Question
The following facts pertain to a non-cancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system. Commencement date October
The following facts pertain to a non-cancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system.
Commencement date | October 1, 2017 | |||||
Lease term | 6 | years | ||||
Economic life of leased equipment | 6 | years | ||||
Fair value of asset at October 1, 2017 | $ 313,043 | |||||
Book value of asset at October 1, 2017 | $ 280,000 | |||||
Residual value at end of lease term | - | |||||
Lessor's implicit rate | 8% | |||||
Lessee's incremental borrowing rate | 8% | |||||
Annual lease payment due at the beginning of each year, beginning with October 1, 2017 | ||||||
$ 62,700 |
The collectability of the lease payments is probable by the lessor. 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 finance lease by the lessee and as a sales-type lease by the lessor.
Date | Lease Payment / Receipt | Interest (8%) on Unpaid Liability / Receivable | Reduction of Lease Liability / Receivable | Balance of Lease Liability / Receivable |
10/01/17 | $ 313,043 | |||
10/01/17 | $ 62,700 | - | $ 62,700 | 250,343 |
10/01/18 | 62,700 | $ 20,027 | 42,673 | 207,670 |
10/01/19 | 62,700 | $ 16,614 | 46,086 | 161,584 |
10/01/20 | 62,700 | $ 12,927 | 49,773 | 111,811 |
10/01/21 | 62,700 | $ 8,945 | 53,755 | 58,056 |
10/01/22 | 62,700 | 4,644 | 58,056 | 0 |
$ 376,200 | $ 63,157 | $ 313,043 |
a) Assuming the lessee's accounting period ends on September 30, answer the following questions with respect to this lease agreement.
1. What items and amounts will appear on the lessee's income statement for the year ending September 30, 2018?
2. What items and amounts will appear on the lessee's balance sheet at September 30, 2018?
3. What items and amounts will appear on the lessee's income statement for the year ending September 30, 2019?
4. What items and amounts will appear on the lessee's balance sheet at September 30, 2019?
b) Assuming the lessee's accounting period ends on December 31, answer the following questions with respect to this lease agreement.
1. What items and amounts will appear on the lessee's income statement for the year ending December 31, 2017?
2. What items and amounts will appear on the lessee's balance sheet at December 31, 2017?
3. What items and amounts will appear on the lessee's income statement for the year ending December 31, 2018?
4. What items and amounts will appear on the lessee's balance sheet at December 31, 2018?
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