Marlin Industries enters into a lease agreement with Anemone Corporation on Janu
ID: 2515492 • Letter: M
Question
Marlin Industries enters into a lease agreement with Anemone Corporation on January 1, 2020 for fishing trawler. As per the agreement, Marlin Industries gets full use of the trawler for 4 years, at which time it will then revert back to Anemone. The trawler has an expected life of 6 years. Marlin’s incremental borrowing rate is 10% and Anemone’s implicit rate of return is 8%. Assume that the expected residual value is $50,000, the fair value of the trawler is $3,500,000 and the trawler cost Anemone $2,000,000 to build.
a. What is the annual lease payment that the lessor will charge on this investment? Assume that the residual value is guaranteed and the lease payments will occur on the first day of the year.
b. Record the required journal entry(ies) for the first year of the lease for the lessor. Date your journal entry(ies).
c. Record the payment on January 1, 2021 for the lessor.
d. What type of lease is this for the lessee? Provide evidence for your answer.
e. Record the first year of journal entry(ies) for the lessee. Date your journal entry(ies).
Explanation / Answer
b. Jouranl Entries-Lessor
C. Payment received by Lessor on 1 Jan 2021:
e. Lesse Entries:
d. THis is sale type lease since this is giving profit to manufacturer/dealer.
a. the amount of the annual Lease payment 3500000-(50000*PV of $1 8% 6 years)/PV of Annuity $1 8% 6 Year 3500000-(50000*0.6806)/4.9927 (3500000-34030)/4.9927 3465970/4.9927 694208 Working.the present value of the minimum lease payments. PV of Minimum Leas Payment 694208*PVAF 6 year 10% 694208*4.7908 3325812 PV of Guaranteed Residual Value 50000*PVF 6 Year 10% 50000*0.5645 28225 PV of minimum Lease payments 3354037