EXERCISE 21-10 (Computation of Rental, Journal Countries for Lessor)

Fieval Leassing Company signs an agreement on January 1,2011, to lease equipment to Reid
Company. The following information relates to the agreement.
1. The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an
estimated economic life og 6 years
2. the cost and fair value of the asset at January 1, 2010, is £343,000
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is
expected to have a residual value of £61,071, none of which is guaranteed
4. Reid Company assumes direct responsibility for all executor costs
5. The agreement requires equal annual rental payments, beginning on January 1, 2010

Instructions

(a) Fair value of leased asset to lessor £343,000.00

Less: Present value of unguaranteed
residual value £61,071 X .56447
(present value of 1 at 10% for 6 periods) 34,472.75
Amount to be recovered through lease payments £308,527.25

Six periodic lease payments £308,527.25 ÷ 4.79079* £ 64,400.00**

*Present value of annuity due of 1 for 6 periods at 10%.

**Rounded to the nearest pound.

(b) FIEVAL LEASING COMPANY (Lessor)

Lease Amortization Schedule
Annual Lease
Interest (10%) on Recovery
Date Payment Plus Lease Receivable
Lease Receivable of Lease Receivable
URV
1/1/10 - - - £343,000
1/1/10 £ 64,400 £ 64,400 278,600
1/1/11 64,400 £ 27,860 36,540 242,060
1/1/12 64,400 24,206 40,194 201,866
1/1/13 64,400 20,187 44,213 157,653
1/1/14 64,400 15,765 48,635 109,018
1/1/15 64,400 10,902 53,498 55,520
12/31/15 61,071 5,551 55,520 0
£447,471 £104,471 £343,000

(c) 1/1/10 Lease Receivable 343,000

Equipment 343,000

1/1/10 Cash 64,400

Lease Receivable 64,400

12/31/10 Interest Receivable 27,860

Interest Revenue 27,860

1/1/11 Cash 64,400

Lease Receivable 36,540
Interest Receivable 27,860

12/31/11 Interest Receivable 24,206

Interest Revenue 24,206
EXERCISE 21-12 (Accounting for an Operating Lease)
On January 1, 2011, Secada Co. leased a building to Ryker Inc. The relevant information related to
the lease is as follows.
1. The lease arrangement is for 10 years
2. The leased building cost €3,600,000 and was purchased for cash on January 1,2011
3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with
no residual value.
4. Lease payments are €220,000 per year and are made at the end of the year
5. Property tax expense of €85,000 and insurance expense of €10,000 on the building were
incurred by Secada in the first year. Payment on these two items was made at the end of the
year.
6. Both the lessor and the lessee are on a calendar-year basis

Intructions
a) Prepare the journal entries that Secada Co. should make in 2011
b) Prepare the journal entries that Ryker Inc. should make in 2011
c) If Secada paid €30,000 to a real estate broker on January 1, 2011, as a fee for finding the lesse,
how much should be reported as an expense for this item in 2011 by Secada Co.?

Solutions
(a) Entries for Secada are as follows:

1/1/11 Building 3,600,000

Cash 3,600,000

12/31/11 Cash 220,000

Rental Revenue 220,000

Depreciation Expense 72,000

Accumulated Depreciation—
Building (€3,600,000 ÷ 50) 72,000

Property Tax Expense 85,000

Insurance Expense 10,000
Cash 95,000

(b) Entries for Ryker are as follows:

12/31/11 Rent Expense 220,000

Cash 220,000

(c) The real estate broker’s fee should be capitalized and amortized equally over the 10-year period. As
a result, real estate fee expense of $3,000 (€30,000 ÷ 10) should be reported in each period.