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Q. 21-5E-b

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Intermediate Accounting (Kieso)
Found in: Page 1241

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Short Answer

(Type of Lease; Amortization Schedule) Mike Macinski Leasing Company leases a new machine that has a cost and fair value of $95,000 to Sharrer Corporation on a 3-year noncancelable contract. Sharrer Corporation agrees to assume all risks of normal ownership including such costs as insurance, taxes, and maintenance. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2017. Mike Macinski Leasing Company expects to earn a 9% return on its investment. The annual rentals are payable on each December 31.

Instructions

(b) Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved.

Interest revenue/expense on 12/31/2017 is $8,550

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Step by Step Solution

Meaning of Lease

The term lease is a lawful bilateral agreement between the lessor and the lessee. The lessor is the owner of the asset while the lessee has only rights to use the assets on lease. The lessee pays the lease rent amount according to the lease agreement.

Preparing an amortization schedule both for the lessor and the lessee

Date

Rent Receipt/ Payment

Interest Revenue/ Expense

Reduction of Principal

Receivable/ Liability

1/1/17

-

-

-

$95,000

12/31/17

$37,530

$8,550

$28,980

66,020

12/31/18

37,530

5,942

31,588

34,432

12/31/19

37,530

3,098

34,432

0

Working Notes:-

Calculation of interest revenue/expense on 12/31/2017

Note: There is a rounding difference in interest revenue/expense on 12/31/2019

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