E21-3 (Lessee Entries, Finance Lease with Executory Costs and Unguaranteed

Residual Value) Assume that on January 1, 2015, Stora Enso (FIN) signs a 10-year, non-
cancelable lease agreement to lease a storage building from Balesteros Storage
Company. The following information pertains to this lease agreement.

1. The agreement requires equal rental payments of € 90,000 beginning on January 1,

2015.
2. The fair value of the building on January 1, 2015, is € 550,000.
3. The building has an estimated economic life of 12 years, with an unguaranteed
residual value of € 10,000. Stora Enso depreciates similar buildings on the straight-
line method.
4. The lease is non-renewable. At the termination of the lease, the building reverts to
the lessor.
5. Stora Enso’s incremental borrowing rate is 12% per year. It is impracticable to
determine the lessor’s implicit rate.
6. The yearly rental payment includes € 3,088.14 of executory costs related to taxes on
the property.

Instructions

Prepare the journal entries on the lessee’s books to reflect the signing of the lease
agreement and to record the payments and expenses related to this lease for the years
2015 and 2016. Stora Enso’s corporate yearend is December 31.
E21-11 (Amortization Schedule and Journal Entries for Lessee) Demir Leasing Company
signs an agreement on January 1, 2015, to lease equipment to Azure Company. The
following information relates to this agreement.

1. The term of the non-cancelable lease is 5 years with no renewal option. The
equipment has an estimated economic life of 5 years.
2. The fair value of the asset at January 1, 2015, is 90,000.
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 7,000, none of which is guaranteed.
4. Azure Company assumes direct responsibility for all executory costs, which
include the following annual amounts: (1) 900 to Frontier Insurance Company for
insurance and (2) 1,600 for property taxes.
5. The agreement requires equal annual rental payments of 20,541.11 to the lessor,
beginning on January 1, 2015.
6. The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10%
and is known to the lessee.
7. Azure Company uses the straight-line depreciation method for all equipment.
8. Azure uses reversing entries when appropriate.

Instructions

(Round all numbers to two decimal places.)

a) Prepare an amortization schedule that would be suitable for the lessee for the
lease term.
b) Prepare all of the journal entries for the lessee for 2015 and 2016 to record the
lease agreement, the lease payments, and all expenses related to this lease.
Assume the lessee’s annual accounting period ends on December 31.