Question

E21-8 (L02,4) EXCEL (Lessor Entries; Sales-Type Lease) Crosley Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2017. The lease is for an 8-year period and requires equal annual payments of $35,004 at the beginning of each year. The first payment is received on January 1, 2017. Crosley had purchased the machine during 2016 for $160,000. Collectibility of lease payments by Crosley is probable. Crosley set the annual rental to ensure a 6% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Crosley at the termination of the lease.

Instructions

(a) Compute the amount of the lease receivable.

(b) Prepare all necessary journal entries for Crosley for 2017.

(c) Suppose the collectibility of the lease payments was not probable for Crosley. Prepare all necessary journal entries for

the company in 2017.

(d) Suppose at the end of the lease term, Crosley receives the asset and determines that it actually has a fair value of $1,000

instead of the anticipated residual value of $0. Record the entry to recognize the receipt of the asset for Crosley at the end of the lease term.

Answer 1

(a)   $35,004 X 6.5824* = $230,410

        *Present value of an annuity due of 1 for 8 periods at 6%.

(b)   1/1/17         Lease Receivable................................      230,410

                            Cost of Goods Sold............................      160,000

                                    Sales Revenue.............................                            230,410

                                    Inventory.......................................                            160,000

        1/1/17         Cash......................................................      35,004

                                    Lease Receivable........................                             35,004

        12/31/17     Interest Receivable.............................      11,724

                                    Interest Revenue.........................                             11,724

                                        [($230,410 – $35,004) X .06]

(c)   1/1/17         Cash......................................................        35,004

                                    Deposit Liability...........................                               35,004

(d)   12/21/24     Inventory...............................................          1,000

                                    Gain on Lease(Residual Value)                                 1,000