Accounting

Assume that the following facts pertain to a non-cancelable lease  agreement between Fifth-Third Leasing Company and Bob Evans Farms, a lessee.

Inception date

1-Jan-14

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 executory 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 an excel spreadsheet, prepare an amortization schedule that would be suitable for the lessee for the lease term.

2. Using the same spreadsheet set up an area for journal entries, 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.