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 $40,500, payable at the beginning of each year.
•	The interest rate implicit in the lease is 13%.
•	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 $155,500, and the fair retail value is approximately $219,600.
•	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 $40,500 discounted at 13% is $219,615.71 (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.

Answer 1

Requirement 1		It is considered as Capital Lease from the Ballieu's point of view.
Requirement 2
	Date	Account Title & Explanation		Debit	Credit
				Amount in $	Amount in $
	January 1, 2016	Lease Receivable		219600
			Gain on lease of equipment		64100
			Leased Asset		155500
		To record the inception of lease
	January 1, 2016	Cash		40500
			Lease Receivable		40500
		To record the first annual Payment of lease
	December 31, 2016	Lease Receivable		23285.04393
			Interest Income		23285.04393
		To record the interest income on lease
	January 1, 2016	Cash		40500
			Lease Receivable		40500
		To record the first annual Payment of lease
	December 31, 2016	Lease Receivable		21047.09964
			Interest Income		21047.09964
		To record the interest income on lease
		Year	Annual Lease Payment	Discount Factor	Lease Receivable	Interest Income
	January 1, 2016	0	40500	1	40500	0
	january 1, 2017	7	40500	0.884955752	35840.70796	4659.292035
		6	40500	0.783146683	31717.44068	8782.559323
		5	40500	0.693050162	28068.53157	12431.46843
		4	40500	0.613318728	24839.40847	15660.59153
		3	40500	0.542759936	21981.77741	18518.22259
		2	40500	0.480318527	19452.90036	21047.09964
		1	40500	0.425060644	17214.95607	23285.04393