4. Pr.20-07 Sales-Type Lease with Receipts at End of Year Instructions Lamplighter Company, the lessor, agrees to lease equipment to Tilson Company, the lessee, beginning January 1, 2016. The lease terms, provisions, and related events are as follows: . The lease is noncancelable and has a term of 8 years. . The annual rentals are $32,000, payable at the end of each year. . Tilson agrees to pay all executory costs. . The interest rate implicit in the lease is 14%. . The cost of the equipment to the lessor is $110,000. . The lessor incurs no material initial direct costs. . The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor. . The lessor estimates that the fair value at the end of the lease term will be $20,000 and that the economic life of the equipment is 9 years. Required: 1. Calculate the selling price implied by the lease and prepare a table summarizing the lease receipts and interest revenue earned by the lessor for this sales-type lease. 2. Next Level State why this is a sales-type lease. 3. Prepare journal entries for Lamplighter for the years 2016, 2017, and 2019. 4. Prepare partial balance sheets for Lamplighter for December 31, 2016, and December 31, 2017, showing how the accounts should be disclosed.Balance Sheet Prepare partial balance sheets for Lamplighter for December 31, 2016, and December 31, 2017, showing how the accounts should be disclosed Additional Instructions Round your answers to the nearest cent. Use the present value of next year's payments to determine the current liability portion of the lease obligation. LAMPLIGHTER COMPANY Score: 16/16 Partial Balance Sheet December 31, 2016 and 2017 Assets 2016 2017 2 Current Assets: 3 Net investment in sales-type leases $28,070.18 $28,070.18 Noncurrent Assets: 5 Net investment in sales-type leases $117,148.33 $105,478.92 Points: 4/4Feedback Check My Work When a lessee classifies its capital lease obligation on its balance sheet, it considers the usual criteria for classifying the lease as current or noncurrent. Because GAAP provides no guidelines to measure the respective amounts, a lessee may use two approaches to measure the amount of the current liability: the present value of next year's payments or the change in the present value. 1. Under the present value of next year's payments approach, the amount of the lessee's current liability is the payment(s) the lessee will make in the next year discounted to the balance sheet date. The remaining portion of the obligation (the present value of all future lease payments beyond next year) is classified as a noncurrent liability. 2. The change in present value approach may also be used by a lessee to measure the amount of its current liability. In this approach, the current liability is the amount by which the total balance of the lease liability will decrease in the next year. . The lease is noncancelable and has a term of 8 years. . The annual rentals are $32,000, payable at the end of each year. . The interest rate implicit in the lease is 14%.q **Annual rentals (or rental payments)is $32,000.1 **Present value of-8 years (amounts) in advance at -14%% *Lamplighter Company-has a contract (or stated) interest rate and annual coupon interest rate- (cpa) of-14.0%. -Or, Lamplighter-Company pays-14.0% contract (or-stated) interest rate-and. annual coupon interest rate (cpa). T(Step.1)T [Method #1]1 Now, I must refer to page-M-50-on-Table-4-Present Value of Ordinary Annuity of 1: Pod=- 1 1 of Interest.Tables of Compound Interest Tables of-Chapter-5-The-Income-Statement And-The-Statement-Of-Cash Flows to find value for Present-value interest factor of an Ordinary- Annuity of -1.1TABLE 1 - Present Value of an Ordinary Annuity of 1: po,nji = (1 +i)" i 14.0% 0.877193 1.646661 2.321632 2.913712 3.433081 3.888668 4.288305 4.638864 5 At the intersection of then =-8 periods (e.g., years) column and the 1 = 14% or-14.0% row, we- find a value for the Present-value interest-factor of Ordinary Annuity of-1 is-4.638864.1 "Present value interest factor of Ordinary Annuity of-1 for-8 receipts at-14%, the implicit interest- rate (or interest rate implicit), is-4.638864.1 Present value of the lease payments, also called-Selling price-Formula =Annual rentals (or rental payments)-x-Present-value interest factor of Ordinary Annuity of-19 = Present value of the lease payments (annual lease payments), also called Selling pricef=-$32,000-x-4.6388641 =$148.443.648 Round to the nearest hundredths, so it is $148,443.65. T =-$148,443.651 $148,443.64-is the-Present value of lease payments, also called Fair value of the lease (rental) payments." Present value of the annual rental (lease) payments discounted at 14% is-$148,443.64.T(Step.2)T "*Present value of-8 years (amounts) in advance at-14%, the implicit interest rate (or interest rate. implicit)T . The lessor estimates that the fair value at the end of the lease term will be $20,000 and that the economic life of the equipment is 9 years. TABLE 1 Present Value of 1: Pni = (1 + i )" 7 14.0% 0.877193 2 0.769468 0.674972 4 0.592080 5 0.519369 6 0.455587 7 0.399637 8 0.350559 7 At the intersection of the n = 8 periods column and the i-=-14% or-14.0% row, we find-a value- for the Present-value-interest-factor of-1 is-0.350559.T . The lessor estimates that the fair value at the end of the lease term will be $20,000 and that the economic life of the equipment is 9 years. TTotal-Present value (or-Investment-value, Net investment value) of Annual.Lease Payments. Formula T =-Selling Price + (Residual value-x-Present-value interest factor of-1)] =.Selling Price-+-Present value of the unguaranteed residual value (amount) | =Total-Present value (or-Investment value, Net investment value) of Lease Payments T *Present value of the lease payment (or Present value of the minimum lease payment) is Selling- price.T *Undiscounted amount of the bargain purchase option (the unguaranteed residual value (amount) of the equipment) is-Residual value.T =-$148,443.65+ ($20,000-x-0.350559)1 =$148,443.65+-$7,011.181 =-$155,454.835\f[Method #2]-Present value of a Single-Sum *Refer to-M-9-of Learning Objective-M.3-Compute and use the present value of a single-sum. Of Time-Value of Money-Module of Chapter-5.The-Income-Statement And-The-Statement Of Cash- Flows Present Value of a Single Sum T 1 PV = FV X (1 +i)n 1 PV = $20,000 X (1 + 0.14) 1 PV = $20,000 X (1.14)8 = (1.14)(8) or-1.14$5 =-2.852586421 1 PV = $20,000 X 2.85258642 1 2.85258642=0.3505590557 PV = $20,000 * 0.3505590551 PV =-$7,011.18119 Round to the nearest hundredths, so it is $7, 011.185 PV =$7,011.181 Total-Present value (or-Investment-value, Net investment -value) of Annual Lease Payments. Formula = Selling-Price-+ (Residual value.x-Present-value interest-factor of-1)fCHART OF ACCOUNTS Lamplighter Company General Ledger ASSETS REVENUE 111 Cash 411 Sales Revenue 121 Accounts Receivable 431 Interest Revenue: Leases 122 Lease Receivable 141 Inventory EXPENSES 152 Prepaid Insurance 500 Cost of Asset Leased 181 Equipment 511 Insurance Expense 189 Accumulated Depreciation 512 Utilities Expense 521 Salaries Expense LIABILITIES 532 Bad Debt Expense 211 Accounts Payable 540 Interest Expense 231 Salaries Payable 541 Depreciation Expense 250 Unearned Interest 559 Miscellaneous Expenses 261 Income Taxes Payable 910 Income Tax Expense=-Selling Price-+-Present value of the unguaranteed residual value (amount) =.Total-Present value (or-Fair value, .Investment-value, -Net-investment-value) of-Lease-Payments- (or Annual-Lease Payments) T *Present value of the lease payment (or Present value of the minimum lease payment) is Selling- price. I *Undiscounted amount of the-bargain purchase option (the unguaranteed residual value (amount) of the equipment) is-Residual value. f =$148,443.65+ ($20,000-x-0.350559)1 =$148,443.65+-$7,011.189 =-$155.454.831 *$155,454.83 -is the-Total-Present value (or-Fair value, .Investment value, Net investment-value). of Lease Payments on January-1, -2016.1 *The cost and fair value of the equipment is $155,454.83-on January-1, -2016.TEQUITY 311 Common Stock 331 Retained Earnings Analysis Calculate the selling price implied by the lease. Additional Instruction Round your computations and final answer to the nearest cent. $148,443.65 K Points: 1/1LAMPLIGHTER COMPANY Score: 117/117 Lease Payments Received and Interest Revenue Eamed Summary 2016 - 2023 Interest Revenue Lease Payment Reduction of Net Unearned Date at 14% on Net Lease Receivable Net Investment Received Investment Interest: Leases Investment 2 January 1. 2016 $276,000.00 $120.545.17 $155.454.83 December 31. 2016 $32.000.00 $21.763.68 $10.236.32 244,000.00 98.781.49 145.218.51 December 31. 2017 32.000.00 20.330.59 11.669.41 212.000.00 78.450.90 133.549.10 5 December 31, 2018 32,000.00 18.696.87 13.303.13 180.000.00 59.754.03 120.245.97 December 31. 2019 32,000.00 16.834.44 15.165.56 148,000.00 42.919.59 105.060.41 7 December 31. 2020 32,000.00 14,711.26 17.288.74 116,000.00 28.208.33 87.791.67 December 31. 2021 32,000.00 12.290.83 19.709.17 84,000.00 15.917.50 68.082.50 December 31. 2022 32,000.00 9.531.55 22.468.45 52,000.00 6.385.95 45.614.05 10 December 31. 2023 32,000.00 6.385.95 25.614.05 20,000.00 0.00 20.000.00 Points: 51 / 51Feedback Check My Work The lease receivable or gross investment is defined as the sum of the undiscounted minimum lease payments plus and unguaranteed residual value. The Unearned Interest Leases amount is the difference between the lease receivable (or gross investment in the lease) and the sum of the present value of the minimum lease payments and the present value of the unguaranteed residual value (or net investment).Next Level State why this is a sales-type lease. This is a sales-type lease for Lamplighter Company because: I There is a dealer profit. Il This lease meets all of the Group I (capitalization) criteria. Ill This lease meets at least one of the Group II (recognition) criteria for classification of a sales-type lease. I only. Points: 1/1General Journal Prepare journal entries for Lamplighter for the years 2016, 2017, and 2019. Additional Instructions id 2019. Additional Instructions Record your entries on the page that matches the year. For ex. December 31 2016 should be recorded on page 2016. Scare: 219/219 Round your answers to the nearest cent. CREDIT Equipment held for lease is classified as Inventory on the company's books. 32,000.00PAGE 2016 PAGE 2017 PAGE 2019 GENERAL JOURNAL Score: 219/219 DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT Jan. 1 Lease Receivable 276,000.00 Cost of Asset Leased 102.988.82 Sales Revenue 148,443.65 Unearned Interest 120.545.17 Inventory 110,000.00 Dec. 31 Cash 32,000.00 Lease Receivable 32,000.00 Dec. 31 Unearned Interest 21,763.68 Interest Revenue: Leases 21,763.68 PAGE 2016 PAGE 2017 PAGE 2019 GENERAL JOURNAL Score: 219/219 DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 Dec. 31 Cash 32,000.00 Lease Receivable 32,000.00 Dec. 31 Unearned Interest 20.330.59 Interest Revenue: Leases 20,330.59PAGE 2016 PAGE 2017 PAGE 2019 GENERAL JOURNAL Score: 219/219 DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 Dec. 31 Cash 32,000.00 Lease Receivable 32,000.00 Dec. 31 Unearned Interest 16.834.44 Interest Revenue: Leases 16,834.44 Points: 41 / 41 Feedback Check My Work Use the Lease Payments Received and Interest Revenue Earned Summary to determine amounts for entries