Problem 21-01

The following facts pertain to a non-cancelable lease agreement between Faldo Leasing Company and Pearl Company, a lessee.

Commencement date		January 1,
Annual lease payment due at the beginning of each year, beginning with January 1,		$114,639
Residual value of equipment at end of lease term, guaranteed by the lessee		$53,000
Expected residual value of equipment at end of lease term		$48,000
Lease term		6	years
Economic life of leased equipment		6	years
Fair value of asset at January 1,		$620,000
Lessors implicit rate		7	%
Lessees incremental borrowing rate		7	%

The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line amortization for all leased equipment.

Need help with the below:

1. Prepare all of the journal entries for the lessee for and to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessees annual accounting period ends on December 31.

2. Suppose Pearl received a lease incentive of $5,000 from Faldo Leasing to enter the lease. How would the initial measurement of the lease liability and right-of-use asset be affected?

Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round present value factor calculation places e.g. 5,275.) PEARL COMPANY (Lessee) Lease Amortization Schedule Interest on Reduction of Lease Liability Liability Annual Lease Payment Plus GRV Date 1/1/20 Lease Liability 620,000 D $ 114,639 505,361 426,097 35,375 29,827 1/1/20 1/1/21 1/1/22 1/1/23 1/1/24 1/1/25 12/31/26 23,890 114,639 114,639 114,639 114,639 114,639 53,000 740,834 114,639 79,264 84,812 90,749 97,101 103,899 49,535 620,000 341,285 250,536 153,435 49,536 17,538 10,740 3,465 120,834 Date Account Titles and Explanation Debit Credit (To record the lease.) (To record first lease payment.) (To record interest.) (To record amortization.) (To record second lease payment.) (To record interest.) Right-of-use asset Lease Liability What if Pearl prepaid rent of $5,000 to Faldo? Right-of-use asset Lease Liability