The following facts pertain to a non-cancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee. Commencement date January 1, 2020
Annual lease payment due at the beginning of each year, 113,864
beginning with January 1, 2020$
Residual value of equipment at end of lease term, $50,000
guaranteed by the lessee
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, 2020 $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 2020 and 2021 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?

Explanation:

From the given information:

The PV of the lease payment is as follows:

Lease Payment                                                    113864

No of periods                                                             6

Interest rate per period                                         8.00%

PV annuity due factor at 8% for 6 years            4.99271

PV of lease payment

= 113864 × PV factor for annuity fee                  568490

PV of residual value of $5000 PV factor

at 8% for 6 years = 0.630170                                 3151

PV of minimum lease payments                        571641

The schedule for the lease amortization can be computed as:

                                                   Interest Expense  (B) Reduction    Lease

                                                 =D × interest rate   in liability (C)   liability(D)

                                                                                 = (A) - (B)          =(D) - (C)

Date         Lease Payment (A)  

01-01-2020                                                                                       571641

01-01-2020      113864.00                                        113864            457777

01-01-2021       113864.00         36622                    77242            380535      

01-01-2022      113864.00         30443                    83421             297114

01-01-2023      113864.00         23769                    90095            207019

01-01-2024      113864.00         16562                     97302            109716

01-01-2025      113864.00           8777                     105087             4630

31-01-2025         5000.00           370                         4630                    0

                       Journal Entries  - In lessee Books

01-01-2020             Asset                                        571641  

                               Lease  Liability                                          571641

                             (To record liability)

                             Lease Liability                            113864      

                              Cash                                                             113864

                             (To record lease payments)      

31-Dec-2020        Interest Expense                        36622

                              Lease  Liability                                            36622

                              (To record accrued interest)

                               Amortization Expense             94440

                               Right-to-Use Asset                                     94440

                    To record Amortization Expense

                               (581641 - 5000/6)

01-01-2021             Interest Payable                        36622

                              Lease Liability                             77242

                              Cash                                                           113864

                      To record lease payment

Dec 31, 2021           Interest Expense                     30443

                               Interest Payable                                       30443

                               (To record accrued interest)

                                Amortization  Expense        94440

                                Right-to-Use asset                                    94440

                              To record Amortization

                               Expense (571641 - 5000/6)

Assuming Vance received a lease incentive of $5000;

The initial measurement of lease liability = $571641 - $5000

= $566641

The lease liability will remain the same = $571641

If Vance prepaid rent $5000 to Faldo;

The right to use asset increased by $5000 = $571641 + $5000

= $576641

SInce lease liability remains the same, then we have: $512691

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