Exercise 21-2 Pat Delaney Company leases an automobile with a

Exercise 21-2
Pat Delaney Company leases an automobile with a fair value of $8,725 from John Simon Motors,
Inc., on the following terms.
1. Noncancelable term of 50 months.
2. Rental of $200 per month (at end of each month). (The present value at 1% per month is
$7,840.)
3. Estimated residual value after 50 months is $1,180. (The present value at 1% per month is
$715.) Delaney Company guarantees the residual value of $1,180.
4. Estimated economic life of the automobile is 60 months.
5. Delaney Companys incremental borrowing rate is 12% a year (1% a month). Simons implicit
rate is unknown.

What is the present value of the minimum lease payments?
The present value of the minimum lease payments

$

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(c) Record the lease on Delaney Companys books at the date of inception. (Credit account
titles are automatically indented when amount is entered. Do not indent manually.)
Account Titles and
Explanation

Debit

Credit

(d) Record the first months depreciation on Delaney Companys books (assume straight-line).
(Credit account titles are automatically indented when amount is entered. Do not
indent manually. Round answers to 0 decimal places, e.g. 15.)
Account Titles and

Debit

Credit

Explanation

(e) Record the first months lease payment. (Credit account titles are automatically
indented when amount is entered. Do not indent manually. Round answers to 0
decimal places, e.g. 15.)
Account Titles and
Explanation

Debi Credi
t
t

Exercise 21-4
Castle Leasing Company signs a lease agreement on January 1, 2014, to lease electronic equipment to
Jan Way Company. The term of the noncancelable lease is 2 years, and payments are required at the
end of each year. The following information relates to this agreement:
1.
2.
3.
4.
5.

Jan Way has the option to purchase the equipment for $16,000 upon termination of the lease.
The equipment has a cost and fair value of $160,000 to Castle Leasing Company. The useful
economic life is 2 years, with a salvage value of $16,000.
Jan Way Company is required to pay $5,000 each year to the lessor for executory costs.
Castle Leasing Company desires to earn a return of 10% on its investment.
Collectibility of the payments is reasonably predictable, and there are no important
uncertainties surrounding the costs yet to be incurred by the lessor.

(a) Prepare the journal entries on the books of Castle Leasing to reflect the payments received under
the lease and to recognize income for the years 2014 and 2015. (Credit account titles are
automatically indented when amount is entered. Do not indent manually. Round present
value factor calculations to 5 decimal places, e.g. 0.527552 and the final answers to 0
decimal places e.g. 5,275.)
Date
1/1/14

12/31/14

12/31/15

Account Titles and
Explanation

Debi Credi
t
t

(b) Assuming that Jan Way Company exercises its option to purchase the equipment on December 31,
2015, prepare the journal entry to reflect the sale on Castles books. (Credit account titles are
automatically indented when amount is entered. Do not indent manually. Round present
value factor calculations to 5 decimal places, e.g. 0.527552 and the final answers to 0
decimal places e.g. 5,275.)
Date

Account Titles and
Explanation

Debi Credi
t
t

12/31/15

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Exercise 21-8 (Essay)
The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company
and Rode Company, a lessee.
Inception date:
Annual lease payment due at the beginning of
each year, beginning with May 1, 2014
Bargain-purchase option price at end of lease term
Lease term
Economic life of leased equipment
Lessors cost
Fair value of asset at May 1, 2014
Lessors implicit rate
Lessees incremental borrowing rate

May 1, 2014
$21,227.65
$ 4,000.00
5
10
$65,000.00
$91,000.00
10
10

years
years

%
%

The collectibility of the lease payments is reasonably predictable, and there are no important
uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes
responsibility for all executory costs.

Discuss the nature of this lease to Rode Company.

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Discuss the nature of this lease to Mooney Company.

Exercise 21-8
The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company
and Rode Company, a lessee.
Inception date:
Annual lease payment due at the beginning of
each year, beginning with May 1, 2014
Bargain-purchase option price at end of lease term
Lease term
Economic life of leased equipment
Lessors cost
Fair value of asset at May 1, 2014
Lessors implicit rate
Lessees incremental borrowing rate

May 1, 2014
$21,227.60
$4,000
5
10
$65,000
$91,000
10
10

years
years

%
%

The collectibility of the lease payments is reasonably predictable, and there are no important
uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility
for all executory costs.

Prepare a lease amortization schedule for Rode Company for the 5-year lease term. (Round present
value factor calculations to 5 decimal places, e.g. 1.25125 and Round answers to 2 decimal
places, e.g. 15.25.)

Date

RODE COMPANY (Lessee)
Lease Amortization Schedule
Annual Lease Payment
Reduction of
Interest on
Plus
Lease
Liability
BPO
Liability

$

5/1/14
5/1/14
5/1/15
5/1/16
5/1/17
5/1/18
4/30/19

Lease
Liability

$

$

$

$

$

$

Prepare the journal entries on the lessees books to reflect the signing of the lease agreement and to
record the payments and expenses related to this lease for the years 2014 and 2015. Rodes annual
accounting period ends on December 31. Reversing entries are used by Rode. (Credit account titles
are automatically indented when amount is entered. Do not indent manually. Round
present value factor calculations to 5 decimal places, e.g. 1.25124 and Round answers to 2
decimal places, e.g. 15.25.)
Date

Account Titles and
Explanation

5/1/14

(To record the lease.)

(To record the first lease
payment.)
12/31/14

(To To record interest.)

(To record depreciation.)
1/1/15

5/1/15

12/31/15

(To record interest.)

Debi Credi
t
t

(To record depreciation.)

Exercise 21-13
On January 1, 2014, a machine was purchased for $900,000 by Young Co. The machine is expected to
have an 8-year life with no salvage value. It is to be depreciated on a straight-line basis. The machine
was leased to St. Leger Inc. on January 1, 2014, at an annual rental of $210,000. Other relevant
information is as follows.
1.
2.
3.
4.

The lease term is for 3 years.
Young Co. incurred maintenance and other executory costs of $25,000 in 2014 related to this lease.
The machine could have been sold by Young Co. for $940,000 instead of leasing it.
St. Leger is required to pay a rent security deposit of $35,000 and to prepay the last months rent
of $17,500.

(a) How much should Young Co. report as income before income tax on this lease for 2014?
Income before income tax

$

(b) What amount should St. Leger Inc. report for rent expense for 2014 on this lease?
Rent expense

$

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