The following facts pertain to a non-cancelable lease agreement between Faldo Leasing and Vance plc, a lessee.
Commencement date January 1, 2019
Annual lease payment due at the beginning of each year, beginning with January 1, 2019...................................................................................................£113,864
Residual value of equipment at end of lease term, guaranteed by the lessee..................£50,000
Expected residual value of equipment at end of lease term.....................................£45,000
Lease term...............................................................................................6 years
Economic life of leased equipment...................................................................6 years
Fair value of asset at January 1, 2019............................................................£600,000
Lessor's implicit rate.......................................................................................8%
Lessee's incremental borrowing rate.....................................................................8%
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.
Instructions
a. Prepare an amortization schedule that would be suitable for the lessee for the lease term.
b. Prepare all of the journal entries for the lessee for 2019 and 2020 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee's annual accounting period ends on December 31.
c. Suppose Vance 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? What if Vance prepaid rent of £5,000 to Faldo?