Problem 21A-6 b-f

Splish Leasing Company agrees to lease equipment to Blossom Corporation on January 1, 2017. 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 $485,000, and the fair value of the asset on January 1, 2017, is $687,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $107,000. Blossom estimates that the expected residual value at the end of the lease term will be 107,000. 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, 2017.
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.)

Requirement 1: Calculate the amount of the annual rent payment required.

Requirement 2: Calculate the value of the lease liability to the lessee.

Requirement 3: Prepare the journal entries Blossom would make in 2017 and 2018 related to the lease agreement.

Date	Account Titles and Explanation	Debit	Credit
1/1/17
	(To record the lease.)
	(To record lease payment.)
12/31/17
	(To record amortization.)
	(To record interest.)
1/1/18
12/31/18
	(To record amortization.)
	(To record interest.)

Requirement 4: Prepare the journal entries Splish would make in 2017 and 2018 related to the lease agreement.

Date	Account Titles and Explanation	Debit	Credit
1/1/17
	(To record the lease.)
	(To record lease payment.)
12/31/17
1/1/18
12/31/18

Requirement 5: Suppose Blossom expects the residual value at the end of the lease term to be $97,000 but still guarantees a residual of $107,000. Compute the value of the lease liability at lease commencement.