Question

In: Accounting

3. (LESSOR ENTRIES FOR FINANCING LEASE WITH A GUARANTEED RESIDUAL) The following facts pertain to a...

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.

Solutions

Expert Solution

Interest revenue amortization schedule

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.

Interest of 62619 is recorded as interest receivable on December 31, 2020

Lessor

Journal entries

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.)

01-Jan-20

Cash

137171

Lease receivable

137171

(To record First lease payment received.)

31-Dec-20

Interest receivable

62619

Interest revenue

62619

(To record accrued interest on lease receipt.)


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