Lessee Accounting Issues

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.
	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. Timmers incremental borrowing rate is 16%, it knows the rate 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.

Analysis

Calculate the amount of the asset and liability of Timmer at the inception of the lease. Additional Instruction

Prepare a table summarizing the lease payments and interest expense. Additional Instructions

TIMMER COMPANY

Lease Payments and Interest Expense Summary

2016 - 2020

1	Date	Lease Payment Required	Interest Expense at 12% on Obligation Balance	Reduction of Lease Obligation	Balance of Lease Obligation
2	January 1, 2016
3	December 31, 2016
4	December 31, 2017
5	December 31, 2018
6	December 31, 2019
7	December 31, 2020

General Journal

Prepare journal entries on the books of Timmer for 2016 and 2017. Additional Instructions

PAGE 2016PAGE 2017

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9

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. Additional Instructions

TIMMER COMPANY

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