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Lease problems

Question 1

Aquarius Incorporated (AI) uses leases as a method of selling its products. In early 2011, AI completed construction of a passenger ferry for use between Manhattan and Staten Island. On April 1, 2011, the ferry was leased to the Manhattan Ferry Line on a contract specifying that ownership of the ferry will transfer to the lessee at the end of the lease period. Annual lease payments do not include executory costs. Other terms of the agreement are as follows:

Original Cost of the ferry                               $1,500,000

Fair Value of ferry at the lease date                $2,107,102

Lease Payments (paid in advance)                  $225,000

Estimated residual value (unguaranteed)         $78,000

Incremental borrowing rate – lessee                $10%

Date of first lease payment                            April 1, 2011

Lease period                                                    20 years

Required:

  • Compute the amount of financial revenue that will be earned over the lease term and the manufacturer’s profit that will be earned immediately by Aquarius.
  • Give the entry to record the signing of the lease on Aquarius’ books.    
  • Compute the implicit rate of interest on the lease.                                 
  • Give the journal entries necessary on Aquarius’ books to record the lease for the first three years, exclusive of the initial entry. Aquarius has a calendar accounting year.

Indicate the balance of Lease Payments Receivable at December 31, 2013.

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