SIMULATION6

Chapter 21

Assume that LR, Inc., the lessor, paid $5,600 for an automobile that has a fair value of $5,600 and an estimated economic life of five years.

LR, Inc. leases the automobile to LE, Inc. for a fixed noncancelable term of 5 years beginning January 1, 2013, with rentals of $1232 due at the beginning of each year.

The following additional information is also available:

Residual value of the automobile at the end of the lease is expected to be zero and LE, Inc. makes no related guarantee.

LE, Inc. pays the normal expenses of maintenance and taxes which are not part of the lease payments.

LE, Inc. depreciates its own automobiles on a straight-line basis.

LE, Inc. has an incremental borrowing rate of 5% per year and this is the implicit interest rate assumed in the lease.

LR, Inc. expects to receive all the lease payments from LE, Inc. and has no material cost uncertainties.

REQUIRED:

Assuming a present value of 4.545455 where applicable, prepare for the lessor and lessee:

Journal entries for year 2013 and 2014.

A lease amortization table to be used by the lessor and lessee for 2013 & 2014.

Balance Sheet presentation for 2013 for lessor and lessee.