, 2011 ...............$88,000.00
Lessor’s implicit rate ................... 9%
Lessee’s incremental borrowing rate .............. 9%
Instructions
Provide the following for Hebert Corporation, the lessor, rounding all numbers to the nearest cent.
(a) Calculate the amount of gross investment at the inception of the lease.
(b) Calculate the amount of net investment at the inception of the lease.
(c) Prepare a lease amortization schedule using a computer spreadsheet for Hebert Corporation for the five-year lease term.
(d) Prepare the journal entries to reflect the signing of the lease and to record the receipts and income related to this lease for the years 2011, 2012, and 2013. The lessor’s accounting period ends on December 31, and Hebert Corporation does not use reversing entries.