Question
Flint Co. leases equipment to Buffalo Inc. on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease
Flint Co. leases equipment to Buffalo Inc. on January 1, 2020. The following information relates to the lease agreement.
1. | The term of the lease is 5 years with no renewal option, and the machinery has an estimated economic life of 6 years. | |
2. | The cost of the machinery is $785,000, and the fair value of the asset on January 1, 2020, is $1,180,000. | |
3. | At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $68,000. Buffalo depreciates all of its equipment on a straight-line basis. | |
4. | The lease agreement requires equal annual rental payments, beginning on January 1, 2020. | |
5. | The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. | |
6. | Flint desires a 9% rate of return on its investments. Buffalos incremental borrowing rate is 12%. Flints implicit rate is unknown to Buffalo. |
Assume the accounting period ends on December 31.
A. Determine the nature of this lease for both the lessee and the lessor.
Flint Company : ____________
Buffalo Company: __________
B. Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
Annual Lease Payment: ___________
C. Prepare the journal entries Flint would make in 2020 and 2021. (Round answers to 0 decimal places, e.g. 5,125. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
(5 JEs total)
D. Compute the present value of the lease payments for Buffalo. Buffalo expects the fair value of the equipment to be greater than or equal to $68,000. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.
Present Value of the Lease Payments for Buffalo: _____________ |
E. Prepare the journal entries Buffalo would make in 2020 and 2021 related to the lease arrangement. (Round answers to 0 decimal places, e.g. 5,125. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
(6 JEs Total)
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