Question

The Bobo Company leased equipment from Bolinger Industries on January 1, 2018. Bolinger purchased the equipment at a cost of $270,000.

Other information:

Lease term	3 years
Annual payments	$120,000 beginning Jan. 1, 2018
Life of asset	3 years
Implicit interest rate	8%
Lessee's incremental rate	8%
Present value of an ordinary annuity of $1, i = 8, n = 3	2.5771
Present value of an annuity due of $1, i = 8, n = 3	2.7833

Required:

Round your answers to the nearest whole dollar amounts.

1. Calculate the amount of selling profit that Bolinger would recognize in this sales-type lease. Round to nearest dollar. Show calculations.

2. Prepare the appropriate journal entries for Bolinger on January 1, 2018. Round to nearest dollar. Show calculations.

Answer 1

1	The Annual Lease payments which is received from Bobo company is a Sales Revenue for Bollinger company
	Also the Equipment purchased by Bollinger co. is Cost of Goods sold for Bollinger company.
	So Selling profit will be the difference between the PV of annuity of annual Lease payment - Cost of Goods sold
	Sales Revenue($120,000*2.7833)	$3,33,996
	Cost of Goods Sold(Purchase price of Equipment)	2,70,000
	Selling Profit	$63,996
2	Journal Entries in Books of Bollinger co.
Date	Description	Debit	Credit
Jan 1,2006	Lease Receivable($120,000*3)	3,60,000
	Cost of Goods sold	2,70,000
	Unearned Interest revenue		26,004
	Sales Revenue		3,33,996
	Equipment Inventory		2,70,000
	(Lease agreement entered upon and Sales and interest revenue recognized)
Jan 1,2006	Cash	1,20,000
	Lease Receivable		1,20,000
	(Annual Lease payment received)
	Unearned Interest Revenue = Lease payment received - PV of Annual Lease Payment
	Unearned Interest revenue = $360,000 - $333,996 = $26,004