Instructions Timmer Company signs a lease agreement dated January 1, 2016, that provides for it to lease equipment from Landau Company beginning January 1, 2016. The lease terms, provisions, and related events are as follows: The lease is noncancelable and has a term of 5 years. 5 The annual rentals are $83,222.92, payable at the end of each year, and provide Landau with a 12% annual rate of return on its net investment. Timmer agrees to pay all executory costs at the end of each year. In 2016, these were insurance, $3,760; property taxes, $5,440. In 2017: insurance, $3,100; property taxes, $5,330. There is no renewal or bargain purchase option. Timmer estimates that the equipment has a fair value of $300,000, an economic life of 5 years, and a zero residual value. Timmer's incremental borrowing rate is 16%, it knows the rate 5 implicit in the lease, and it uses the straightline method to record depreciation on similar equipment. Required: 1. Calculate the amount of the asset and liability of Timmer at the inception of the lease. 2. Prepare a table summarizing the lease payments and interest expense. 3. Prepare journal entries on the books of Timmer for 2016 and 2017. 4. Next Level Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2016. Use the change in present value approach to classify the capital lease obligation between current and noncurrent. ASSETS REVENUE 111 Cash 411 Sales Revenue 121 Accounts Receivable 141 Inventory EXPENSES 152 Prepaid Insurance 500 Cost of Goods Sold 181 Leased Equipment 512 Utilities Expense 189 Accumulated Depreciation 514 Executory Costs 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 252 Capital Lease Obligation 910 Income Tax Expense 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings Prepare journal entries on the books of Timmer for 2016 and 2017. Additional Instructions All transactions on this page must be entered (except for post ref(s)) before you will receive Check My Work feedback. PAGE 2016 PAGE 2017 GENERAL JOURNAL Score: 72/207 DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 2 3 4 5 6 7 8 9 Prepare journal entries on the books of Timmer for 2016 and 2017. Additional Instructions All transactions on this page must be entered (except for post ref(s)) before you will receive Check My Work feedback. PAGE 2016 PAGE 2017 GENERAL JOURNAL Score: 72/207 DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 2 3 4 5 6 7 Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2016. Use the change in present value approach to classify the capital lease obligation between current and noncurrent. Additional Instructions Question not attempted. TIMMER COMPANY Score: 0/12 Balance Sheet (Partial) December 31, 2016 1 Assets 2 Property, Plant, and Equipment: 3 Leased property less accumulated amortization 4 Liabilities 5 Current: 6 Capital lease obligation 7 Noncurrent: 8 Capital lease obligation
