Lessor Company Leases Small Computers on Three-Year Leases at the End

question 204

Essay

Lessor Company leases small computers on three-year leases at the end of which the residual value is not material in amount.Rents are collected at year-end.On January 1,2014,Lessor signed a 3-year lease with Lessee Company that called for annual rents of $12,063,which was a return to Lessor of 10% on the $30,000 cost (market value at date of lease).Assume the lease qualifies as a direct financing lease to the lessor and a finance lease to the lessee.There was no bargain purchase option or residual value.The lessee's incremental borrowing rate is 12%.
(a)Complete the following amortization schedule for the lease.
Round to the nearest dollar. * May have slight rounding error.
(b)Can both the lessor and lessee use the amortization schedule values in this instance?
Yes __________________ No ___________________
Explain why _________________________________________________.
(c)Give the entries for the lessor and lessee on the following dates (assume the accounting period ends December 31).Use the abbreviated account titles.

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