The following facts pertain to a non-cancelable lease agreement between Hernandez Leasing Company and Sangsanoy Company, a lessee.
Inception date: 1-May-2018
First payment due date: 1-May-2018
Bargain-purchase option price at end of lease term $5,000.00
Lease term 5 years
Economic life of leased equipment 10 years
Lessor’s cost $63,900.00
Fair value of asset at May 1, 2018 $78,900.00
Lessor’s implicit rate (unknown by the Lessee) 8%
Lessee’s incremental borrowing rate 11%
The collectability of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.
Present value of 1 for 5 periods at 8% 0.68058
Present value of 1 for 5 periods at 11% 0.59345
Present value of annuity for 5 periods at 8% 3.99271
Present value of annuity for 5 periods at 11% 3.69590
Present value of annuity due for 5 periods at 8% 4.31213
Present value of annuity due for 5 periods at 11% 4.10245
Part 1: Calculate the annual lease payments required by Hernandez Leasing Co, given their implicit rate of return.
Part 2: What are the journal entries for the first two years (through Dec. 31, 2019) for both the lessor and lessee?