On January 1, 2019, a lessor agrees to rent a truck with fair value and carrying value of $145,151 for a period of five years at an annual rental of $34,500 first payable at the commencement date. The truck's residual value is estimated to be $19,500. The interest rate implicit in the lease is 14%, and the lessee cannot readily determine this. The lessee's incremental borrowing rate is 13%. Previous analysis has already concluded that this is a direct financing lease for the lessor.

Requirement a. Compute the lessor's net investment in the lease at initial recognition.

Requirement b. Compute the value of the lessee's ROU asset and lease liability at initial recognition.

Requirement c. Prepare the lessor's journal entries for each of January 1, 2019, December 31, 2019, and January 1, 2020.

Requirement d. Prepare the lessee's journal entries for each of January 1, 2019, December 31, 2019, and January 1, 2020.

Requirement e. Record the lessor's journal entries on January 1,2023,to derecognize the net investment in the lease assuming that the truck's actual residual value is(i)$22,500;(ii)$3,800;or (iii)$35,500.

Requirement f. Record the lessee's journal entries on January 1, 2023, to derecognize the net investment in the lease assuming that the truck's actual residual value is (i) $22,500; (ii) $3,800; or (iii) $35,500.

Requirement g. Prepare the lessee's journal entries for each of January 1,2019, December 31, 2019, and January 1, 2020. Assume that the residual value is not guaranteed.

Transcribed Image Text:

Date Jan. 1 2019 Accounts Net investment in lease (lease receivable) Cash Truck Debit Credit Date Jan. 1 2019 Accounts Net investment in lease (lease receivable) Cash Truck Debit Credit

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Requirement a Compute the lessors net investment in the lease at initial recognition To compute the lessors net investment in the lease at initial recognition we need to consider the present value of ... View the full answer