(a) Gothic Corporation (Lessee)
June 30, 2013
Rent expense 40,000 Cash 40,000
December 31, 2013
Rent expense 40,000 Cash 40,000

(b) HardWhere (Lessor)
June 30, 2013
Cash 40,000 Rent revenue 40,000
December 31, 2013
Cash 40,000 Rent revenue 40,000

Depreciation expense ($350,000 ÷ 5 years) 70,000 Accumulated depreciation 70,000

Present Value of Minimum Lease Payments:

($10,000 x 10.78685*) = $107,866 lease present payments value * present value of an annuity due of $1: n=12, i=2% [i = 2% (8% ÷ 4) because the lease calls for quarterly payments]

Requirement 1

Lease Amortization Schedule Lease Effective Decrease Outstanding Payments Interest in Balance Balance 2% x Outstanding Balance 107,866
1 10,000 10,000 97,886
2 10,000 .02 (97,886) = 1,957 8,043 89,823
3 10,000 .02 (89,823) = 1,796 8,204 81,619
4 10,000 .02 (81,619) = 1,632 8,368 73,251
5 10,000 .02 (73,251) = 1,465 8,535 64,716
6 10,000 .02 (64,716) = 1,294 8,706 56,010
7 10,000 .02 (56,010) = 1,120 8,880 47,130
8 10,000 .02 (47,130) = 943 9,057 38,073
9 10,000 .02 (38,073) = 761 9,239 28,834
10 10,000 .02 (28,834) = 577 9,423 19,411
11 10,000 .02 (19,411) = 388 9,612 9,799
12 10,000 .02 (9,799) = 201* 9,799 0 120,000 12,134 107,866 * adjusted for rounding of other numbers in the schedule

January 1, 2013
Leased equipment (calculated above) 107,866 Lease payable (calculated above) 107,866

Lease payable 10,000 Cash (lease payment) 10,000
April 1, 2013
Interest expense (2% x [$107,866 – 10,000]) 1,957
Lease payable (difference) 8,043 Cash (lease payment) 10,000

July 1, 2013
Interest expense (2% x $89,823: from schedule) 1,796
Lease payable (difference) 8,204 Cash (lease payment) 10,000

October 1, 2013
Interest expense (2% x $81,619: from schedule) 1,632
Lease payable (difference) 8368 Cash (lease payment) 10,000

December 31, 2013
Interest expense (2% x $73,251: from schedule) 1,465 Interest payable 1,465

Depreciation expense ($107,866 ÷ 3 years) 35,955 Accumulated depreciation 35,955
January 1, 2014
Interest payable (from adjusting entry) 1,465
Lease payable (difference) 8,535 Cash (lease payment) 10,000

Requirement 2
Lease Amortization Schedule Lease Effective Decrease Outstanding Payments Interest in Balance Balance 2% x Outstanding Balance 107,866
1 10,000 10,000 97,886
2 10,000 .02 (97,886) = 1,957 8,043 89,823
3 10,000 .02 (89,823) = 1,796 8,204 81,619
4 10,000 .02 (81,619) = 1,632 8,368 73,251
5 10,000 .02 (73,251) = 1,465 8,535 64,716
6 10,000 .02 (64,716) = 1,294 8,706 56,010
7 10,000 .02 (56,010) = 1,120 8,880 47,130
8 10,000 .02 (47,130) = 943 9,057 38,073
9 10,000 .02 (38,073) = 761 9,239 28,834
10 10,000 .02 (28,834) = 577 9,423 19,411
11 10,000 .02 (19,411) = 388 9,612 9,799
12 10,000 .02 (9,799) = 201* 9,799 0 120,000 12,134 107,866 * adjusted for rounding of other numbers in the schedule

January 1, 2013
Lease receivable (present value of lease payments) 107,866 Inventory of equipment (lessor’s cost) 107,866

Cash (lease payment) 10,000 Lease receivable 10,000
April 1, 2013
Cash (lease payment) 10,000 Lease receivable (to balance) 8,043 Interest revenue (2% x [$107,866 – 10,000]) 1,957
July 1, 2013
Cash (lease payment) 10,000 Lease receivable (to balance) 8,204 Interest revenue (2% x $89,826: from schedule) 1,796
October 1, 2013
Cash (lease payment) 10,000 Lease receivable (to balance) 8,368 Interest revenue (2% x $81,619: from schedule) 1,632
December 31, 2013
Interest receivable 1,465 Interest revenue (2% x $73,251: from schedule) 1,465
January 1, 2014
Cash (lease payment) 10,000 Lease receivable (to balance) 8,535 Interest receivable (from adjusting entry) 1,465
Requirement 1

Lessor’s Calculation of Lease Payments Amount to be recovered (fair value) $107,866