In: Accounting
3. (LESSOR ENTRIES FOR FINANCING LEASE WITH A GUARANTEED RESIDUAL)
The following facts pertain to a non-cancelable lease agreement between Ace Leasing Company and King Company, a lessee.
Commencement of Lease Date January 1, 2020
Annual lease payment due at the beginning of the year beginning with January 1, 2020 $137,171
Residual value of equipment at end of lease term, guaranteed by lessee $54,000
Book Value of Lease Equipment on LESSOR books $500,000
Lease term 6 years
Economic life of leased equipment 7 years
Fair Value of asset at January 1, 2020 $659,000
Lessor’s Implicit Rate 12% Lessee’s incremental borrowing rate 12%
The asset will revert to the lessor at the end of the lease term. You examined this lease from the Lessee prospective in problem #1. Based on the tests you found it was a financing lease. In this problem you will complete the LESSOR entries. You do not need to redo the tests – it is still a financing lease with a guaranteed residual
A. Prepare the entry on the Lessor’s book to record this Lease on 1/1/2020. You will need to compute the Lease Receivable debit, the CGS debit, the Equipment credit and the Sale Revenue credit to complete the entry.
B. Complete the entry to receive the first rental payment on 1/1/2020.
C. Prepare the interest revenue amortization schedule for the first two years and prepare the interest revenue entry for 12/31/2020.
Interest revenue amortization schedule |
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Date |
Beginning balance of lease receivable |
Lease receipt |
Interest revenue (beginning balance of lease receivable * 12%) |
Reduction in lease receivable (lease receipt - interest revenue) |
Ending balance of lease receivable (beginning balance of lease receivable - reduction in lease receivable) |
01-Jan-20 |
659000 |
137171 |
137171 |
521829 |
|
01-Jan-21 |
521829 |
137171 |
62619 |
74552 |
447277 |
01-Jan-22 |
447277 |
137171 |
53673 |
83498 |
363780 |
01-Jan-23 |
363780 |
137171 |
43654 |
93517 |
270262 |
01-Jan-24 |
270262 |
137171 |
32431 |
104740 |
165523 |
01-Jan-25 |
165523 |
137171 |
19863 |
117308 |
48215 |
31-Dec-25 |
48215 |
54000 |
5786 |
48214 |
0 |
Ending balance of lease receivable at end of lease term must be zero. |
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Interest of 62619 is recorded as interest receivable on December 31, 2020 |
Lessor |
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Journal entries |
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Date |
Account title & explanation |
Debit |
Credit |
01-Jan-20 |
Lease receivable |
659000 |
|
Cost of goods sold |
500000 |
||
Equipment |
500000 |
||
Sales revenue |
659000 |
||
(To record lease agreement.) |
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01-Jan-20 |
Cash |
137171 |
|
Lease receivable |
137171 |
||
(To record First lease payment received.) |
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31-Dec-20 |
Interest receivable |
62619 |
|
Interest revenue |
62619 |
||
(To record accrued interest on lease receipt.) |