Haystack, Inc. manufactures machinery used in the mining industry. On Dec. 31, 2020, it leased equipment with a cost of $400,000 to Silver Point Co. The 4-year lease calls for equal annual payments at the end of each year, with the first payment being on the lease inception date. The lease agreement is non-cancelable.

Its collectibility is probable, and there is no purchase option for Silver Point Co. There is a guaranteed residual value of $20,000, which is more than the expected residual value of the equipment at the end of the lease in the amount of 12,000. The lease contains no renewal options. The machine does not revert to Haystack, Inc. at the termination of the lease.

The equipment has an expected useful life of 5 years. Silver Point’s incremental borrowing rate is 10%, and it depreciates similar equipment using the straight-line method. The selling price of the equipment is $650,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. Given the following PVF:

PVF-AD4,8% = 3.57710 PVF-AD4,10% = 3.48685

PVF-SS4,8% = 0.73503 PVF-SS4,10% = 0.68301

PVF-OA4,8% = 3.31213 PVF-OA4,10% = 3.16986

1. What is this lease to Lessee? Who is the lessee?

2. What is this lease to Lessor?

3. What is the amount Rent that Lessee have to pay every period?

4. What is the PV of the Lease that the Lessee has to book? If the GRV is actually unguaranteed, will this amount calculated be different?

5. What is the PV of the Lease that the Lessor has to book? If the GRV is actually unguaranteed, will this amount calculated be different?

6. For Lessor, on their income statement for 2020, how much is their gross profit from the lease? if the GRV is actually unguaranteed, will this number for GP change?

7. What is the amount of amortization expense that the Lessee has to amortize every EOY?

8. What is the amount of the depreciation expense that the Lessor has to depreciate every year on the machine?

Prepare JE for Lessee:

a. At lease inception:

b. At first lease payment:

c. At EOY 2020: (2 JEs, can be 3)

d. At EOY 2021:

e. At the end of the Lease, if the RV of the machine is $15,000; prepare the journal entry:

f. At the end of the Lease, if the RV of the machine is $10,000; prepare the journal entry:

g. Prepare Lessee’s Amortization Schedule:

Date Annual Rent Interest Exp. Reduction in LL Balance of LL

12/31/2020

12/31/2020

12/31/2021

12/31/2022

12/31/2023

12/31/2023

Prepare JE for Lessor:

a. At lease inception:

b. At lease inception, but the GRV is actually unguaranteed by the lessee:

c. At first lease payment received:

d. At EOY 2020: (2 JEs, or just 1)

e. At EOY 2021:

f. At the end of the Lease, if the FV of the asset is deemed to be $18,000, assume that they get the asset back at the end:

g. At the end of the Lease, if the FV of the asset is deemed to be $22,000, assume that they get the asset back at the end:

Prepare Lessor’s Amortization Schedule:

Date Annual Rent Interest Rev. Reduction in LR Balance of LR

12/31/2020

12/31/2020

12/31/2021

12/31/2022

12/31/2023

12/31/2023