Bonita Leasing Company agrees to lease equipment to Windsor Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $559,000, and the fair value of the asset on January 1, 2020, is $724,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Windsor estimates that the expected residual value at the end of the lease term will be 60,000. Windsor amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Bonita desires a 10% rate of return on its investments. Windsor’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown. (Assume the accounting period ends on December 31.) Suppose Windsor expects the residual value at the end of the lease term to be $50,000 but still guarantees a residual of $60,000. Compute the value of the lease liability at lease commencement. Lease liability $

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 2E: Lessee Accounting with Payments Made at Beginning of Year Adden Company signs a lease agreement...

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Bonita Leasing Company agrees to lease equipment to Windsor Corporation on January 1, 2020. The following information relates to the lease agreement.

1.		The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2.		The cost of the machinery is $559,000, and the fair value of the asset on January 1, 2020, is $724,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Windsor estimates that the expected residual value at the end of the lease term will be 60,000. Windsor amortizes all of its leased equipment on a straight-line basis.
4.		The lease agreement requires equal annual rental payments, beginning on January 1, 2020.
5.		The collectibility of the lease payments is probable.
6.		Bonita desires a 10% rate of return on its investments. Windsor’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.

(Assume the accounting period ends on December 31.)

Suppose Windsor expects the residual value at the end of the lease term to be $50,000 but still guarantees a residual of $60,000. Compute the value of the lease liability at lease commencement.

Lease liability

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