On January 2, 2017, JenStar leased a $88,000 piece of equipment from Centurion Leasing Limited. The lease
Question:
On January 2, 2017, JenStar leased a $88,000 piece of equipment from Centurion Leasing Limited. The lease had the following terms:
- The initial lease term is 3 years and is non-cancellable with no renewal options.
- Payments are $40,000, due each January 2.
- Payments include $9,500 for maintenance and insurance.
- The equipment has an estimated life of 4 years.
- At the end of the lease term, the asset reverts to the lessor, although it is expected to have a residual value of $3,000 which is guaranteed by JenStar.
- Centurion is a large leasing company specializing in equipment leases.
- Centurion pays the exact amount of the estimated maintenance and insurance costs to a third party each year on January 2.
- JenStar's incremental borrowing rate is 11.50%. The implicit rate is 11%, which is known to JenStar.
- JenStar's uses straight-line depreciation for similar equipment that it owns.
- Collectability of the payments is reasonably predictable and there are no important uncertainties about costs that have not yet been incurred by the lessor.
- Both companies' year-ends are December 31 and they both follow ASPE.
Please make sure your final answer(s) are accurate to 2 decimal places.
a) Calculate the net present value (NPV) of the lease payments.
b) What is the classification of this lease for the lessee?
c) What is the classification of this lease for the lessor?
d) Prepare an amortization schedule with amounts rounded to the nearest cent.
year | payments | Interest | principal | Balance |
2017 | ||||
2017 | ||||
2018 | ||||
2019 | ||||
2019 | ||||
Totals |
e) Prepare journal entries to record the lease in 2017 for the lessor. Enter an appropriate description when entering the transactions in the journal.
f) Prepare journal entries to record the lease in 2017 for the lessee. Enter an appropriate description when entering the transactions in the journal.
g) Calculate the current portion and long-term portions of the long-term lease obligation to be reported on the lessee's balance sheet as at December 31, 2017.
Current portion:
Long-term portion:
Financial Reporting and Analysis
ISBN: 978-1259722653
7th edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer