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Splish Leasing Company agrees to lease equipment to Blossom Corporation on January 1, 2020. The following information relates to the lease agreement.
| 1. | | The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. |
| 2. | | The cost of the machinery is $514,000, and the fair value of the asset on January 1, 2020, is $677,000. |
| 3. | | At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $55,000. Blossom estimates that the expected residual value at the end of the lease term will be 55,000. Blossom amortizes all of its leased 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 probable. |
| 6. | | Splish desires a 10% rate of return on its investments. Blossoms incremental borrowing rate is 11%, and the lessors implicit rate is unknown. |
(Assume the accounting period ends on December 31.)
View Policies Show Attempt History Current Attempt in Progress Splish Leasing Company agrees to lease equipment to Blossom Corporation on January 1, 2020. The following information relates to the lease agreement. 1. 2. 3. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. The cost of the machinery is $514,000, and the fair value of the asset on January 1, 2020, is $677,000. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $55,000. Blossom estimates that the expected residual value at the end of the lease term will be 55,000. Blossom amortizes all of its leased equipment on a straight-line basis. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. The collectibility of the lease payments is probable. Splish desires a 10% rate of return on its investments. Blossom's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown. 4. 5. 6. (Assume the accounting period ends on December 31.) Your answer is correct. Discuss the nature of this lease for both the lessee and the lessor. This is a finance lease for Blossom. This is a sales-type lease for Splish. e Textbook and Media List of Accounts Your answer is correct. 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. 58,972.) Annual rental payment $ 121147 e Textbook and Media List of Accounts X Your answer is incorrect. Compute the value of the lease liability to the lessee. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,972.) Present value of minimum lease payments $ Prepare the journal entries Blossom would make in 2020 and 2021 related to the lease arrangement. (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 for the amounts. Round answers to O decimal places e.g. 58,972. Record journal entries in the order presented in the problem.) Date Debit Credit Account Titles and Explanation Leased Equipment 1/1/20 Lease Liability (To record the lease.) Lease Liability 121147 12 Cash (To record lease payment.) Depreciation Expense 12/31/20 Accumulated Depreciation-Capital Leases (To record amortization.) Interest Expense Interest Payable (To record interest.) Lease Liability 1/1/21 121147 Cash 12 12/31/21 Depreciation Expense Accumulated Depreciation-Capital Leases (To record amortization.) Interest Expense Interest Payable (To record interest.) Your answer is correct. Prepare the journal entries Splish would make in 2020 and 2021 related to the lease arrangement. (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 O for the amounts. Round answers to O decimal places e.g. 58,972. Record journal entries in the order presented in the problem.) Date Debit Credit Account Titles and Explanation Lease Receivable 1/1/20 677000 Cost of Goods Sold 514000 Sales Revenue 67 51 Inventory (To record the lease.) Cash 1/1/20 121147 12 Lease Receivable (To record lease payment.) Lease Receivable 12/31/20 55585 Interest Revenue 5 1/1/21 Cash 121147 Lease Receivable 12 12/31/21 Lease Receivable 49029 Interest Revenue 4 X Your answer is incorrect. Suppose Blossom expects the residual value at the end of the lease term to be $45,000 but still guarantees a residual of $55,000. Compute the value of the lease liability at lease commencement. Lease liability $ e Textbook and Media List of Accounts
