Question

Berne Company (lessor) enters into a lease with Fox Company to lease equipment to Fox beginning January 1, 2016. The lease terms, provisions, and related events are as follows:

1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of $50,000 to be made at the end of each year.

2. The equipment costs $130,000. The equipment has an estimated life of 4 years and an estimated residual value at the end of the lease term of zero.

3. Fox agrees to pay all executory costs.

4. The interest rate implicit in the lease is 12%.

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 Berne’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 Berne, the lessor, for the years 2016 and 2017.

Required:

1.	Next Level Determine if the lease is a sales-type or direct financing lease from Berne’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 Berne, the lessor, for the years 2016 and 2017. Please note the other answers posted are NOT correct. Thank you!

Answer 1

Answer
1	Year	Annual Rental Payments(A)	Present Value Factor @12%(B)	Discounted Annual Rental Payments(C)=(A)*(B)
	1	50000	0.8929	44645
	2	50000	0.7972	39860
	3	50000	0.7118	35590
	4	50000	0.6355	31775
			TOTAL	151870
		Discounted Value of the Annual lease Payment is considered as the Fair Value
		Since this value substantially covers the cost of the equipment, the lease is to be considered as direct financing lease
2	Year	Lease Receivable Oustanding(Opening)(A)	Annual Lease Rental(B)	Interest Revenue (C)=(A)*12%	Lease Rental(Principal Portion) (D)= B-C	Lease Receivable Oustanding(Closing) E=A-D
	1	151870	50000	18224	31776	120094
	2	120094	50000	14411	35589	84505
	3	84505	50000	10141	39859	44646
	4	44646	50000	5354	44646	0
3			Journal Entries
			In the Books of Berne Company
	Date	Particulars	Debit	Credit
	Jan.1,2016	Lease Receivable	151870
		Equipment		151870
		(Equipment given on lease recorded)
	Dec.31,2016	Cash	50000
		Lease Receivable		31776
		Interest Revenue		18224
		(Lease rental received segregated into lease receivable and Interest revenue)
	Dec.31,2016	Interest Revenue	18224
		Income Statement		18224
		(Interest revenue transferred to Income Statement)
	Dec.31,2017	Cash	50000
		Lease Receivable		35589
		Interest Revenue		14411
		(Lease rental received segregated into lease receivable and Interest revenue)
	Dec.31,2017	Interest Revenue	14411
		Income Statement		14411
		(Interest revenue transferred to Income Statement)