Question

Grant Company leased machinery to Tim Company on July 1, 2015, for a ten-year period expiring June 30, 2025. Equal annual payments under the lease are $150,000 and are due on July 1 of each year. The first payment was made on July 1, 2013. The rate of interest used by Grant and Tim is 9%. The cash selling price of the machinery is $1,050,000 and the cost of the machinery on Grant's accounting records was $930,000. Prepare all of Grant's 2015 journal entries to this lease assuming that it is defined as a sales-type lease.

Answer 1

Interest revenue = Beginning balance of lease receivable* 9%
Reduction in lease receivable = Lease receipt - Interest revenue
Ending balance of lease receivable = Beginning balance of lease receivable - Reduction in lease receivable
Lease amortization table - lessor
Period	Beginning balance of lease receivable	Lease receipt	Interest revenue	Reduction in lease receivable	Ending balance of lease receivable
July 1, 2015	1,050,000	150,000	-	150,000	900,000
July 1, 2016	900,000	150,000	81,000	69,000	831,000

Machinery is goods for Grant Company.
Lessor
Journal entries
Date	General journal	Debit	Credit
July 1, 2015	Lease receivable	1,050,000
	Cost of goods sold (Machinery)	930,000
	Inventory		930,000
	Sales revenue		1,050,000
	(To record lease agreement for sales-type lease.)
July 1, 2015	Cash	150,000
	Lease receivable		150,000
	(To record lease payment.)
Dec 31, 2015	Interest receivable	40,500
	Interest revenue		40,500
	(To record interest revenue accrued on the lease payment.) (July to Dec = 6 Months) (81000*6/12)