Question

On January 1, 2016, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions:

•	The lease is noncancelable and has a term of 8 years.
•	The annual rentals are $34,500, payable at the beginning of each year.
•	The interest rate implicit in the lease is 11%.
•	Anderson agrees to pay all executory costs and is given an option to buy the equipment for $1 at the end of the lease term, December 31, 2024.
•	The cost of the equipment to the lessor is $137,000, and the fair retail value is approximately $197,100.
•	The lessor incurs no material initial direct costs.
•	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.
•	The lessor estimates that the fair value is expected to be significantly greater than $1 at the end of the lease term.

The lessor calculates that the present value on January 1, 2016 of 8 annual payments in advance of $34,500 discounted at 11% is $197,070.76 (the $1 purchase option is ignored as immaterial).

Required:

1.	Next Level Identify the classification of the lease transaction from Ballieu’s point of view.
2.	Prepare all the journal entries for Ballieu for the years 2016 and 2017.

8

9

Answer 1

1. Next Level Identify the classification of the lease transaction from Ballieu’s point of view.

______________________________________________________________________

2.

Working as follows:

Prepare journal entries as follows:

Date	Account Titles and Explanation	Debit	Credit
Jan. 01, 2016	Lease rent receivable [$34,500 × 8 years]	$276,000
	Sales revenue		$197,070.76
	Unearned interest		$78,929.24
	(To record the lease rent receivable)
Jan. 01, 2016	Lease equipment cost	$137,000
	Merchandise inventory		$137,000
	(To record the lease asset to merchandise)
Jan. 01, 2016	Cash	$34,500
	Lease rent receivables		$34,500
	(To record the cash receivable)
Dec. 31, 2016	Unearned interest revenue	$17,882.78
	Unearned revenue		$17,882.78
	(To record the unearned revenue)
Date	Account Titles and Explanation	Debit	Credit
Jan. 01, 2017	Cash	$34,500
	Lease rent receivable		$34,500
	(To record the cash received)
Dec. 31, 2017	Unearned Interest	$16,054.89
	Unearned revenue		$16,054.89
	(To record the unearned revenue)