Question

Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2016. The lease terms, provisions, and related events are as follows:

1.	The lease term is 5 years. The lease is noncancelable and requires annual rental receipts of $100,000 to be made in advance at the beginning of each year.
2.	The equipment costs $313,000. The equipment has an estimated life of 6 years and, at the end of the lease term, has an unguaranteed residual value of $20,000 accruing to the benefit of Edom.
3.	Davis agrees to pay all executory costs.
4.	The interest rate implicit in the lease is 14%.
5.	The initial direct costs are insignificant and assumed to be zero.
6.	The collectibility of the 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.	Next Level Determine if the lease is a sales-type or direct financing lease from Edom’s point of view (calculate the selling price and assume that this is also the fair value).
2.	Prepare a table summarizing the lease receipts and interest revenue earned by the lessor.
3.	Prepare journal entries for Edom, the lessor, for the years 2016 and 2017.
Prepare a table summarizing the lease receipts and interest revenue earned by the lessor.
Edom Company Lease Payments Received and Interest Revenue Earned Summary 2016 - 2020 1 Date Annual Lease Payments Received Interest Revenue at 14% on Net Investment Lease Receivable Unearned Interest: Leases Net Investment 2 January 1, 2016 3 January 1, 2016 4 December 31, 2016 5 January 1, 2017 6 December 31, 2017 7 January 1, 2018 8 December 31, 2018 9 January 1, 2019 10 December 31, 2019 11 January 1, 2020 12 December 31, 2020 General Journal Prepare journal entries for Edom, the lessor, for the year 2016. Additional Instructions PAGE 1 GENERAL JOURNAL DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 2 3 4 5 6 7 8 9 Prepare journal entries for Edom, the lessor, for the year 2017. Additional Instructions PAGE 1 GENERAL JOURNAL DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 2 3 4

Answer 1

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	Part 1
	Selling Price/Fair value		$100,000*3.913712	$                           391,371
	(PVAF, n=5 Years, i=14%)
	Part 2
	Gross Investment		($100,000*5 Years)+$20,000	$                           520,000
	Initial Present value of investment:
	PV of lease payments			$                           391,371
	PV of unguranteed Residual Value		$20,000*0.519369	$                             10,387
	Net Investment/Initial PV			$                           401,759
	Unearned Interest		$520,000-$401,759	$                           118,241
	Sales Price			$                           391,371
	Cost of Goods Sold		$313,000-$10,387	$                           302,613
	Cost of equipment-PV of Unguranteed Residual Value
	Gross Profit		Sales Price-COGS	$                             88,759
Date	Annual Lease payment Received	Interest 14% of	Lease Recievable	Unearned Interest Leases	Net Investment
		Net Investment
Jan 1 2016			$                                 520,000	$                           118,241	$          401,759
Jan 1 2016	$                                              100,000		$                                 420,000		$          301,759
Dec 31 2016		$            42,246		$                             75,995	$          344,005
Jan 1 2017	$                                              100,000		$                                 320,000		$          244,005
Dec 31 2017		$            34,161		$                             41,835	$          278,165
Jan 1 2018	$                                              100,000		$                                 220,000		$          178,165
Dec 31 2018		$            24,943		$                             16,891	$          203,109
Jan 1 2019	$                                              100,000		$                                 120,000		$          103,109
Dec 31 2019		$            14,435		$                               2,456	$          117,544
Jan 1 2020	$                                              100,000		$                                   20,000		$            17,544
Dec 31 2020		$               2,456			$            20,000
	Part 3
Date	Account	Debit	Credit
Jan 1 2016	Lease Receivable	$          520,000
	Cost of goods sold	$          302,613
	Sales		$                                 391,371
	Inventory/Equipment		$                                 313,000
	Unearned Interest on Lease		$                                 118,241
	(To record lease)
Jan 1 2016	Cash	$          100,000
	Lease Receivable		$                                 100,000
	(To record receipt of lease payment)
Dec 31 2016	Unearned Interest Leases	$            42,246
	Interest Revenue-Leases		$                                   42,246
	(To record interest earned)
Jan 1 2017	Cash	$          100,000
	Lease Receivable		$                                 100,000
	(To record receipt of lease payment)
Dec 31 2017	Unearned Interest Leases	$            34,161
	Interest Revenue-Leases		$                                   34,161
	(To record interest earned)