Assume that the following facts pertain to a non-cancellable lease agreement between Fifth-Third Leasing Company and Bob Evans Farms, a lessee.
Inception date January 1 2014
Annual lease payment due at the beginning of each year, beginning with January 1, 2014 $81,365
Residual value of equipment at end of lease term, guaranteed by the lessee $50,000
Lease term 6 years
Economic life of leased equipment 6 years
Fair value of asset at January 1, 2014 $400,000
Lessor’s implicit rate 12%
Lessee’s incremental borrowing rate 12%
The lessee assumes responsibility for all executor costs, which are expected to amount to $4,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straight-line depreciation method for all equipment.
1. Using the Excel Template spreadsheet below, prepare an amortization schedule that would be suitable for the lessee for the lease term.
2. Prepare the journal entries for the lessee for 2014 and 2015 to record the lease agreement and all expenses related to the lease. Record them clearly in that spreadsheet. Assume the lessee’s annual accounting period ends on December 31 and that reversing entries are used when appropriate.
Bob Evans Farms - Lease Amortization Schedule
Date Lease Payment / Executory Costs / Interest Expense / Reduction of Lease Liability / Balance of Lease Liability
January 1 2014 $400,000
January 1 2214
January 1 2015
January 1 2016
January 1 2017
January 1 2018
January 1 2019
December 31 2019