Various Lease Issues for Lessor and Lessee
Response to the following problem:
Benjamin Company has rented new equipment to Murrell Builders that cost $50,000. This equipment has a life of four years and no residual value at the end of that time. The lease is noncancelable and is signed on January 1, 2010. Murrell Builders assumes all normal risks and executory costs of ownership. The title to the property is transferred to Murrell Builders at the end of the four years. The Benjamin Company computes the rents on the basis of a 14% return. The lessee's incremental borrowing rate is also 14%. The collectibility of rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor.
Required:
1. Assuming the annual rentals are payable at the end of each year, complete the following:
a. Lessor computation of periodic rental receipts.
b. Lessee computation of the present value of the special property rights under the lease.
c. A table summarizing lease and interest payments that would be suitable for both lessor and lessee.
2. Assuming the annual rentals are payable at the start of each year, compute the same three items listed in Requirement 1.
3. Prepare the journal entries for the lessor and lessee for Requirement 2 throughout 2010. Use the straight-line depreciation method.
4. Indicate the asset and liability amounts that the lessor and lessee would report on their balance sheets at December 31, 2010 under Requirement 2.