E21-11B (Amortization Schedule and Journal Entries for Lessee) Chemical Financial Corporation signs an agreement on January 1, 2014, to lease equipment to Chells, Inc. The following information relates to this agreement.
1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 7 years.
2. The fair value of the asset at January 1, 2014, is $460,000.
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $20,000, none of which is guaranteed.
4. Chells assumes direct responsibility for all executory costs, which include $2,000 for insurance and $850 for property taxes.
5. The agreement requires equal annual rental payments of $91,637.36 to the lessor, beginning on January 1, 2014.
6. The lessee’s incremental borrowing rate is 10%. The lessor’s implicit rate is 9% and is known to the lessee.
7. Chells uses the straight-line depreciation method for all equipment.
8. Chells uses reversing entries when appropriate.
Instructions
(Round all numbers to the nearest cent.)
(a) Prepare an amortization schedule that would be suitable for the lessee for the lease term.
(b) Prepare all of the journal entries for the lessee for 2014 and 2015 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31