Question
1) On October 1, 20X1, Kelly Company leased a boat from Grant Company. The lease is noncancelable and requires five equal annual payments of $50,000
1) On October 1, 20X1, Kelly Company leased a boat from Grant Company. The lease is noncancelable and requires five equal annual payments of $50,000 each. The lease payments are due each October 1, beginning October 1, 20X1. The boat is recorded on Grants books at $207,542, which is equal to its fair value. Grant expects that the boats residual value at the end of the lease term will be $10,000, but it is not guaranteed by Kelly. However, Kelly has an option to purchase the boat for $10,000 at the end of the lease term. At the inception of the lease, the boat has a remaining economic life of six years with a $2,500 estimated salvage value at the end of its life. Both firms use the straight-line method of amortization and have December 31 year-ends for financial reporting purposes. The interest rate used by Grant Company to calculate the annual lease payment is 12%, and known by Kelly. Collection of the lease payments is reasonably predictable by Grant.
Required:
Complete the following table for Grants and Kellys December 31, 20X1 income statements:
| Grant (Lessor) | Kelly (Lessee) |
Sales |
|
|
Interest income |
|
|
Rent revenue |
|
|
Amortization expense |
|
|
Rent expense |
|
|
Interest expense |
|
|
|
Be sure to show and clearly label all calculations.
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