Question

Carla Vista Company leases a building to Walsh, Inc. on January 1, 2020. The following facts pertain to the lease agreement.

1. The lease term is 4 years, with equal annual rental payments of $4,429 at the beginning of each year.
2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature.
3. The building has a fair value of $17,500, a book value to Carla Vista of $10,500, and a useful life of 5 years.
4. At the end of the lease term, Carla Vista and Walsh expect there to be an unguaranteed residual value of $2,625.
5. Carla Vista wants to earn a return of 9% on the lease, and collectibility of the payments is probable. This rate is known by Walsh.

(b)Using the original facts of the lease, show the journal entries to be made by both Carla Vista and Walsh in 2020. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Answer 1

Answer & Explanation: Using annuity formula

P = r (PV)/((1-(1+r)^-4)

Where, P = annnual payment; Pv = present value and r = discount rate

4429 = 0.09 (PV)/(1-(1.09)^-4)

4429 × 0.29 = 0.09 (PV)

Pv = 1291.38/0.09 = $14,348.72

Calculate present value of unguaranteed value of $2625 at a discount rate of 9% in year 4. That is 0.71 × 2625 = $1863.75

Add both sums, that is $14348.72 + $1863.75 = $16,212.47

Yearly depreciation = $14348.78/4 = $3587.18

B) To journalise;

In the C's books

1/1/20

Lease receivable from W (debit $16,212.47)

Assets ( credit $16,212.47)

(To record lease receivables)

In the books of W

1/1/20

Assets (debit $14,348.72)

Lease liability (credit $14,348.72)

(To record lease liability)

12/31/20

Depreciation (debit $3587.18)

Assets (credit $3587.18)

(Being depreciation recorded for the period)