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1166 · Chapter 21 Accounting for Leases

•5 E21-10 (Computation of Rental, Journal Entries for Lessor) Fieval Leasing Company signs an agree-
ment on January 1, 2010, to lease equipment to Reid Company. The following information relates to this
agreement.
1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an
estimated economic life of 6 years.
2. The cost of the asset to the lessor is $343,000. The 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 executory costs.
5. The agreement requires equal annual rental payments, beginning on January 1, 2010.
6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties
surrounding the amount of costs yet to be incurred by the lessor.

Instructions
(Round all numbers to the nearest cent.)
(a) Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the
annual rental payment required. Round to the nearest dollar.
(b) Prepare an amortization schedule that would be suitable for the lessor for the lease term.
(c) Prepare all of the journal entries for the lessor for 2010 and 2011 to record the lease agreement, the
receipt of lease payments, and the recognition of income. Assume the lessor’s annual accounting
period ends on December 31.

•2 E21-11 (Amortization Schedule and Journal Entries for Lessee) Grady Leasing Company signs an
agreement on January 1, 2010, to lease equipment to Azure Company. The following information relates
to this agreement.
1. The term of the noncancelable 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, 2010, 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 to Crawford
County for property taxes.
5. The agreement requires equal annual rental payments of $20,541.11 to the lessor, beginning on
January 1, 2010.
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 the nearest cent.)
(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 2010 and 2011 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.

•3 •4 E21-12 (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
salvage 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.