Problem 21-5

The following facts pertain to a noncancelable lease agreement between Pearl Leasing Company and McKee Electronics, a lessee, for a computer system.

Inception date October 1, 2017 Lease term 6 years Economic life of leased equipment 6 years Fair value of asset at October 1, 2017 $319,783 Residual value at end of lease term 0 Lessors implicit rate 9 % Lessees incremental borrowing rate 9 % Annual lease payment due at the beginning of each year, beginning with October 1, 2017 $65,400

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs, which amount to $6,100 per year and are to be paid each October 1, beginning October 1, 2017. (This $6,100 is not included in the rental payment of $65,400.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment. The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-financing lease by the lessor.

Annual Lease Interest (996) on Unpaid Reduction of Lease Balance of Lease 10/01/17 10/01/17 10/01/18 10/01/19 10/01/20 10/01/21 10/01/22 Date Payment/Receipt Liability/Receivable Liability/Receivable Liability/Receivable $319,783 254,383 211,877 165,546 115,045 59,999 $65,400 65,400 65,400 65,400 65,400 65,400 $392,400 $22,894 19,069 14,899 10,354 5,401 $72,617 $65,400 42,506 46,331 50,501 55,046 59,999 $319,783 0