Question

Oriole Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $87,000. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2017. Oriole expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals are payable on each December 31, beginning December 31, 2017.

Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved. (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.)
Date
Rent Receipt/ Payment
Interest Revenue/ Expense
Reduction of Principal
Receivable/ Liability
1/1/17 $
$
$
$
12/31/17
12/31/18
12/31/19
Prepare the journal entry at commencement of the lease for Oriole. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
1/1/17
Prepare the journal entry at commencement of the lease for Sharrer. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
1/1/17
Prepare the journal entry at commencement of the lease for Sharrer, assuming (1) Sharrer does not know Oriole’s implicit rate (Sharrer’s incremental borrowing rate is 9%), and (2) Sharrer incurs initial directs costs of $9,500. (Credit account titles are automatically indented when amount is entered. Do not indent manually. 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.)
Date
Account Titles and Explanation
Debit
Credit
1/1/17

Answer 1

Answer and Explanation:

1. The Preparation of amortization table is shown below:-

Date Rent payment Interest Reduction of Liability

revenue Principal

01.01.2017 $0 $0 $0 $87,000

31.12.2017 $33.759 $6,960 $26,799 $60201

(87,000 × 8%)

31.12.2018 $33.759 $4,816 $28,943 $31,258

(60,201 × 8%)

31.12.2022 $33,759 $2,501 $31,258 $0

(32,258 × 8%)

Working note

The computation of the yearly lease amount is shown below:-

Period Table value PV at 8%

1 0.92593

2 0.85734

3 0.79383

Total 2.57710

Lease rent $33.759

($87,000 ÷ 2.5771)

2. The Journal entry is shown below:-

Lease receivable Dr, $87,000

Cost of goods sold Dr, $65,000

To Sales $87,000

To Inventory $65,000

(Being lease commenced is recorded)

3. The Journal entry is shown below:-

ROU assets Dr, (right of use) $87,000

To lease liability $87,000

(Being ROU assets recognized is recorded)

4. ROU assets Dr, (right of use) $96,500

To lease liability $87,000

To Cash $9,500

(Being ROU assets recognized of direct costs is recorded)