3. Exercise 21A-13

b Carla Vista Company leases a building to Walsh, Inc. on January 1, 2017. The following facts pertain to the lease agreement. 1. The lease term is 4 years, with equal annual rental payments of $4,429 at the beginning of each year. 2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. 3. The building has a fair value of $17,500, a book value to Carla Vista of $10,500, and a useful life of 5 years. 4. At the end of the lease term, Carla Vista and Walsh expect there to be an unguaranteed residual value of $2,625. 5. Carla Vista wants to earn a return of 9% on the lease, and collectibility of the payments is probable. This rate is known by Walsh.

(b)

Using the original facts of the lease, show the journal entries to be made by both Carla Vista and Walsh in 2017. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Carla Vista Journal Entries

Date Account Title & Explanation Debit Credit

1/1/17

(To Record the Lease)

(To Record Lease Payment)

Walsh's Journal Entries

Date Account Title & Explanation Debit Credit

1/1/17

(To Record the Lease)

(To Record Lease Liability)

12/31/17

(To Record Interest Expense)

(To Record Amortization of the Right-of-Use Asset)